On December 29, 2019, a federal district court in Sacramento issued a temporary restraining order enjoining the state of California from enforcing the law known as AB 51.
Readers of this newsletter will recall that AB 51 was signed into law in October 2019. It prohibits California employers from requiring applicants or employees to waive any right to or opt out of any legal forum or procedure established by the California Fair Employment and Housing Act and the California Labor Code.
In plain English, the law bans employers from forcing employees to go to arbitration instead of suing in the courts or in administrate agencies. AB 51 was to apply to contracts for employment entered into, modified or extended on or after January 1, 2020, which was to be the effective date of the new law. AB 51 also provides that an employer who violates the act and continues to force arbitration commits a misdemeanor.
Employer groups were up in arms over the prohibition of arbitration as a means to resolve employment disputes. To challenge the new law, a variety of business groups, including the U.S. Chamber of Commerce, the California Chamber of Commerce and the National Retail Federation filed suit in federal court seeking to prevent the law from going into effect. The essence of the employer groups’ argument was that the Federal Arbitration Act (FAA) and recent U.S. Supreme Court cases had created a federal policy of using arbitration as a legitimate alternative to court litigation. The business groups further argued that the FAA preempts or overrules any state law to the contrary. On a preliminary basis, the federal court in Sacramento was persuaded by this argument and issued a temporary injunction. However, this is only a preliminary ruling. This means that while the new law is on hold for now, the litigation will continue and the ultimate outcome of the case is uncertain.
Employers in all states who currently make employees sign arbitration agreements or are considering doing so should keep a watchful eye to see how this case plays out in the courts. A final ruling holding the primacy of the FAA over state law will give broad-based endorsement to employer use of arbitration and will thwart other states from passing similar laws.