AB 51 seems primed for a court challenge but who will do it?

Opponents of Assembly Bill 51, which prohibits employers from requiring arbitration agreements as a condition of new or continuing employment, believe the law taking effect Jan. 1 will eventually be struck down by a court. But legal experts question who would initiate a challenge and risk the potential consequences.

Not only could companies who either implement new mandatory agreements or use them as a condition of continuing employment expose themselves to civil penalties, they could also incur criminal misdemeanor charges for violating the Fair Employment and Housing Act, a rare occurrence in non-wage-and-hour abuses, said Damien P. DeLaney, a partner in Akerman LLP's Los Angeles labor and employment and employment litigation practices.

"It's unusual to attach criminal liability to a statute like this," DeLaney said. "It's a bit hard to see district attorneys in California prosecuting companies for trying to implement employment arbitration agreements, but it's in the law."

The challenge to AB 51 might come in a complaint against the state of California or state attorney general's office by business or trade associations seeking declarative relief, says Wendy M. Lazerson, head of Sidley Austin LLP's Northern California labor and employment group and a partner in the firm's Palo Alto office.

Groups like the California Chamber of Commerce or the American Arbitration Association could sue, Lazerson said, arguing the statue is too vague to be understood.

That level of ambiguity pockmarks the statue, Lazerson said, most notably in language preventing employers from offering workers "an employee-related benefit" if they sign the agreement and a clause that states the statute is not meant to invalidate the Federal Arbitration Act.

Lazerson believes the latter part is meant to sidestep FAA preemption, which federal judges routinely rule when state laws interfere with arbitration. This past June, a federal judge shot down a 2018 New York state law banning mandatory arbitration agreements in sexual harassment cases.

While FAA preemption remains a key reason many believe the law will fail, challengers could also use the vagueness doctrine as an argument, Lazerson said.

"It says, 'nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the federal arbitration act.' What does that even mean?" Lazerson said. "There are lots of things in here that one might try to challenge as being void for vagueness."

Those groups have an incentive to challenge the new law, Lazerson added. The chamber represents more than 40,000 member businesses, according to its site. Meanwhile, arbitration has become a cottage industry in California, Lazerson said.

"Think about the loss of their business that would result if employers can't arbitrate," she said. "It's become quite a cottage industry. ... Now we've got all these arbitration agreements and alternative dispute resolution organizations, and people are now making their living as arbitrators. They could be financially motivated to challenge the law."

Until the statute is challenged and battled in court, companies must consider the risks in using arbitration agreements, DeLaney said, though few choices are available. They can try to hire as many employees as they can prior to Jan. 1; those agreements will remain enforceable. Companies could also try offering a "truly voluntary" agreement, though that could prove difficult if the employee sued for voiding the agreement, DeLaney said.

"I suspect the employee will argue there was some element of coercion just because of the power differential between employers and employees," DeLaney said. "Figuring out how to avoid that type of argument coming back at you down the road is going to be a big part of the trick."

But Peter Hering, an employment associate with Rutan & Tucker, LLP in Costa Mesa, thinks many employees will sign a voluntary agreement, opting for a fast approach to resolution rather than a lengthy day in court.

"I just think that a lot of employees are not inclined to sue their employers in the first place," Hering said. "Arbitration gets a bad rap. You don't have bad outcomes if you have a good case."