United States District Court Issues Temporary Restraining Order Restraining the State of California From Enforcing AB-51’s Prohibition of Arbitration Agreements as a Condition of Employment

01.02.2020

A properly drawn arbitration agreement can effectively immunize a California employer against costly employment related class action lawsuits, which for a number of years have been the most frequently filed class action lawsuits in California.  It is well settled under current federal law and under current California law that a current or a former employee who signed a properly drawn arbitration agreement who files a lawsuit against his or her former employer can be compelled in court to submit his or her claims to binding arbitration on an individual, non-class basis.  This effectively converts a costly class action lawsuit into a far more manageable single-plaintiff case with far less exposure to potential liability. 

Arbitration agreements can provide additional benefits for California employers beyond immunization as a practical matter in most instances from employment related class action lawsuits.  Among other things:

• Arbitrations are typically significantly streamlined compared to lawsuits litigated in federal or state courts.  This can result in reduced litigation expenses. 
• The case will be decided by a retired state court or federal judge or an experienced attorney who is knowledgeable about the relevant subject area of the law instead of a jury. 
• In general, the parties to an arbitration agreement must mutually agree upon the arbitrator who will decide the case.  Litigants in court have virtually no say about the judge who will preside over their case. 
• The records of lawsuits litigated in a federal or a state court are available to the public as public records, but, the records of a private arbitration generally are not available to public. 

What’s not like for California employers?  A current or former employee cannot under the current state of the law be required to submit to binding arbitration claims for the very significant penalties for alleged violations of the California Labor Code under the California Private Attorneys General Act of 2004, commonly referred to as “PAGA.”  When a plaintiff alleges in a lawsuit claims for damages and for certain penalties available under the Labor Code and claims for PAGA penalties, the claims for PAGA penalties are typically stayed pending resolution of the arbitration of the plaintiff’s individual claims, which often results as a practical matter in the resolution of the entirety of the plaintiff’s claims. 

Depending on the outcome of pending litigation, something else for California employers not to like is Assembly Bill 51, slated to become effective January 1, 2020.  In a nutshell, by its terms, AB 51 effectively prohibits California employers from making employees enter into an arbitration agreement a condition of employment or of continued employment.  Prior to AB 51, it was well settled that California employers could make entering into an arbitration agreement a condition of employment or of continued employment. 

Fortunately for California employers, AB 51 does contain a notable status quo preserving provision. AB 51 expressly does not apply to employment arbitration agreements entered into before January 1, 2020.  It states, “This section applies to contracts for employment entered into, modified, or extended on or after January 1, 2020.”  In other words, otherwise valid arbitration agreements entered into before January 1, 2020 remain valid even if they were made as a condition of employment. 

As anticipated by if not most employment law practitioners, AB 51 is already the subject of litigation challenging its enforceability under the Federal Arbitration Act stating as follows, which generally preempts contrary state laws imposing restrictions upon the enforcement of arbitration agreements:

A written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. [9 U.S. 9 §2.]

Today, in a lawsuit brought by the Chamber of Commerce of the United States and other national trade associations, the United States District Court for the Eastern District of California issued an order temporarily enjoining the State of California from enforcing AB 51, stating the relevant State of California officials are “are temporarily enjoined from enforcing AB 51, pending this court’s resolution of plaintiffs’ motion for a preliminary injunction.”  The court went on to explain, “Plaintiffs have raised serious questions regarding whether the challenged statute [AB 51] is preempted by the Federal Arbitration Act as construed by the United States Supreme Court.”  According to the court’s order, the hearing on the plaintiff national trade association’s motion for a preliminary injunction barring further enforcement of AB 51 is currently set for hearing on January 10, 2020.  We will continue to monitor that litigation. 

While the federal court’s order described above is encouraging news from our perspective as employer advocates, the ultimate outcome of that litigation or of similar litigation cannot be predicted with certainty. 

Accordingly, California employers with questions about how they should proceed regarding arbitration agreements at the present time and/or after January 1, 2020 should consult with their usual Atkinson, Andelson, Loya, Ruud & Romo counsel.

This AALRR alert is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR presentation/publication does not create an attorney-client relationship. The firm is not responsible for inadvertent errors that may occur in the publishing process. 

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