Court Hits Pause Button on California Arbitration Ban

On October 10, 2019, Governor Newsom signed a law prohibiting employers from requiring employees to sign arbitration agreements as a condition of employment on or after January 1, 2020. The law, AB 51, expressly prohibits companies from compelling employees to waive any right, forum or procedure for a violation of any provision of the California Labor Code or Fair Employment and Housing Act, and puts employers who violate the law at risk of being found guilty of a misdemeanor.

The United States Chamber of Commerce and several other business groups filed suit in the United States District Court for the Eastern District of California challenging AB 51 on several grounds, including that it was preempted by the Federal Arbitration Act (“FAA”). On December 29, United States District Judge Kimberly J. Mueller issued a temporary restraining order preventing the law from taking effect on January 1, 2020. The court found that important questions existed concerning whether the FAA, as construed by the United States Supreme Court in prior cases, preempted AB51, and also that allowing the statute to take effect, even briefly, would disrupt the standard formation of employment contracts. As noted in our prior advisory summarizing AB 51, preemption concerns caused former Governor Brown to veto several similar bills.

The Court’s ruling is welcome news for employers who currently include arbitration agreements as part of new hire on-boarding processes and also those who update their agreements for current employees as a matter of practice; however, because this decision is not the final word on this new law, employers must stay tuned for future rulings. The Court noted in its order that the issues raised in this case would benefit from additional briefing by the parties and a more complete record. Another hearing is set for January 10, 2020, to determine whether the injunction should remain in place. While this initial decision provides a brief respite for employers in rolling out revised agreements or discontinuing use of arbitration agreements for California employees, these actions may be required if the court reaches a different conclusion following the January 10 hearing. While this case (and any appeal) remains pending, employers who desire to continue asking applicants or employees to sign new arbitration agreements should consult with counsel.