Once more unto the FAA... again

The Spanish philosopher George Santayana said, "Those who cannot learn from history are doomed to repeat it." His protégé Yogi Berra said, ?It?s like déjà vu all over again.? But with Assembly Bill 465, the California Legislature seems poised to ignore these two wise men, taking their cue instead from King Henry V, and go "once more unto the breach..."

AB 465 creates a new Section 925 to the Labor Code, which forbids employers from requiring, as "a condition of employment," that employees "waive any legal right, penalty, remedy, forum, or procedure" for addressing any violation of the Labor Code, "including the right to file and pursue a civil action" or file a complaint with the labor commissioner. It provides that "any person" who requires such a waiver as a condition of employment is liable for a civil penalty of up to $10,000 per occurrence, plus attorney fees. It also says any such waiver that is not "a condition of employment" must be in writing, and the party seeking to enforce the waiver - rather than the party seeking to avoid the waiver - bears the burden of proof to establish that the waiver is (1) not "a condition of employment," and (2) "knowing and voluntary."

Although the bill flirts with language that seems to create a rule of general applicability to all contracts, there is little doubt that it is aimed straight at arbitration agreements. One subsection of the new statute expressly applies it to any "agreement to accept private arbitration." And the legislative history conclusively shows that the sole aim of the bill is to do away with employment-related arbitration agreements.

It is beyond rational debate that AB 465 is preempted by the Federal Arbitration Act, and cannot be applied to arbitration agreements under the FAA.

California has been down this road before. Labor Code Section 229 - added in 1959 - provides that "[a]ctions ... for the collection of due and unpaid wages ... may be maintained without regard to the existence of any private agreement to arbitrate." A little over 28 years ago, in Perry v. Thomas, 482 U.S. 483 (1987), the U.S. Supreme Court held that the FAA preempted Labor Code Section 229. Noting that Section 2 of the FAA "is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary," Perry held that the FAA established a "body of substantive law is enforceable in both state and federal courts" which requires that arbitration agreements be "rigorously enforce[d]" notwithstanding the provisions of Labor Code Section 229. "Therefore, under the Supremacy Clause, the state statute must give way."

Strangely, not one of the many committee or floor analyses prepared by the Legislature's staff in connection with AB 465 even mentions Labor Code Section 229 or Perry v. Thomas. But clear and binding U.S. Supreme Court precedent cannot simply be wished away or ignored.

The Supreme Court has not retreated one inch from Perry in the past 28 years. In fact, it has repeatedly reaffirmed it. In Buckeye Check Cashing Inc. v. Cardegna, 546 U.S. 440, 443 (2006), for example, it said that "Section 2 [of the FAA] embodies the national policy favoring arbitration." In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), it held that the FAA preempts state law rules which prohibit the arbitration of particular claims, or that otherwise frustrate the FAA's objective of ensuring that arbitration agreements are enforced according to their terms.

Section 2 of the FAA exempts from the scope of FAA preemption legal rules which "exist at law or in equity for the revocation of any contract." However, this offers little hope to save AB 465 from FAA preemption. As the California Supreme Court noted in Sonic-Calabasas A Inc. v. Moreno, 57 Cal.4th 1109 (2013), Concepcion "make[s] clear" that state-law unconscionability principles "must not disfavor arbitration as applied by imposing procedural requirements that 'interfere[] with fundamental attributes of arbitration.'" There can be little doubt but that AB 465 "interferes" with the most fundamental attribute of arbitration imaginable - whether arbitration will take place.

Supporters of AB 465 will undoubtedly argue that the bill is necessary to insure that employees may secure effective vindication of their rights under the Labor Code. But the U.S. Supreme Court's "effective vindication" cases - like Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614 (1985) - make it crystal-clear that the FAA only yields in certain cases to "effective vindication" or federal - not state - statutory rights.

On Monday, the California Supreme Court held in Sanchez v. Valencia Holding Co. LLC, 2015 DJDAR 8822, that the FAA demands that "our unconscionability standard is, as it must be, the same for arbitration and nonarbitration agreements ... the application of unconscionability doctrine to an arbitration clause must proceed from general principles that apply to any contract clause. In particular, the standard for substantive unconscionability - the requisite degree of unfairness beyond merely a bad bargain - must be as rigorous and demanding for arbitration clauses as for any contract clause." By establishing substantive and procedural rules for the enforcement employment-related arbitration contracts, AB 465 runs afoul of this principle.

There is, in short, absolutely no ground on which supporters of AB 465 can stand to defend the bill. It cannot be applied to arbitration agreements subject to the FAA - and so it will not achieve what its supporters intend.