New state laws signal arbitration scrutiny, legal experts say

The recent signing of Assembly Bill 51 and Senate Bill 707 could signal a growing rebuff of arbitration agreements, provided they can withstand the impending court battles they are likely to face, experts said Wednesday.

"It is part of a general push back against arbitration," said Glenn A. Danas of Robins Kaplan LLP in Los Angeles. "It's not profound, but I think it's starting."

As arbitration agreements have garnered more attention in recent years -- especially as the #MeToo movement has highlighted their role in silencing victims of sexual harassment -- many now see these contracts as an infringement on their Seventh Amendment right to a jury trial, Danas said.

AB 51 prohibits employers from making arbitration agreements a condition of employment, and SB 707 imposes statutory sanctions against parties that force arbitration but do not pay the accompanying fees. The former provides greater transparency by prohibiting mandatory arbitration for any discrimination claims, including sexual harassment, Danas said, while the latter dissuades employers from compelling arbitration, then stopping payment, delaying the process indefinitely.

"What [employers] want is to go to arbitration as a way of not having to pay or face any liability," Danas said. "So when they're faced with either a potential for class or aggregate arbitration on some basis, they won't pay the fees as a way to stall."

Still, the state laws, which go into effect this coming January, may be preempted by the Federal Arbitration Act of 1925, said Peter Hering, an employment associate at Rutan & Tucker LLP in Costa Mesa. The U.S. Supreme Court routinely uses the federal edict on state laws that interfere with arbitration, Hering said.

In particular, Hering wondered about the survivability of AB 51, though proponents argue the law merely limits arbitration.

"We all question whether AB 51 has any chance of being constitutional or not being preempted by the FAA," Hering said.

Similar bills have been struck down. Last year, Gov. Jerry Brown vetoed AB 3080, which would have prohibited businesses from requiring employees or independent contractors from signing arbitration agreements. Brown did sign AB 2617 in 2014, preventing mandatory arbitration of civil rights claims on contracts. However, the 2nd District Court of Appeal used Federal Arbitration Act preemption to shoot down the law in Saheli v. White Memorial Medical Center, 21 Cal. App. 5th 308 (2018).

If a case questioning the validity of either law reaches the U.S. Supreme Court, it would likely share a similar fate, said Daniel H. Handman, a partner in the Los Angeles office of Hirschfeld Kraemer LLP. "At the [U.S.] Supreme Court level, there is a pro-business tilt, and arbitration is essential to that mindset," Handman said. "California has been at the forefront of pushing back on arbitration agreements -- at times with some success; other times with no success. I have a feeling these two statutes are going to fall into the latter."

While AB 51 seems destined to be challenged, SB 707 may prove more elusive, Danas said. Unlike AB 51, SB 707 doesn't impede an employer's ability to arbitrate disputes. Also, the law seems more pro-arbitration as it strives to remove impediments from arbitrations moving forward.

"If there's an agreement to arbitrate and they refused to pay the fees, there aren't really any good arguments for why it should not be kicked to court," Danas said.

The U.S. Supreme Court could let California figure out its stance on arbitration even if decisions clash with federal arbitration ethos, Handman said. He cited Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), which ruled claims filed under the Private Attorney General Act could not be forced into arbitration. The California Supreme Court confirmed the decision.

"When I saw that, I was sure the U.S. Supreme Court would take that up and reverse that the same way they've historically reversed other decisions emanating from California, and they didn't," Handman said.

Handman believes the high court isn't going to review potential cases whose decisions are based on California-specific laws such as PAGA, and he noted any decision they render based on those state-specific laws could impact decisions at the state level in other jurisdictions.

Handman said it could also explain the court's recent decision not to hear a case involving a former Winston & Strawn partner, who successfully filed suit to get out of her arbitration agreement over a sexual harassment claim. Winston & Strawn, LLP v. Ramos, 18-1437.

The 1st District Court of Appeal ruled the firm's arbitration agreement was not in line with the guidelines set forth in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000).

"I don't see it as an approval of the way things are done in California," Handman said. "When you look at the number of cases the U.S. Supreme Court takes up in any given year, they have a certain amount of bandwidth, and they're probably not going to focus on such state-specific type of matters."