Employment Arbitration Agreements

Arbitration agreements are widely used in the employment and consumer arenas, particularly to avoid class action litigation by requiring individual arbitration of claims. Over the past ten years, issues related to the enforceability of arbitration agreements have been hotly litigated in both California and federal courts. The U.S. Supreme Court has handed down a string of noteworthy opinions generally favoring enforcement of arbitration agreements, and preempting state laws that would otherwise curb their widespread use to avoid class actions in employment and consumer cases. As we move into a new decade, the fight continues with the introduction of California Assembly Bill 51, pushing back against the tightening grip of the federal preemption doctrine.

Recent U.S. Supreme Court Cases

The line of U.S. Supreme Court arbitration cases in the 2010’s began with the landmark case of AT&T Mobility LLC v. Concepcion, in which the court held that the Federal Arbitration Act (FAA) preempts California’s “Discover Bank rule” that prohibited arbitration agreements with class action waivers. The late Justice Scalia penned the majority opinion, writing that, “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

In response to the ruling in Concepcion, the National Labor Relations Board ruled in 2012 that employment arbitration agreements with class action waivers were unenforceable as they violate the National Labor Relations Act (NLRA). The Supreme Court disagreed. This time, Justice Scalia’s successor, Justice Gorsuch, wrote for the majority in the 2018 case of Epic Systems Corp. v. Lewis, holding that individual arbitration agreements are enforceable under the FAA and the NLRA does not dictate otherwise.

In 2019, following the decision in Epic Systems Corp., the Court reinforced the authority of the FAA, holding in Lamps Plus, Inc. v. Varela, that even when an ambiguity exists in the terms of the arbitration agreement as to whether the parties consented to class wide arbitration, courts cannot utilize California contract interpretation principles to compel arbitration of class claims. This line of cases shows the Court’s strong preference for interpreting arbitration agreements in favor of arbitration and preempting state law attempts to circumvent enforcement of the agreements. It is noteworthy that each of these cases were 5-4 decisions, with the traditionally conservative justices joining in the majority opinions and Justices Breyer, Ginsburg, Kagan, and Sotomayor dissenting.

The impact of these decisions in the employment arena is substantial. California employers have widely reintroduced class action waiver provisions into their arbitration agreements. As a result, class action cases subject to these arbitration agreements have been compelled to individual arbitration instead of class wide arbitration.

As a method of reducing litigation risks, more employers have required employees to sign arbitration agreements with class waiver provisions as a condition of employment.

California’s Response and Pushback

Outside the courts, there has been some social backlash to implementation of these types of agreements and some employers have voluntarily ceased the use of employment arbitration agreements altogether. California lawmakers have recently targeted mandatory employment arbitration agreements, particularly in the wake of the #MeToo movement, urging that employees should not be required to give up their rights as a condition of employment.

Governor Jerry Brown vetoed Assembly Bill 3080 in 2018, which was authored particularly to help victims of sexual harassment by prohibiting California employers from requiring employees to sign arbitration agreements. Governor Brown said that he thought federal law would preempt such a prohibition.

A similar bill, Assembly Bill 51, landed on Governor Gavin Newsom’s desk in 2019, but, unlike his predecessor, Governor Newsom signed the bill, along with 14 other bills aimed at increasing protections for California employees, into law on October 10, 2019, prohibiting mandatory employment arbitration agreements. AB 51 adds two sections to the California Code, one section (432.6) to the Labor Code and one section (12953) to the Government Code.

Labor Code Section 432.6 prohibits any person from requiring an applicant or employee to, “waive any right, forum, or procedure” for a violation of the Fair Employment and Housing Act (FEHA) or the Labor Code. In essence, the bill bans (and criminalizes) mandatory arbitration agreements for claims of discrimination, harassment, and retaliation, as well as wage and hour violations.

Government Code Section 12953 makes any employer’s violation of Labor Code Section 432.6 an “unlawful employment practice” under the FEHA, thereby creating a private right of action for employees forced to sign arbitration agreements as a condition of employment. The new law only applies to employment contracts entered into, modified, or extended on or after January 1, 2020.

As expected, industry groups and trade associations challenged AB 51 in a complaint filed on December 6, 2019, in the U.S. District Court in the Eastern District of California arguing that AB 51 is preempted by the FAA. The plaintiffs in this case filed a motion for a temporary restraining order (TRO) on December 16, 2019, seeking an order prohibiting California from enforcing AB 51 until the court is able to hear the merits of a motion for a preliminary injunction. On the eve of AB 51’s implementation, the district court judge granted the TRO (on December 30, 2019) and enjoined the State from enforcing AB 51 pending resolution of the preliminary injunction. The court has since ordered supplemental briefing on issues of jurisdiction, standing, and severability of any provisions of AB 51. On January 31, 2020, the district court issued a minute order granting the preliminary injunction, thereby prohibiting enforcement of the new law during the pendency of the case.

We are likely to see continued litigation of the preemption issue and appeals of any subsequent decisions rendered. From the positions the U.S. Supreme Court has recently taken, California is facing an uphill battle in keeping AB 51 on the books as long as the traditionally conservative Justices continue to hold the majority vote.

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