California Defends Ban on Mandatory Arbitration for Workers

(CN) — Arguing employers could retaliate against workers, a California Justice Department attorney told a Ninth Circuit panel Monday it should overturn a judge’s ruling that federal law preempts the state’s pro-worker bill barring arbitration requirements as conditions of employment.

California Assembly Bill 51 prohibits businesses from requiring prospective employees to waive their right to sue as a condition of accepting a job offer but doesn’t prevent parties from entering into voluntary arbitration agreements. 

Proponents of the bill say it protects workers in food service, hospitality and retail who are increasingly being forced to sign away their rights to sue in exchange for being hired.

The bill, signed into law in 2019, allows workers to pursue damages and attorneys’ fees and open criminal cases against employers who discriminate and retaliate against them for declining arbitration contracts.

This past January, U.S. District Judge Kimberly Mueller blocked state officials from enforcing key provisions of the bill that regulate agreements governed by the Federal Arbitration Act. The Barack Obama appointee agreed with a coalition of business groups led by the U.S. Chamber of Commerce that AB 51 unfairly regulated or singled out arbitration agreements in comparison to other contracts. 

The chamber argued the bill would unfairly expose California businesses to civil and criminal penalties and force them to both alter hiring practices and spend more on dispute resolution.

On Monday, California Deputy Attorney General Chad Stegeman told the Ninth Circuit AB 51 was crafted to complement the Federal Arbitration Act — referred to during oral arguments as the FAA — and that it doesn’t undermine arbitration but rather targets employers’ “discriminatory intent” toward workers.

“It’s a matter of consent. An employer can’t fire an employee because of their refusal to arbitrate,” Stegeman said, adding Mueller’s ruling exposes workers to unfair contracts. “The court created a new substantive right to force arbitration. But there’s no such right derived from the FAA.”

Stegeman also laid out the argument in a court brief. “The district court’s application of FAA preemption to AB 51 could result in a seismic shift in employment law by essentially creating immunity for employers at the state level who threaten, retaliate, or discriminate against or terminate an employee or prospective employee for refusing to consent to waiver of a right, forum, or procedure — even when the waiver is unenforceable and void — so long as it applies in some way to arbitration.”

He told the panel that contrary to the chamber’s argument, the U.S. Supreme Court has not yet issued a decision “anchoring” preemptive jurisprudence on the issues that any federal judge or court of appeals could rely on. The chamber had argued in court papers AB 51 violated the high court’s 2017 opinion in Kindred Nursing Centers v. Clark, which said arbitration agreements must be put on equal footing with other contracts.

“In the Supreme Court’s Kindred case, Kentucky created a barrier to enforcement. We don’t have that here,” Stegeman said.

U.S. Circuit Judge Sandra Ikuta asked Stegeman if the bill sought broad authority to criminally charge employers who require arbitration in all contracts.

Stegeman told Ikuta, a George W. Bush appointee, that under the law criminal charges can be filed when, for example, employers force workers to accept arbitration as part of an employment contract.

“The intent behind the law, it was derived from the Me Too movement, and is designed to make sure employees are not silenced beforehand if sexual harassment takes place at a company,” Stegeman said. “It doesn’t change the nature of arbitration.”

Andrew Pincus of Mayer Brown, an attorney for the chamber, told the panel the Federal Arbitration Act clearly preempts state laws that block formation and enforcement of arbitration agreements. 

Supreme Court precedent directly applies in situations described in AB 51 where workers must weigh the benefits of nonnegotiable employment contracts even if they don’t have the same bargaining power, Pincus said.

U.S. Circuit Judge Carlos F. Lucero, a Bill Clinton appointee sitting by designation from the 10th Circuit, asked Pincus whether his argument is too broad since arbitration provisions are found in increasingly numerous and ordinary agreements.

“Are courts, by fiat, written out of existence then?” Lucero asked.

“I don’t think so. Lots of cases go to court,” Pincus said. 

Lucero shot back: “Yes, that’s because the statutes you’re talking about, you’re asking we strike them down.”

U.S. Circuit Judge William Fletcher, also a Clinton appointee, asked Pincus if under the chamber’s analysis an employer could “do whatever they want” in a workplace, including violate California law, and also require arbitration. 

“An employer can’t say ‘I’ll violate California law’ but the FAA protects arbitration,” Pincus told Fletcher. “The employer gets to make that a condition of employment, like vacation hours.”

The panel took the matter under submission and did not indicate when it would rule.

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