AB 51: Attacking Arbitration, Again

October 14, 2019

By George Abele, Jennifer Baldocchi, Paul Cane & Ryan Derry

Governor Newsom Thursday signed AB 51, the latest in the California legislature’s campaign against pre-dispute employment arbitration agreements. With AB 51, California not only has prohibited, but also purported to criminalize, an employer requiring any applicant or employee, as a condition of employment, to agree to arbitration of any claim under the California Fair Employment and Housing Act or Labor Code. Last year, then Governor Brown vetoed AB 3080—a bill nearly identical to AB 51—because it flouted the preemptive effect of the Federal Arbitration Act. Courts should conclude that federal law likewise preempts AB 51. In the meantime, California employers now must decide how to address the implementation of arbitration agreements after the statute’s effective date, January 1, 2020.

The Provisions of AB 51

AB 51 adds a new section 432.6 to the Labor Code,[1] which imposes several restrictions on “contracts for employment entered into, modified, or extended on or after January 1, 2020”:

It precludes “a person” from requiring any applicant or employee, as a condition of employment, continued employment, or the receipt of any employment-related benefit, “to waive any right, forum, or procedure” for a violation of the Fair Employment and Housing Act (FEHA) or the Labor Code. (The law says that requiring an employee to opt out of an agreement to avoid being bound, or to take any affirmative action to preserve his or her rights, is “deemed a condition of employment.”)
It precludes “an employer” from threatening, retaliating or discriminating against, or terminating any applicant or employee for refusing to consent to the waiver of “any right, forum, or procedure” for a violation of the FEHA or the Labor Code.

AB 51 provides for, in addition to any other available remedies, injunctive relief and reasonable attorney’s fees to a prevailing plaintiff who enforces his or her rights under the statute. Because AB 51 adds its prohibitions to the Labor Code at section 432.6, a violation will be a misdemeanor under Labor Code section 433.[2]

AB 51 sets forth specific instances in which it does not apply:

It does not apply to post-dispute settlement agreements or negotiated severance agreements.
It does not apply to a person registered with a self-regulatory organization under the Securities Exchange Act of 1934,[3] or regulations adopted under that act pertaining to the arbitration of disputes.

Finally, AB 51 also adds a provision that was not present in the vetoed AB 3080, and which likely will lead to litigation:

“Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act (9 U.S.C. Sec. 1 et seq.).”

What Lies Ahead?

Employers will certainly challenge the new statute as preempted by the FAA, and they have strong arguments for doing so. The statutory language and legislative history are clear that the law targets predispute arbitration agreements in the workplace.[4] But Supreme Court cases, written by justices across the ideological spectrum, consistently hold that the FAA preempts state laws that “stand as an obstacle” to “enforc[ing arbitration agreements] according to their terms.”[5] Justice Ruth Bader Ginsburg, for example, wrote for an 8-1 majority enforcing an arbitration agreement that California’s Talent Agencies Act purported to displace. “When parties agree to arbitrate,” she wrote, “the FAA supersedes state laws.”[6]

Supporters of the legislation have stated that it can withstand a preemption challenge. They claim the bill does not prevent parties from entering into voluntary agreements to arbitrate; rather, it focuses on consent, and thus regulates behavior before an arbitration agreement is reached, thereby falling outside the purview of the FAA. But as then-Governor Brown communicated in his veto message for AB 3080, the Supreme Court has held that the FAA “cares not only about the ‘enforce[ment] of arbitration agreements, but also about their initial ‘valid[ity]’—that is, about what it takes to enter into them.”[7] Thus, the purported regulation of pre-agreement behavior, when focused on agreements to arbitrate, is contrary to the FAA and federal policy favoring arbitration.

In addition to the issue of federal preemption, there almost certainly will be litigation regarding the impact of the clause, quoted above, purporting not to affect FAA-protected agreements. Employers have a strong argument that such agreements—whether already in place or implemented after January 1, 2020—are lawful. We are advised, however, that plaintiffs will contend that the language was only intended to exempt FAA-protected agreements formed before AB 51’s effective date (Jan. 1, 2020).

What Should Employers Do Now?

Absent a court order enjoining implementation of the legislation, California employers with ongoing arbitration programs (or those interested in enacting arbitration programs) face a difficult choice.

An employer could maintain those programs, in reliance on the strong argument that the legislation is preempted, or the argument that the statute itself expressly states that it does not invalidate written arbitration agreements that are otherwise enforceable under the FAA. (Last year, a host of partners from major law firms wrote a joint letter to Governor Brown opining that AB 3080 plainly was preempted.) However, any person who participates in the administration of any such program could face the theoretical risk of misdemeanor liability in the interim. It is doubtful, however, that the State would devote its scarce enforcement resources and seek to impose misdemeanor liability until the statutory-interpretation and preemption issues are authoritatively resolved. Out of an abundance of caution, employers without arbitration agreements should consider implementing them before January 1, 2020, thereby avoiding a dispute regarding the preemption issue or the meaning of the bill’s FAA-exclusion language.

Alternatively, an employer could suspend implementation of new arbitration agreements as of January 1, 2020, until the meaning and enforceability of AB 51 is resolved. (That is what the bill’s proponents hope will occur.) If the legislation is preempted, or the FAA exclusionary clause applies to agreements entered after January 1, 2020, an employer could reinstate its arbitration program at that time.

Further in the alternative, given AB 51’s focus on FEHA and Labor Code claims, an employer could proceed with a narrow arbitration program limited to any other claims, such as breach of contract or tort claims. This path also has its drawbacks, however, since an employer could face instances in which parallel claims might proceed simultaneously in different venues. For example, a claim for wrongful termination in violation of public policy alleging discrimination would proceed in arbitration, while the statutory claim under FEHA would proceed in court.

The particular path chosen by an employer will depend on each employer’s specific circumstances, assessment of the risks and benefits, and the guidance of employment counsel.

[1] AB 51 also adds a new section 12953 to the Government Code (within the Fair Employment and Housing Act) making it an unfair labor practice for an employer to violate section 432.6 of the Labor Code.

[2] “Any person violating this article is guilty of a misdemeanor.” CAL. LAB. CODE § 433.

[3] 15 U.S.C. § 78c.

[4] Lorena Gonzalez, sponsor of AB 51, commented on the need for the bill: “Forced arbitration is among the most harmful practices that have enabled widespread abuse to go undetected for decades. Workers are forced to sign away their rights in order to get hired . . . .” But AB 51 does not preclude only “forced arbitration”; it also prohibits voluntary opt-out programs.

[5] AT&T Mobility v. Concepcion, 563 U.S. 333, 343-44 (2011).

[6] Preston v. Ferrer, 552 U.S. 346, 359 (2008).

[7] See, e.g., Kindred Nursing Centers Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1428 (2017) (the FAA preempted a state-law rule prohibiting an individual holding a power of attorney from forming an agreement to arbitrate, since the prohibition singled out arbitration provisions and left the holder of the power of attorney free to form other kinds of contracts).

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