A federal district court found that the new California law barring mandatory employment arbitration agreements is preempted by the Federal Arbitration Act (FAA). The court granted the challengers’ motion for preliminary injunction and barred the Attorney General (AG) from enforcing Assembly Bill (AB) 51.[1] The court’s order followed its grant of a temporary restraining order enjoining the AG’s enforcement of AB 51 while the parties litigated the preliminary injunction.[2]
The Court’s Ruling
In its preliminary injunction order, the court rejected two threshold matters raised by the AG, finding: 1) the organizations that filed the challenge had standing because they alleged that at least some of their members enter into arbitration agreements or require affirmative opt outs as a condition of employment and would be irreparably harmed if AB 51 goes into effect; and 2) the court had subject matter jurisdiction over suits challenging state statutes on federal preemption grounds.[3]
Turning to the merits, the court found plaintiffs were likely to succeed on the merits of their preemption claim because “AB 51 places arbitration agreements on unequal footing with other contracts.”[4] Although AB 51 purports to bar the waivers of any “right, forum, or procedure,” the court found that “the primary target of the bill is agreements to arbitrate.”[5] The court quoted the Supreme Court in explaining: “AB 51’s prohibition on California employers’ use of ‘right, forum, or procedure’ waivers as a condition of employment ‘oh so coincidentally’ disfavors contracts with the ‘defining features’ of arbitration.”[6] That the law was “artfully crafted” to allow the AG to argue it regulates employer behavior did not avoid its effect of discriminating against arbitration agreements.[7]
The court also found that AB 51 “interferes with the FAA’s goal . . . and is subject to preemption on this basis as well.”[8] The FAA, the court explained, reflects a broad federal policy approving of arbitration. But AB 51 will likely deter employers from using arbitration agreements, interfering with federal policy.[9]
The court also found plaintiffs had demonstrated their members would experience irreparable harm absent injunctive relief because many businesses will have to choose between the risk of civil or criminal penalties and ending their use of arbitration agreements.[10] Such businesses “will incur immediate costs of redrafting their employment agreements to omit arbitration provisions and be unable to realize the cost and efficiency benefits they say arbitration provides.”[11] They likely cannot recoup those costs in a suit for damages because the AG is “immune from suit under sovereign immunity.”[12]
Because the AG would suffer minimal harm – perhaps none, as the state has no interest in enforcing an unconstitutional law – and because Plaintiffs would suffer irreparable harm, the court found the balance of equities weighed in favor of granting the preliminary injunction.[13]
Impact of the Court’s Ruling
It remains to be seen whether the AG will appeal the preliminary injunction,[14] stipulate to entry of final judgment and appeal, or litigate the case to final judgment. In the meantime, employers want to know about the AG’s authority if they continue to enter into mandatory arbitration agreements and the preliminary injunction is later overturned by the Ninth Circuit or the Supreme Court. There is very little case law on the issue, but we believe employers would have a strong argument that even if the preliminary injunction is later overturned, the AG would not be able to pursue an action based on the employer’s entry into a mandatory arbitration agreement while the temporary restraining order or injunction was in effect. Employers would have to reevaluate those agreements on a going-forward basis if an appellate court were to lift the injunction.
[1] Chamber of Commerce of the U.S. v. Becerra, No. 2:19-cv-02456-KJM-DB, 2020 WL 605877 (N.D. Cal. Feb. 7, 2020).
[2] AB 51 provides for AG enforcement and also private rights of action by employees.
[3] Id. at *6–9.
[4] Id. at *11.
[5] Id.
[6] Id. at *12 (quoting Kindred Nursing Ctrs. Ltd. P’Ship v. Clark, 137 S. Ct. 1421, 1426 (2017)).
[7] Id. at *12.
[8] Id. at *13.
[9] See id.
[10] Id. at *16.
[11] Id.
[12] Id.
[13] Id. at *18.
[14] See 28 U.S.C. § 1292(a)(1).