As part of the swath of legislation enacted in response to the #MeToo movement, California passed a law prohibiting mandatory arbitration provisions in employment agreements. The bill, known as AB 51, was set to take effect on January 1, 2020 as section 432.6 of the California Labor Code with its corresponding civil and criminal penalties deposited in the California Government Code.
However, AB 51 was stopped in its tracks when a US District Court Judge in Sacramento agreed with the US Chamber of Commerce that the law violated the Federal Arbitration Act (“FAA”). In doing so, Judge Kimberly Mueller issued a restraining order two days before the law was set to go “live” and, two months later, issued a preliminary injunction thereby preventing the state from enforcing any aspect of AB 51.
Last Wednesday, the 9th Circuit in a split decision, vacated Judge Mueller’s preliminary injunction finding that the portion of the law prohibiting employer mandated arbitration provisions did not violate the FAA, but that the criminal and civil penalties in the Government Code do and, therefore, those are the only pieces of the law preempted by the FAA.
The 9th Circuit focused on the following two key provisions in Labor Code Section 432.6:
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, forum, or procedure for violation of any provision of the California Fair Employment and Housing Act…
Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.
Putting these two pieces together, the 9th Circuit found that Section 432.6 does not run afoul of the FAA because it focuses on pre-agreement conduct, (e.g. an employer making an arbitration provision a condition of employment) while the purpose of the FAA is the enforceability of already executed arbitration agreements. This law, the 9th Circuit held, insures the enforceability of arbitration provisions so long as both the employer and the employee enter into it voluntarily just like any other contract.
Labor Code Section 432.6 also applies to other common terms in employment agreements such as non-disparagement and non-disclosure. While the 9th Circuit opined that an employee-defense to these types of waivers in employment agreements could be based on a “lack of voluntariness”, it declined to address the validity of such a defense as it was not the issue before it.
Now that the prohibition on the law has been lifted, employers should proceed with caution before either entering into agreements with their employees, or trying to enforce agreements with their employees, that contain provisions requiring employees to waive certain rights in exchange for their jobs.
"In light of Congress' clear purpose to ensure the validity and enforcement of consensual arbitration agreements according to their terms, it is difficult to see how § 432.6, which in no way affects the validity and enforceability of such agreements, could stand as an obstacle to the FAA."