Arbitration Update – Court Grants Preliminary Injunction Preventing Enforcement of AB51 Until A Trial Is Held
California enacted a major change to the law impacting arbitration agreements, originally set to take effect January 1, 2020 (AB51). The legislation attempted to overturn decades of California law that established the criteria necessary for a mandatory arbitration provision to be enforceable, consistent with federal law under the Federal Arbitration Act (FAA).
AB51’s stated purpose is “to ensure that individuals are not retaliated against for refusing to consent to waive their rights and the procedures under FEHA (the Fair Employment & Housing Act) and the Labor Code as well as to ensure that any contract relating to those rights and procedures be executed as a matter of voluntary consent.” AB51 was written to accomplish this via changes to the California Labor Code (LC) and the Government Code (GC).
In brief, AB51 added LC section 432.6, making it a violation of employee rights for an employer to require consent to arbitration of disputes as a condition of employment. LC 432.6 sets out a number of ways for employer policies and actions to violate the new law, with violations subjecting the employer to both civil liability and criminal prosecution. GC section 12953 makes a violation of LC section 432.6 also a violation of FEHA, giving employees access to the process, rights and remedies available under FEHA .
For anyone familiar with the underlying federal law under the FAA and California case law, it seemed apparent that AB51 was inconsistent with both the FAA and California law established by the California Supreme Court after decades of litigation. It is noteworthy that former Governor Jerry Brown refused to sign similar legislation, stating that he would not sign a law that clearly violated the FAA.
In early December 2019, a group of plaintiffs, including the US Chamber of Commerce and the California Chamber of Commerce, filed a lawsuit in federal court seeking to order four California officials to stop the enforcement of AB51 (Chamber vs. Becerra). A Temporary Restraining Order (TRO) was granted on December 30, 2019, with a hearing set for January 10 to determine whether a Preliminary Injunction should be granted to stop enforcement of the law until the full lawsuit seeking to ban enforcement of the law could be heard on its merits.
In order to obtain a Preliminary Injunction, the plaintiffs had to prove that (1) they are likely to succeed on the merits of the case when it comes to trial, and (2) there would be irreparable harm suffered in the meanwhile if the Preliminary Injunction is not granted. This is a very high legal standard, and difficult for any plaintiff to prove.
On January 10, the court granted the Preliminary Injunction, finding that it is likely that the Chambers of Commerce will be able to win their case at trial and that businesses in California would be materially and irreparably harmed if the law were to take effect in the meanwhile. The written decision, in the form of a federal court Order, was issued on February 6, 2020.
The Order enjoins (stops) the California Attorney General, Labor Commissioner, Secretary of the Labor and Workforce Development Agency, and the Director of the Department of Fair Employment and Housing from enforcing Labor Code section 432.6 and Government Code section 12953.
AB51 is thus on hold, maybe forever, but at least until the trial is held and the case seeking a Permanent Injunction stopping enforcement of these new laws can be determined. Note that the trial will be conducted and the case will be determined (without a jury) by the same judge who just found that plaintiffs are likely to be successful on the merits of their case. There is no trial date set.
For now, arbitration agreements in effect prior to January 1, 2020 are still in effect and as legally enforceable as they were prior to AB51. In addition, the Preliminary Injunction means that new arbitration agreements can be entered into on an ongoing basis without violating the law, because AB51 is not yet enforceable law. The current gray area we see is that IF the trial does not result in a Permanent Injunction, there is a slight possibility that AB51 could be given retroactive effect back to January 1, 2020. That seems very unlikely, but it is not impossible and would create uncertainty as to the ultimate enforceability of arbitration agreements entered into between January 1, 2020 and the date of any court decision that both denies the Permanent Injunction and makes the decision retroactive.
If you want to discuss how this Preliminary Injunction impacts your workplace and arbitration policies specifically, feel free to contact an SMT employment law attorney.
Jan Gabrielson Tansil
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Spaulding McCullough & Tansil LLP
Employment Law Group