Judge Extends Block of California Ban on Mandatory Arbitration

SACRAMENTO, Calif. (CN) – A landmark California labor law barring mandatory arbitration agreements remains in doubt as a federal judge on Friday extended a ban of the bill business groups claim would shatter longstanding hiring practices and flood the courts with employment disputes.

After an hour of back-and-forth between the U.S. Chamber of Commerce and the state, U.S. District Judge Kimberly Mueller left in place a temporary restraining order against Assembly Bill 51 and gave the state one week to supplement pieces of its defense.

The parties were in the Sacramento federal courthouse Friday to argue a motion for preliminary injunction, less than two weeks after the chamber and co-plaintiff the National Retail Federation won the first round of the bout. On Dec. 30, just two days before it was set to take effect, Mueller enjoined the state from enforcing the law, finding that the business groups raised “serious questions” about whether it was pre-empted by federal law.

At issue is the law signed this past October by Gov. Gavin Newsom which prohibits businesses from requiring applicants to waive their right to sue as a condition of employment. It also allows workers to pursue damages and attorneys’ fees and in extreme cases 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.

Chamber attorney Donald Falk argued AB 51 is pre-empted by the Federal Arbitration Act and rattled off a list of U.S. Supreme Court opinions that he believes shatter the pro-worker law. He claims the state is “singling out” arbitration agreements and violating the high court’s 2017 opinion in Kindred Nursing Centers v. Clark, where it reiterated that arbitration agreements must be put on equal footing with other contracts.

“It’s designed at its core to force parties not to select an arbitration form,” Falk said of AB 51’s intent.

California Deputy Attorney General Chad Stegeman countered the statute was crafted within the boundaries of federal law as a way to stop businesses from requiring current and new workers to give up their rights in exchange for employment. He added that parties can still come to voluntary arbitration deals under AB 51.

Sponsored by the California Labor Federation and Consumer Attorneys of California, the measure cleared the Democratic-controlled Legislature in a series of mostly party-line votes. Lawmakers passed similar bills in 2015 and 2018 but former Gov. Jerry Brown said they “plainly” violated federal laws and vetoed them.

There has been a major shift in the use of mandatory arbitration contracts by businesses of all sizes following a series of arbitration-friendly U.S. Supreme Court decisions over the last two decades. According to the Economic Policy Institute, 53% of nonunion private-sector employers have mandatory arbitration procedures.

Mueller, appointed by President Barack Obama in 2010, directed most of her questions to the state and highlighted the bill’s legislative analysis, which in part notes that it would be on shaky ground if approved.

“There is little doubt that, if enacted, this bill would be challenged in court and there is some chance, under the current composition of the U.S. Supreme Court, that it would be found pre-empted,” the 2019 analysis by the state Senate Judiciary Committee predicted.

Mueller said she couldn’t ignore the bill’s legislative history and asked Stegeman if it was crafted with an “artful side-step” meant to assuage potential pre-emption flaws. The judge was referring to a section added toward the end of the bill that reads: “Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.”

“It’s focused on employer behavior, not agreements,” Stegeman responded. “We don’t target arbitration in the language.”

As for the two prior versions that were vetoed, the state says AB 51 has added provisions that make it clear the law does not apply to post-dispute settlement agreements or negotiated severance agreements.

Falk, partner at Mayer Brown in San Francisco, pushed back on the bill’s disclaimers and said the law is clearly intended to stem the use of arbitration. He noted it carries both civil and potentially criminal penalties for employers.

“You can’t get around pre-emption by not using the word arbitration,” Falk said. “You can’t launder a statute that has illegal provisions by adding legal ones.”

Mueller concluded the hearing by extending the temporary restraining order until Jan. 31 as she further considers the chamber’s motion for preliminary injunction. She additionally gave the state one week to supplement its argument, with the chamber’s reply due by Jan. 24.

The judge hinted she may find pieces of the law both unenforceable and enforceable with questions about severability. She ultimately agreed with Stegeman that the Supreme Court hasn’t weighed in on a case like this.

“I think that’s right,” Mueller said. “This carves out a new path and could be headed there.”

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