The #MeToo movement has brought renewed attention to mandatory arbitration of employment disputes, and the question of whether such programs lead to the reduction of employee complaints. Notwithstanding the prevalence of arbitration programs, companies that continue to adopt mandatory arbitration are increasingly facing public backlash. Over the past few years, state lawmakers have also sought to pass legislation to restrict such arbitration programs, but have faced the challenge of passing laws that would survive federal preemption.

The California state legislature has been exploring its ability to prohibit mandatory arbitration for some time, but has had to address the challenge of passing a law that the Federal Arbitration Act ("FAA") does not preempt. For example, in September 2018, former California Governor Edmund G. Brown, Jr. vetoed Assembly Bill 3080 ("A.B. 3080"), a prior bill that sought to ban mandatory arbitration agreements and criminalize employer conduct to implement such an agreement. The employer community reacted vociferously against this bill, arguing that the U.S. and California Supreme Courts have clearly rejected such a position and that federal law would preempt such a state law. Thus, former Governor Brown said in his veto message: "Since this bill [A.B. 3080] plainly violates federal law, I cannot sign this measure." Former Governor Brown also rejected the legislature's argument that A.B. 3080 sought only to regulate behavior prior to reaching an agreement, acknowledging that the FAA regulates not only enforcement of such agreements, but also their initial formation. Thus, Governor Brown vetoed the bill.

In vetoing A.B. 3080, former Governor Brown specifically highlighted the issue of whether states may seek to rebalance the bargaining power when parties first enter an arbitration agreement. More specifically, while the FAA and federal precedent prohibit states from targeting the enforcement of arbitration agreements, proponents of the prior California legislation sought to argue that precedent did not clearly address whether the FAA regulates the formation of arbitration agreements in the first place. However, in Southland Corp. v. Keating, the U.S. Supreme Court stated unequivocally that the FAA "declared a national policy favoring arbitration," untethered to the enforcement or formation stage of arbitration agreements.

Provisions of A.B. 51

In a renewed effort to restrict mandatory arbitration agreements, in midOctober, California Governor Gavin Newsome signed Assembly Bill 51 ("A.B. 51"), which goes into effect on January 1, 2020. The bill adds a new section to the California Labor Code, Section 432.6, and imposes restrictions on "contracts for employment" entered into, modified, or extended on or after January 1, 2020. A.B. 51 prohibits employers from conditioning new or continued employment or the receipt of any employment-related benefit on an applicant's or employee's consent to waive any right, forum, or procedure to resolve any discrimination, wage and hour, and other claims under the Fair Employment and Housing Act ("FEHA") or the California Labor Code. The law also imposes liability on employers who "threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee" who refuses to consent to such a provision.

A.B. 51 further provides that requiring an employee voluntarily to opt out of an agreement to avoid being bound, or to take affirmative action to preserve his or her rights is "a condition of employment." Notably, A.B. 51 also includes a so-called "savings" provision that was not in the vetoed A.B. 3080: "Nothing in this [Section 432.6] is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act."

Under A.B. 51, an employee whose employer has threatened, retaliated or discriminated against him or her, or terminated him or her for refusing to consent to a mandatory arbitration program, may file a complaint with the California Department of Fair Employment and Housing ("DFEH"), which may ultimately lead to the issuance of a "right to sue notice," permitting the complainant to bring a civil action against the employer. An employee or applicant whose employer or prospective employer has threatened, retaliated or discriminated against him or her, or terminated him or her in violation of A.B. 51, may also be entitled to recover back pay, front pay, injunctive relief (i.e., hiring/reinstatement, promotion, training), damages for emotional distress, punitive damages, and attorney's fees.

A.B. 51 also sets forth specific instances in which it does not apply: (i) it does not apply to post-dispute settlement agreements or negotiated severance agreements; and (ii) it does not apply to a person registered with a self-regulatory organization under the Securities Exchange Act of 1934, or regulations adopted under that act pertaining to the arbitration of disputes.

Does Federal Law Preempt A.B. 51?

A.B. 51 will almost certainly face a preemption challenge. Indeed, states, including California, that have previously targeted mandatory arbitration programs have seen those efforts struck down as preempted by federal law and policy, or otherwise limited in application. For example, in AT&T Mobility LLC v. Concepcion, the U.S. Supreme Court addressed California's judicially created Discover Bank rule, which provided that waiver of the right to bring collective or class action proceedings in arbitration was unconscionable under general contract principles, such that it would render arbitration agreements unenforceable. The Court made clear that state laws disfavoring enforcement of arbitration agreements are preempted by the FAA, and thus, the Discover Bank rule was preempted. The Court further explained that the FAA preempts laws which "undermine the goals and policies of [the FAA]" and that the "overarching purpose of [the FAA] . . . is to ensure the enforcement of arbitration agreements according to their terms."

