On December 6, 2019, a coalition of both national and state business organizations and trade associations filed a Complaint in the U.S. District Court for the Eastern District of California. The lawsuit seeks both a preliminary and permanent injunction against implementation and enforcement of the recently enacted California law that makes it unlawful for California employers to require employees to sign arbitration agreements, under certain circumstances.
If you recall from our prior post, AB 51, which Governor Newsom signed into law on October 10, 2019, prohibits employers from offering and entering into arbitration agreements with applicants or employees even if the agreements contain opt-out procedures, on or after January 1, 2020. AB 51 contains an explicit exception for those agreements enforceable under the Federal Arbitration Act (FAA).
Employers that violate the law face the threat of criminal and civil penalties. The law also prohibits employers from retaliating against applicants or employees who refuse to enter into mandatory arbitration agreements.
The Business Coalition Recent’s Lawsuit
The lawsuit, brought by the California Chamber of Commerce, the California Retailers Association, the Home Care Association of America, and National Association of Security Companies, among others, alleges that AB 51’s attempt to limit the use of arbitration agreements conflicts with federal law. The business groups seek a declaration that AB 51 is preempted by the FAA, the federal law that governs the use of arbitration in employment disputes.
The complaint notes that the FAA has consistently been interpreted by courts to favor and promote the use of arbitration, and its preemptive scope is broadly construed. The plaintiffs ask the court to prevent California state officials from enforcing AB 51, in addition to declaring the law unconstitutional.
Alternatively, the lawsuit seeks a declaration that the text of AB 51 itself precludes application to the formation and enforcement of arbitration agreements that are covered by the FAA. This declaration is aimed at the clause included in AB 51 that explicitly states that it is not “intended to invalidate a written arbitration agreement that is otherwise enforceable under the [FAA].” This clause has been referred to as the FAA carve out provision. The complaint alleges that this carve out provision should preclude state officials from “enforcing the other provisions of AB 51 against an employer that enters into arbitration agreements governed by the FAA, because declaring it unlawful to enter into such agreements – subjecting the employer to liability and potential criminal and civil penalties – invalidates those agreements by foreclosing a previously permissible means of entering into such arbitration agreements.”
AB 51 is scheduled to go into effect on January 1, 2020, but the business groups have asked the court to issue a preliminary injunction preventing the law from taking effect. Oral argument on this motion is scheduled for January 10, 2019. If the court grants the motion for preliminary injunction, AB 51 will be placed on hold and employers will be spared from its enforcement until the case can be decided on the merits.