Try To Restrain Yourself: California Is Temporarily Restrained From Enforcing Arbitration Ban

Remember California’s new ban on mandatory workplace arbitration agreements? The Eastern District of California has put it on ice, granting a temporary restraining order against the ban’s enforcement. As a refresher, and as we wrote about here, on October 10, 2019, California Governor Gavin Newsom signed into law California’s latest afront on workplace arbitration—AB 51. Under AB 51, employers may not, “as a condition of employment, continued employment, or the receipt of any employment-related benefit, require an applicant or employee to waive any right, forum, or procedure” for FEHA and Labor Code claims. Violations of the new statute carry hefty consequences, including criminal penalties. Many employers see arbitration agreements as necessary to manage employment disputes and an outright ban on this efficient process strongly affects their bottom line. The ban was scheduled to go into effect on January 1, 2020, but the TRO put enforcement on hold for now.

The TRO stems from a challenge by the United States and California Chambers of Commerce, along with other organizations such as the California Retailers Association and the National Association of Security Companies, to the validity of the new arbitration restrictions. The plaintiffs in that challenge argue that AB 51 is preempted by the Federal Arbitration Act and is thus unconstitutional. The complaint requests declaratory and injunctive relief to stop AB 51 from being enforced against arbitration agreements that are governed by the FAA. The plaintiffs moved for a temporary restraining order, which the court granted on December 30, 2019, noting that the “plaintiffs raise serious questions regarding whether the challenged statute is preempted by the Federal Arbitration Act.” The plaintiffs also moved for a preliminary injunction to stop AB 51’s enforcement until the preemption issue is fully resolved. A hearing on the preliminary injunction is currently set for January 10, 2020.

The preemption challenge and TRO do not come as a surprise. In 2018, Governor Brown vetoed a similar anti-arbitration bill, explaining that the bill “plainly violates federal law.” The legislative history and statutory text of AB 51 make clear that its proponents anticipated this very argument. The statute explicitly states, “Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.” Cal. Lab. Code § 432.6(f). And proponents claim that AB 51, unlike previous iterations of a ban on mandatory arbitration, does not prohibit, restrict, or discourage anyone from entering into a mandatory arbitration agreement, if an employee affirmatively consents to do so freely and voluntarily. According to AB 51’s proponents, the bill merely provides that an employee cannot be forced to sign an arbitration agreement and, if the employee elects not to, the employer cannot retaliate against the employee. Proponents also argue that, once an arbitration agreement has been signed, the bill does not apply to its enforcement, thus saving it from a preemption challenge. See generally July 8, 2019 Report from the Senate Judiciary Committee. Despite these arguments, the bill’s challengers have shown that they are ready to take it to the mat.

While the legal challenge is pending, employers should continue to review their arbitration agreements carefully and consult with legal counsel before making changes. Stay tuned for updates.