AB 51 will withstand challenges, author insists

AB 51, which prohibits employers from requiring new or continuing employees to sign arbitration agreements as a condition of employment, was written clearly and will withstand legal challenges, one of the law's authors said Tuesday.

Cliff M. Palefsky, a founding partner at the Law Offices of McGuinn, Hillsman and Palefsky in San Francisco, welcomed lawsuits by employers and interest groups, many of whom say the law will be struck down because it interferes with arbitration agreements.

A key concern for opponents is a perceived vagueness in the line regarding Section 432.6 of the Labor Code: "Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act."

The language could not be clearer, Palefsky said. The law does not prohibit pre- or post-dispute agreements, or the arbitration of any category of claims, he said.

"The purpose of that provision was to say that if there is an agreement signed, the FAA is going to govern it," Palefsky said. "We recognize the state does not have the power under the present state of the law to invalidate an agreement that would be valid. All [AB 51] says is it can't be a matter of coercion."

That idea that arbitration under the federal law is a matter of consent rather than coercion has been a tent pole of jurisprudence for the U.S. Supreme Court for decades, Palefsky said. Most recently, the court reaffirmed that notion when it held courts cannot infer whether parties consented to class arbitration from an ambiguous agreement, reversing a 9th U.S. Circuit Court of Appeals ruling. Lamps Plus v. Varela, 139 S. Ct. 1407 (2019)

"The U.S. Supreme Court has said repeatedly that arbitration under the FAA is a matter of consent and not coercion," Palefsky said. "So the purpose of the bill was to follow up on that very straightforward concept, to allow people the right to say no without repercussions from that."

The new law also counters Gov. Jerry Brown's main critique of AB 51's predecessor, AB 3080, which he vetoed last year. AB 3080 carried a provision that specifically said if the arbitration agreement is required as a condition of employment, then it is void and unenforceable, said Mariko Yoshihara, policy director for the Sacramento-based California Employment Lawyers Association.

"As FAA preemption jurisprudence has expanded, it's been along those lines of states' efforts to make otherwise valid arbitration agreements invalid and unenforceable. That's where there's tricky preemption issues," Yoshihara said. "This version was carefully crafted to say it's all about making sure that arbitration agreements are voluntary."

Equally important is the provision in AB 51 prohibiting retaliation for refusing to sign the agreement, Palefsky said. If an employee is retaliated against for not signing the agreement, meaning they're either fired or aren't hired, the courts cannot determine whether the agreement is enforceable because the worker never signed it, rendering the federal law preemption moot, he said.

"The FAA only comes into effect if there's an arbitration agreement," Palefsky said. "I can't imagine what the preemption arguments could be if there isn't even an arbitration agreement."

It's a novel approach around the usual argument for Federal Arbitration Act preemption, said Brian Kabateck of Kabateck LLP. By making arbitration truly voluntary rather than a take-it-or-leave-it stipulation, AB 51 removes federal preemption before it becomes enforceable, he said.

"It raises a very good question that, as far as I can tell, has never been tested," Kabateck said. "The naysayers out there that say, 'Oh, it will be immediately rejected,' are counting on the Supreme Court to be purely doctrinal on this and not look at the situation from the intent of the legislation."

For employers wondering how to make arbitration agreements truly voluntary, Palefsky recommended drafting a post-dispute agreement that includes arbitration as one of several options for employees, including mediation and going to court. But Palefsky warned any such agreement should make it clear what arbitration is and its key fundamental features, including limited discovery, class action waivers and nonreviewable awards.

"You set forth factually and accurately what arbitration is, you give people a choice and you say this will not have any impact on any aspect of your employment; there will be no retaliation," Palefsky said. "That is the closest you're going to come to ensuring a knowingly voluntary agreement."