AB 51 Preliminary Injunction Update

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Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

On Jan. 31, 2020, the United States District Court for the Eastern District of California (the “Court”) issued a preliminary injunction preventing the State of California from enforcing California Assembly Bill 51 (“AB 51”) as it relates to arbitration agreements subject to the Federal Arbitration Act (“FAA”).[1]

At its core, AB 51 enacts new Labor Code §432.6. Among its provisions, subsection (a) prohibits a person from requiring an applicant or employee, as a condition of employment, continued employment or the receipt of any employment-related benefit, to waive any right, forum or procedure for a violation of any provision of the California Fair Employment and Housing Act (“FEHA”)[2] or the Labor Code. This includes the right to notify, file and/or pursue a civil action or a complaint with, any state agency, public prosecutor, law enforcement agency, court or government entity. Subsection (b) prohibits an employer from threatening, retaliating or discriminating against, or terminating any applicant or employee for refusing to consent to such a waiver. Subsection (c) clarifies that an agreement that requires an employee to opt out of a waiver or take any affirmative action to preserve their rights is deemed “a condition of employment.” AB 51 also enacts new Govt. Code §12953, which declares it an unlawful employment practice for an employer to violate Labor Code §432.6. By imposing both civil and criminal[3] penalties for violations, AB 51 had the consequence of significantly restricting the potential for workplace arbitration by effectively criminalizing it.

On December 30, 2019, the District Court initially granted a temporary restraining order to prevent the legislation from taking effect based on plaintiffs’ claim that it is preempted by federal law. On January 31, 2020, the Court issued a preliminary injunction extending the ban. Specifically, the order enjoined California from: (i) enforcing Labor Code §§432.6(a), (b), and (c), where the alleged “waiver of any right, forum, or procedure” is the entry into an arbitration agreement covered by theFAA; and (ii) enforcing Govt. Code §12953, where the alleged violation of Labor Code§432.6 is entering into an arbitration agreement covered by the FAA. This effectively enjoins the State from enforcing all key provisions of AB 51 as it relates to arbitration agreements governed by the FAA.Despite not expressly prohibiting arbitration agreements in employment, AB 51’s legislative intent was clear as to its desired impact, particularly to the Court.

On Feb. 7, 2020, the Court issued its written order detailing its reasoning for granting the January 31 preliminary injunction. In determining whether to issue a preliminary injunction, one of the factors the court must consider is whether the moving party is likely to succeed on the merits. The plaintiffs contend that their preemption claim is likely to succeed on the merits because: (1) AB 51 violates the FAA because it treats arbitration agreements differently from other contracts; and (2) AB 51 conflicts with the purposes and objectives of the FAA.

The Court noted that federal law states that courts must place arbitration agreements on equal footing with other types of contracts, and cannot subject arbitration agreements to disparate treatment. The court found that AB 51 puts arbitration agreements on an unequal footing with other contracts, violating the FAA by targeting arbitration agreements and imposing a higher consent requirement on them.  Defendants argued that AB 51 only prohibited a certain action by a person or employer. While technically true, the Court pointed out that the prohibited action is primarily that of requiring an arbitration clause as a condition of employment, stating, “In its expressed purpose, and its operation, AB 51 singles out the requirement of entering into arbitration agreements and thus subjects these kind of agreements to unequal treatment.”

Similarly, AB 51 interferes with the FAA’s goal of promoting arbitration by threatening civil and criminal penalties against employers who seek to use arbitration agreements. With this in mind, if an employer complies with AB 51, it is deprived of its federal rights to enter arbitration agreements under the FAA. However, if an employer does not comply with AB 51, it may be subject to civil and criminal penalties, leaving the employer in a lose-lose position. While AB 51 (Labor Code §432.6(f)) states that, “[n]othing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the [FAA],” it does not exonerate employers who require the agreement in the first place. Thus it interferes with the FAA and is preempted.

Ultimately, the Court looked to the Supremacy Clause of the U.S. Constitution, which gives the federal government the power to preempt state regulation of certain areas: the balance of the equities and the public interest favored a preliminary injunction because ensuring the supremacy of federal laws is of “paramount” importance.

While the State remains unable to enforce AB 51, the litigation will proceed in the District Court and it is likely that the State will file an appeal directly with the Ninth Circuit Court of Appeals. As things stand now, the preliminary injunction means that employers may continue to require arbitration agreements as a condition of employment without being subjected to criminal prosecution under AB 51, provided that the arbitration agreement is clearly governed by the FAA.

Article by Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

 

 

[1] See Chamber of Commerce of the United States of America, et al. v. Becerra, et al., No. 2:19-cv-02456-KJM-DB (U.S. Dist. Court, Eastern District).

[2] California Fair Employment and Housing Act (”FEHA”), Govt. Code §12900, et seq.

[3] Labor Code §433 states,“Any person violating this article is guilty of a misdemeanor,” and would be subject to up to six months’ imprisonment or a fine up to $1,000.

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