Business groups sue state over no forced-arbitration law

The U.S. Chamber of Commerce's challenge to California's new law that makes it illegal for employers to compel workers into arbitration is a swift clap back that argues the state legislation goes against federal law, attorneys say.

The chamber, along with the National Retail Federation, sued Dec. 6 in the Eastern District of California over AB 51, which subjects employers to criminal charges for enforcing mandatory arbitration agreements. The business groups are asking a judge to block enforcement and rule the new law is invalid on the basis it slaps against the Federal Arbitration Act, which favors arbitration.

"The Supreme Court has repeatedly held that state laws that single out arbitration agreements for disfavored treatment are preempted. Indeed, it has specifically recognized that California Labor Code provisions that disfavor arbitration are preempted," according to the lawsuit filed by Mayer Brown LLP and Littler Mendelson PC.

If an employer extends an arbitration agreement come Jan. 1, they are subject to a misdemeanor. Gov. Gavin Newson signed the bill into law in October.

Glenn A. Danas, a plaintiff-side employment litigator with Robins Kaplan LLP, said the chamber's lawsuit will show whether the U.S. Supreme Court's reasoning regarding the Federal Arbitration Act was outcome-based or follows precedent.

"If arbitration is really a matter of intent and consent, and FAA preemption isn't triggered until an agreement is formed, [then] AB 51 should survive challenge," said Danas in an email.

But because the seminal ruling governing arbitrations in the high court's Concepcion decision was so expansive, Danas said it would be hard for AB 51 to overcome it.

"Concepcion held that any state law that stands in the way of enforcement of arbitration agreements is preempted. AB 51 obviously would be a state law standing in the way of formation of arbitration agreements, and therefore maybe will be found to be preempted. That the law imposed criminal penalties really ups the stakes and makes clarity especially essential," said Danas. AT&T Mobility v. Concepcion, 563 U.S. 333 (2011).

Ackerman LLP partners David Van Pelt and Damien P. DeLaney, who represent employers, echoed similar sentiments.

"If implemented, it would still conflict with the Federal Arbitration Act. It still prohibits pre-dispute binding arbitration agreements, based on what the U.S. Supreme Court has held before," said DeLaney.

Van Pelt said the complaint is strong enough to survive a motion to dismiss.

"I definitely think this is headed to a higher court," said Van Pelt, who added a similar New York law that dealt with harassment claims and barred arbitration was struck down by a federal court.

The chamber argued arbitration is faster and positions employees for a better chance at winning than a court trial. Employee-side litigators have argued mandatory arbitration agreements have stripped away workers rights to use the courts.

Legislators said the law wasn't designed to invalidate the Federal Arbitration Act because it encompasses the time frame prior to an agreement being reached as opposed to once it is already formed.

Previously, former Gov. Jerry Brown vetoed a similar bill barring the arbitration provision, saying it violated federal law.