By Megan Shaked
The seemingly never ending battle over employment arbitration agreements in California continues with last week’s Ninth Circuit court decision vacating a preliminary injunction over 2019’s California Assembly Bill 51 (previously discussed here and here).
Back in 2019, California Governor Gavin Newsom signed Assembly Bill 51, which added section 432.6 to the California Labor Code and sought to ban new mandatory arbitration agreements to the extent they cover any discrimination claims under the California Fair Employment and Housing Act (FEHA), or any claims under the California Labor Code. Under this legislation, an applicant or employee could not, as a condition of employment, continued employment or the receipt of any employment-related benefit, be required to waive any right, forum, or procedure under the FEHA or any other specific statute governing employment. Employers would also be prohibited from threatening, terminating or otherwise retaliating or discriminating against an applicant or employee because of the refusal to consent to a waiver. Violations of these provisions would constitute unlawful employment practices under the FEHA and would be a misdemeanor.
The bill was challenged based on preemption under the Federal Arbitration Act (FAA) and on December 30, 2019, a federal court in California granted a temporary restraining order preventing AB 51 from going into effect on January 1, 2020, as scheduled. The district court later granted a preliminary injunction as well.
Last week, the Ninth Circuit partially reversed the district court’s conclusion that AB 51 is preempted by the FAA. While the Ninth Circuit disagreed that section 432.6 conflicts with the FAA, the Ninth Circuit affirmed the district court’s determination that the civil and criminal penalties associated with section 432.6 were preempted. The district court’s preliminary injunction enjoining AB 51’s enforcement was vacated and the case remanded for further proceedings.
The 2-1 majority acknowledged that section 432.6 specifically provides that nothing in the section was intended to invalidate a written arbitration agreement that was otherwise enforceable under the FAA. The panel found that section 432.6 and the FAA could coexist, as the state law does not provide a contract defense through which an agreement to arbitrate may be invalidated and thus does not prohibit outright the enforcement of arbitration agreements or of a particular type of claim.
Focusing on the purpose of the FAA to ensure that written, consensual agreements to arbitrate disputes are valid and enforceable as a matter of contract, the panel viewed Labor Code section 432.6 as merely assuring “that entry into an arbitration agreement by an employer and employee is mutually consensual” and declaring “that compelling an unwilling party to arbitrate is an unfair labor practice.”
The panel ultimately reasoned that regulating pre-agreement employer behavior through section 432.6 did not conflict with the FAA, though imposing civil and criminal sanctions attached to a violation of that section would violate the FAA since it would necessarily involve punishing employers for entering into an agreement to arbitrate.
The strongly worded dissent described AB 51 as a “blatant attack on arbitration agreements” and described the majority decision as one that “abets California’s attempt to evade the FAA and the Supreme Court’s caselaw by upholding this anti-arbitration law on the pretext that it bars only nonconsensual agreements.” The dissent reviewed the numerous attempts by the California legislature to ban employers from requiring arbitration agreements and the response striking those attempts as violating the FAA. The dissent further noted that the decision creates a circuit split with the First and Fourth Circuits, “which have held that too-clever-by-half workarounds and covert efforts to block the formation of arbitration agreements are preempted by the FAA just as much as laws that block enforcement of such agreements.”
We suspect this will not be the last we hear on this subject. In the meantime, now is a good time for employers to review their arbitration agreements for enforceability as well as review the procedures by which any arbitration agreements are presented to its applicants and employees and any associated risk of potential claims.