Newsom should veto latest anti-arbitration legislation

In its ongoing crusade against arbitration in California, last week the California State Legislature passed Assembly Bill 51, which seeks to prohibit an employer from requiring arbitration of certain employment-related claims. If signed into law, AB 51 will make it a misdemeanor for "a person" to require any applicant or employee to, "as a condition of employment, continued employment, or the receipt of any employment-related benefit[,]" "waive any right, forum, or procedure" -- which would include arbitration -- for a violation of any provision of the California Fair Employment Housing Act or the Labor Code. The bill treats affirmative agreements to arbitrate and opt-out programs the same; both are deemed mandatory, even though in an opt-out program individuals are free to make a voluntary choice.

AB 51 is fatally flawed. It contradicts the long-recognized federal policy favoring arbitration, as codified in the Federal Arbitration Act and articulated in U.S. Supreme Court precedent. It will be subject -- and in the end succumb -- to preemption challenges under the FAA. It fails to satisfy the stated goals it sets forth. It will create uncertainty amongst California employers and create more barriers to California employers' efforts to abide by California law.

We have been down this path before. AB 51 reflects the Legislature's third attempt, since 2015, to block mandatory employee arbitration programs in California. Most recently, in 2018, the Legislature passed AB 3080, which was functionally identical to AB 51. Governor Jerry Brown vetoed that bill, acknowledging it would be subject to immediate preemption challenges under the FAA and the Supreme Court's interpretation of the FAA, concluding: "Since this bill plainly violates federal law, I cannot sign this measure."

Supporters of AB 51 erroneously contend that, this time, the bill can withstand a FAA preemption challenge. Supporters reason that AB 51: (1) does not prevent parties from entering into voluntary agreements to arbitrate; the bill focuses on consent and regulates behavior before an arbitration agreement is reached, falling outside the purview of the FAA; (2) does not single out arbitration, but prohibits a waiver of "any right, forum, or procedure"; and (3) expressly states it is not "intended to invalidate a written arbitration agreement that is otherwise enforceable under the [FAA,]" a clause not present in AB 3080.

Such points, however, fail to acknowledge the fundamental defects in AB 51. If signed, AB 51 will face preemption challenges. Ambiguity in the bill's language, juxtaposed with the legislative history, will also create greater uncertainty for employers.

• First, AB 51 should not survive a FAA preemption challenge. Supreme Court cases, written by justices across the ideological spectrum, consistently hold that the FAA preempts state laws that "stand as an obstacle" to "enforce[ing arbitration agreements] according to their terms." AT&T Mobility v. Concepcion, 563 U.S. 333, 343-44 (2011). Justice Ruth Bader Ginsburg, for example, wrote for an 8-1 majority enforcing an arbitration agreement that California's Talent Agencies Act purported to displace. "When parties agree to arbitrate," she wrote, "the FAA supersedes state laws." Preston v. Ferrer, 552 U.S. 346, 359 (2008).

• Second, the contention that AB 51 focuses on regulating pre-agreement behavior should be immaterial to any preemption analysis. As Gov. Brown communicated in his veto message for AB 3080, the Supreme Court has held that the FAA "cares not only about the 'enforce[ment] of arbitration agreements, but also about their initial 'valid[ity]' -- that is, about what it takes to enter into them." Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S. Ct. 1421, 1428 (2017) (holding the FAA preempted a decision that prohibited an individual with power of attorney from forming an agreement to arbitrate, since the prohibition singled-out arbitration provisions). Thus, the purported focus on regulation of pre-agreement behavior, when focused on agreements to arbitration, is contrary to the FAA and federal policy favoring arbitration and legally insignificant in a preemption challenge. AB 51 plainly is focused on and takes aim at arbitration itself, not contract formation. The legislative history is clear that the purpose of AB 51 is to criminalize arbitration programs. Lorena Gonzalez, sponsor of AB 51, commented on the need for the bill: "Forced arbitration is among the most harmful practices that have enabled widespread abuse to go undetected for decades. Workers are forced to sign away their rights in order to get hired..." But AB 51 also prohibits voluntary opt-out programs.

• Third, the impact of the FAA exclusionary clause is disputed. Employers will contend that FAA-protected agreements are not covered. Plaintiffs, however, will contend that the bill only protects FAA-protected agreements formed before AB 51's effective date, Jan. 1, 2020.

• Fourth, the criminalization of the issue is an egregious overreach. The argument for preemption is compelling. Responsible employers should not have to commit (what the statute says is) a crime to vindicate the well-founded preemption argument.

Accordingly, if AB 51 becomes law, California employers with arbitration programs (or those interested in enacting arbitration programs) will face an untenable dilemma. On one hand, certain employers may choose to comply with AB 51 and eliminate any mandatory arbitration program regarding claims under the FEHA or the Labor Code, notwithstanding AB 51's deficiencies and the fate of almost-certain preemption. However, given AB 51's focus on claims only asserted under FEHA and the Labor Code, an employer could proceed with a narrow arbitration program limited to any other claims, such as tort claims. Then, however, an employer could face instances in which parallel claims, such as a claim for wrongful termination in violation of public policy alleging discrimination, must proceed in arbitration while the statutory claim under FEHA proceeds in court. On the other hand, an employer may continue with their arbitration program, certain that AB 51 will be susceptible to a preemption challenge, but face the potential that any person who participates in the administration of any such program could face criminal liability in the interim.

There may be a temptation to kick the can down the road and let the courts deal with federal preemption. But that is irresponsible. Governor Gavin Newsom should spare California employers from this considerable burden and acknowledge, as his predecessor did, that AB 51 is fatally flawed and bad for California. AB 51 should be vetoed. 