California’s AB 51 Banned (And Criminalized) california employers from requiring employees or applicants to enter into arbitration agreements as a condition of employment.
Days before AB 51 WAs set to take effect, a California District Court issued A Temporary restraining order temporarily preventing the state from enforcing the legislation. As anticipated, that California Court has now granted a motion for preliminary injunction extending the injunction.
Issuance of this preliminary injunction means the state is enjoined enforcing AB 51’s anti-arbitration provisions against California employers entering into arbitration agreements covered by the FAA until a final ruling/permanent injunction is entered (or until an appeal reverses the ruling).
On February 7, 2020, Judge Kimberly J. Mueller of the U.S. District Court for the Eastern District of California issued a detailed order explaining the court’s preliminary injunction of California’s Assembly Bill 51 (AB 51), an expansive anti-arbitration law, set to take effect on January 1, 2020.
As we previously detailed, AB 51 (codified as California Labor Code section 432.6 and California Government Code section 12953), among other things, prohibited California employers from requiring applicants or employees to “waive any right, forum, or procedure” for alleged violations of the Fair Employment and Housing Act (FEHA) and Labor Code as a condition of employment, continued employment, or the receipt of any employment-related benefit. In essence, the law criminalized and banned all mandatory arbitration agreements entered into after January 1, 2020 for any and all claims brought under California’s FEHA and Labor Code. The law also extended to class action waivers.
As we anticipated, AB 51 was quickly challenged before the new year by a coalition of various business and trade associations on the ground that it is preempted by the Federal Arbitration Act (FAA), the federal law that governs the use of arbitration in employment disputes. Just days before the legislation was set to take effect, on December 30, 2019, the district court issued a temporary restraining order, temporarily enjoining the state from enforcing the law with respect to arbitration agreements subject to the FAA.
On January 31, 2020, following multiple rounds of written briefing and lively oral argument between the parties, the district court issued an order granting the plaintiffs’ motion for preliminary injunction, while promising a more detailed order explaining its reasoning for granting the motion.
On February 7, 2020, the court fulfilled this promise and issued a more detailed order, explaining, among other things, that the plaintiffs were likely to prevail on their argument that AB 51 is preempted by the FAA because the legislation “singles out arbitration by placing uncommon barriers on employers who require contractual waivers of dispute resolution options that bear the defining features of arbitration.” In short, it treats arbitration agreements less favorably than it does other contracts, and therefore conflicts with the FAA.
The district court’s order enjoins the State of California and its relevant agencies (the California Attorney General, the Labor and Workforce Development Agency/the California Labor Commissioner, and the Department of Fair Employment and Housing) from:
- Enforcing sections 432.6(a), (b), and (c) of the California Labor Code where the alleged “waiver of any right, forum, or procedure” is the entry into an arbitration agreement covered by the FAA
- Enforcing section 12953 of the California Government Code where the alleged violation of “Section 432.6 of the Labor Code” is entering into an arbitration agreement covered by the FAA
Takeaways for California Employers
Employers can somewhat relax following the district’s court’s preliminary injunction. As a practical matter, the issuance of this preliminary injunction means that the state cannot enforce AB 51’s anti-arbitration provisions against California employers entering into arbitration agreements covered by the FAA (which is most employee-related arbitration agreements) until a final ruling/permanent injunction is issued by the district court.
The path towards a final ruling, however, is likely to be protracted. Now that a preliminary injunction has been issued, the decision can be automatically appealed, which we expect it to be. If it is appealed, employers can expect an appellate decision within the year or shortly after. Barring an unexpected development, the district court’s injunction will remain in place during the pendency of any appeal, and the state will remain enjoined from enforcing AB 51’s anti-arbitration provisions during any appeal.
Notably and unfortunately, the district court’s preliminary injunction could be interpreted by some to be limited in scope in that it does not expressly address the rights of private parties who might seek enforcement of AB 51’s anti-arbitration laws. Nevertheless, the district court’s thorough and convincing opinion as to why the FAA preempts AB 51 would be highly persuasive in any trial court action brought by a private litigant seeking to enforce these laws.
AB 51 continues to present California employers with a catalogue of difficult decisions, but things are certainly looking up for employers following the district court’s ruling. The many California employers who continue to use mandatory employment arbitration agreements in anticipation of AB 51 ultimately being struck down should feel much more comfortable doing so.