Nipped In The Bud: Federal Court Enjoins California’s New Arbitration Statute
California’s brand-new anti-arbitration statute likely is unconstitutional and cannot be enforced against agreements governed by the Federal Arbitration Act,
I. The Court’s Ruling
The court issued a short minute order Friday granting in full the Chamber of Commerce’s motion for a preliminary injunction. The court promised a detailed, written order “in the coming days” that would fully explain the reasoning behind her order. As of Friday’s ruling, however, the court formally enjoined the State and its officials from:
Enforcing the sections of the California Labor Code that purported to preclude an employer from requiring any applicant or employee to enter into an arbitration agreement, or from refusing to hire or discharging any applicant or employee for refusing to consent to an arbitration agreement, where the arbitration agreement is covered by the FAA;
Enforcing section 12953 of the California Government Code to the extent it makes entering into an arbitration agreement covered by the FAA an unlawful employment practice under the Fair Employment and Housing Act.
The court concluded that there was no realistic likelihood of harm to the State from preliminarily enjoining enforcement of AB 51.
Judge Mueller’s order followed her December 30 order temporarily prohibiting enforcement of the statute, but the preliminary injunction is far more significant. First, the new order lasts until the lawsuit ends in a final judgment. Second, the earlier order said only that the Chamber of Commerce had raised “serious questions” of federal preemption; the new order, entered following a much-more-robust defense of the law by the State, suggests the court has concluded that the Chamber of Commerce is likely to prevail on those questions.
AB 51 purported to prohibit a person from requiring a job applicant or employee to enter into an arbitration agreement, and from refusing to hire or discharging persons who refuse to enter into such agreements. The U.S. Supreme Court, however, in cases written by justices across the ideological spectrum, consistently have held that the FAA preempts state laws that “stand as an obstacle” to “enforc[ing arbitration agreements] according to their terms.”
In Chamber of Commerce v. Becerra, the State of California primarily contended that AB 51 does not prohibit the enforcement of an arbitration agreement — something that the FAA protects — but rather the formation of the agreement in the first place. Judge Mueller apparently rejected that as a distinction without a difference. Indeed, the Supreme Court previously 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.”
II. Next Steps
The State may appeal Judge Mueller’s injunction ruling to the U.S. Court of Appeals for the Ninth Circuit. The State may choose to await a final decision in the case on a complete factual record, and (if Judge Mueller adheres to the views suggested by her order Friday) appeal that final judgment. Or the State may do both.
III. What Employers Should Do Now
FAA-covered employers are well advised to take advantage of Judge Mueller’s injunction and continue to obtain arbitration agreements unless and until that injunction is overturned. An important reason is to obtain lawful waivers of class actions. A class waiver can be made expressly,
Employers who wish to obtain new arbitration agreements, either for new hires or for incumbents, first should ensure that the FAA applies, because only by reason of FAA preemption is AB 51 preempted and unenforceable. The FAA does not apply:
to exceptionally small employers, where no nexus to interstate commerce exists;
to certain transportation workers, to whom the FAA by its terms does not apply;and
to arbitration agreements that lawfully (but unwisely) invoke state arbitration law instead of the FAA.
If the FAA applies, employers interested in commencing an arbitration program should consider whom to cover, and how to do it. New hires can be required to enter into arbitration contracts as a condition of hire. Incumbent employees also can be covered, either on a “quit, or you’re bound” basis