Judge Blocks California Ban on Mandatory Arbitration

SACRAMENTO, Calif. (CN) – A week after striking California’s attempt to ban mandatory arbitration in employment cases, a federal judge on Friday highlighted how lawmakers approved the flawed labor law despite multiple warnings from lawyers and a past governor that it was on shaky ground.

U.S. District Judge Kimberly Mueller said she leaned on the bill’s well-documented “legislative genealogy” when she decided last week to halt the first-of-its-kind bill.

“The legislative analyses of AB 51 presciently recognized that, given the Supreme Court’s jurisprudence on FAA pre-emption, ‘there is little doubt that, if enacted it would be challenged in court and there is some chance…that it would be found pre-empted,’” Mueller wrote.

Siding with a coalition of business groups led by the U.S. Chamber of Commerce, Mueller on Jan. 31 issued a minute order preliminarily barring state officials from enforcing the heart of the contentious law.

The law, signed this past October by Gov. Gavin Newsom, also allows workers to pursue damages and attorneys’ fees and opens employers up to potential criminal liability. The state says it’s meant to reduce employers’ leverage and protect workers from being discriminated and retaliated against for declining arbitration contracts.

In a 36-page ruling released Friday, Mueller upheld the chamber’s argument AB 51 plainly interferes with employment arbitration practices routinely upheld by the Supreme Court.

It was a washout victory for the chamber as the Obama appointee dashed the entirety of the state’s counters. Mueller ripped the state’s claim that AB 51 doesn’t regulate or single-out arbitration agreements and was instead focused on employers’ behavior.

Unconvinced, Mueller ruled AB 51 violates the central tenet of the Federal Arbitration Act (FAA) by placing arbitration deals on unequal footing with other contracts.

“The court finds, therefore, that AB 51 is pre-empted by the FAA because it singles out arbitration by placing uncommon barriers on employers who require contractual waivers of dispute resolution options that bear the defining features of arbitration,” Mueller wrote.

Mueller also mentions how lawmakers approved and Gov. Newsom enacted the bill despite prior concerns expressed by former Gov. Jerry Brown.

Lawmakers passed similar bills in 2015 and 2018 but Brown said they “plainly” violated federal laws and vetoed them.

“This bill is based on a theory that the FAA only governs the enforcement and not the initial formation of arbitration agreements and therefore California is free to prevent mandatory arbitration agreements from being formed at the outset. The Supreme Court has made it explicit this approach is impermissible,” Brown said in his 2018 veto message.

Mueller said the state’s attempt to cure the “infirmities of the prior legislation” fell short and AB 51 continues to target arbitration.

“Even if the law itself is artfully crafted to support the argument that it only regulates the behavior of employers, it cannot avoid being construed as law that in effect discriminates against arbitration agreements,” she wrote.

While Becerra’s office said it is “reviewing the decision,” there remains a strong chance of appeal: Mueller acknowledged last month in her courtroom that the case “carves out a new path” and could be headed to the U.S. Supreme Court.

Mueller’s order immediately bars the state from enforcing the heart of the law, including a section that states: “A person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right…including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation.”

The chamber successfully argued the overarching threat of civil and criminal penalties would cause California businesses irreparable harm if the case continued without a preliminary injunction. Aside from potential fines, it warned businesses would be forced to unnecessarily alter hiring practices and spend more on dispute resolution.

Once again Mueller agreed, writing it “is not speculation to conclude that AB 51’s deterrent effect will be widely felt” in the world’s fifth largest economy.

“No matter the choice-continue to utilize arbitration agreements and risk criminal and civil sanctions or avoid arbitration agreements for fear of non-compliance with a statute that is likely pre-empted, the result is the same: California employers are faced with likely irreparable harm,” she wrote.

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