More recently, in Latif v. Morgan Stanley & Co. LLC, Judge Denise Cote of the U.S. District Court for the Southern District of New York addressed a New York state statute seeking to prohibit mandatory arbitration of sexual harassment claims, N.Y. C.P.L.R. 7515 ("Section 7515"). Section 7515 rendered agreements to arbitrate sexual harassment claims "null and void `[e]xcept where inconsistent with federal law.'" Judge Cote noted that in this case it would be "inconsistent with the FAA" to render null and void, and invalidate the parties' agreement to arbitrate the plaintiff's sexual harassment claims because any "state law prohibit[ing] outright the arbitration of a particular claim" is displaced by the FAA's strong presumption that "arbitration agreements are enforceable." The Court further rejected the plaintiff's arguments that Section 7515 merely reflects a general intent to protect victims of sexual harassment, as opposed to a specific intent to single out arbitration agreements, and that Section 7515 only disfavored arbitration of sexual harassment claims, not all claims. Finding that Section 7515 could not prevail over "the FAA's command that the parties' Arbitration Agreement be enforced," Judge Cote granted the defendant's motion to compel arbitration.

In Saheli v. White Memorial Medical Center, a California Court of Appeals held that provisions of two California statutes were preempted by the FAA, to the extent the provisions conditioned enforceability of arbitration agreements on special requirements not applicable to contracts generally. The two statutes provided that a covenant to arbitrate certain claims would not be enforceable where it was offered as a "condition" of entering into certain contracts. Ultimately, the court held that the statutes at issue placed special restrictions, not applicable to contracts generally, on the enforceability of agreements to arbitrate. More specifically, the court held "[i]n practice, such restrictions discourage arbitration by invalidating otherwise valid arbitration agreements. It is precisely this sort of hostility to arbitration that the FAA prohibits."

These are but a few examples of states' attempts to restrict parties with greater bargaining power from presenting on a take-it-or-leave-it basis contracts containing mandatory covenants to arbitrate claims arising out of the employment relationship. Proponents of A.B. 51 have nevertheless argued that the bill targets mandatory arbitration provisions at the formation stage and does not impact the enforceability of such provisions. In other words, supporters have argued that while courts have been hostile towards statutes that outright invalidate arbitration agreements, A.B. 51 permits the enforceability of arbitration agreements that would otherwise be enforceable under the FAA. Indeed, according to the author of A.B. 51, "once a mandatory arbitration agreement has been signed, this bill has nothing more to say about the situation."

Certainly the courts will be called upon to resolve the preemption issue, but the opponents to A.B. 51 will have serious grounds supporting FAA preemption, including the strong federal policy favoring arbitration, recent U.S. Supreme Court precedent interpreting the FAA, and lower federal and state court precedent discussed above. Supporters of A.B. 51 also have argued that A.B. 51 should not be preempted by the FAA because it impacts only "mandatory" arbitration agreements, as opposed to "voluntary" agreements. But again, the bill prohibits "opt-out" or other affirmative actions by employees to preserve their judicial rights and provides a basis for opponents to argue that this law also would impact "voluntary" agreements.

Takeaways for Employers

While the validity of A.B. 51 stands on shaky ground, employers should still review their existing arbitration programs and agreements, and evaluate any pending programs to be implemented, particularly after January 1, 2020. Employers should specifically be mindful of the following:

  • First, by its own terms, A.B. 51 applies only to contracts for employment "entered into, modified, or extended on or after January 1, 2020." However, A.B. 51 does not explain what it means for an agreement to be "extended on or after January 1, 2020." As such, employers should bear in mind that individuals may seek to argue that even mandatory arbitration agreements that were entered into before January 1, 2020, but that were automatically renewed or extended after January 1, 2020, are impacted by A.B. 51.
  • Second, employers should review the content of their arbitration agreements and the method by which these agreements are presented to applicants and employees (whether these agreements be standalone documents, part of the employee handbook, or some other employment policy or document). If courts ultimately hold that A.B. 51 is enforceable, even to a limited extent, employers should review how they obtain applicants' and employees' consent to arbitrate FEHA or Labor Code claims, and whether employees or applicants are expected to take any steps to opt out of arbitration or to preserve their rights to a judicial forum.
  • Third, employers should evaluate the advantages and disadvantages of employing different dispute resolution mechanisms for different claims. A.B. 51 applies to California Labor Code and FEHA claims, but not to many other employment claims, such as breach of contract, tort, or federal discrimination or wage and hour claims.
  • Fourth, employers must remain cognizant of other factors that bear on the enforceability of arbitration provisions, such as whether an agreement to arbitrate is bilateral, the extent of the arbitration fees imposed upon the employee, and the availability of procedural rights and substantive remedies, as compared to those available in a court of law.
  • Finally, because A.B. 51, if enforced, has essentially created a new class of individuals protected by FEHA's antidiscrimination laws, employers must be aware of whether their conduct can be perceived as hostile to individuals who oppose mandatory arbitration.