The FAIR Act and mandatory arbitration

"Arbitration is one of the central ways in which corporate America has rigged the system against middle class families, working people."

This was said by Rep. Rosa DeLauro (D-CT) on the floor of the U.S. House of Representatives on Sept. 20, 2019, when the Forced Arbitration Injustice Repeal Act of 2019, aka FAIR Act, passed the House of Representatives. The words of Congresswoman Rosa DeLauro echo the voices of millions of victims of civil rights violations who have been denied the right to a jury trial due to compelled arbitration.

When the FAIR Act passed the House, it was a vote on a bipartisan basis, of 225-186. The FAIR Act is a comprehensive legislation which prohibits pre-dispute, forced arbitration agreements from being valid or enforceable if it requires forced arbitration of an employment, consumer, or civil rights claim against a corporation.

The purposes of FAIR Act are to:

(1) Prohibit pre-dispute arbitration agreements that force arbitration of future employment, consumer antitrust, or civil rights disputes; and,

(2) Prohibit agreements and practices that interfere with the right of individuals, works, and small business to participate in a joint, class, or collective action related to an employment, consumer, antitrust, or civil rights dispute.

Although the FAIR ACT has cleared the House, it still needs affirmation by Congress. If passed, it would be a huge move towards ensuring justice to employees who would otherwise have to arbitrate their employment disputes, rather than have their disputes heard before a jury.

California's AB 51 Background

California has been at the forefront fighting mandatory arbitration for years now. In 2015, the California Legislature passed Assembly Bill 465, which would have prohibited employers from requiring that employees sign arbitration agreements. Gov. Jerry Brown vetoed the bill in 2015. In 2018, the California Legislature passed AB 3080, which, like AB 465, would have prohibited most employment arbitration agreements in California. Brown again vetoed the bill in 2018.

Last October, Gov. Gavin Newsom signed AB 51 into law, which prohibits employers, starting Jan. 1, 2020, from requiring any applicant or employee to submit any claims to mandatory arbitration under the California Labor Code or the Fair Employment and Housing Act, as a condition of employment, continued employment, or the receipt of any employment-related benefit.

Business Organizations Challenge AB 51

Soon after Gov. Newsom signed AB 51 into law, on Dec. 6, 2019, the U.S. Chamber of Commerce along with several trade organizations, swiftly filed a complaint for declaratory and injunctive relief against the state of California challenging AB 51 in the Eastern District of California, arguing that AB 51 violates the Federal Arbitration Act. See Chamber of Commerce of the United States of America, et al. v. Becerra, 2:19-cv-02456-KJM-DB (E.D. Cal.).

On Dec. 23, the court heard the chamber's motion for a temporary restraining order seeking to stop AB 51 from taking effect until the court rules on the plaintiffs complaint in that action. On Dec. 31, District Judge Kimberly J. Mueller issued a temporary restraining order barring California's attorney general, labor commissioner, and other relevant officials from enforcing AB 51, and as such, halting AB 51 from taking effect on Jan. 1.

Then on Jan. 10, the court heard oral arguments on the preliminary injunction. The chamber argued that the injunction should be granted because AB 51 unlawfully seeks to violate the FAA. The state on the other hand, argued that AB 51's legislative history confirms that it neither bans the use of, nor invalidates any arbitration agreements, and that the Legislature was cognizant of FAA preemption concerns. The state also argued that the court lacked jurisdiction. After further briefing was submitted, the court granted chambers' motion for a preliminary injunction in full. As of Jan. 31, the state (including attorney genera, labor commissioner, secretary of the California Labor and Workforce Development Agency, and director of the California Department of Fair Employment and Housing) is enjoined from enforcing Sections 432.6(a)-(c) of the California Labor Code where the alleged "waiver of any right, forum, or procedure" is the entry into an arbitration agreement covered by the FAA. The court's order is problematic, especially because the legislative intent behind AB 51 was clear and never intended to interfere with FAA. Markedly, the final Senate floor analysis of AB 51 specifically notes the bill:

6) Provides that nothing in this bill is intended to invalidate a written arbitration agreement that is otherwise enforceable under the FAA, and also that this bill does not apply to post-dispute settlement agreements or negotiated severance agreements. (Emphasis added.)

The final Senate floor analysis of AB 51 in its comments section further states:

"The Supreme Court has never ruled that the FAA applies in the absence of a valid agreement. AB 51 regulates employer behavior prior to an agreement being reached. Further, understanding the Courts' hostile precedence toward policies that outright ban or invalidate arbitration agreements, AB 51 does neither. Both pre-dispute and post-dispute agreements remain allowable and the bill takes no steps to invalidate any arbitration agreement that would otherwise be enforceable under the FAA. The steps help ensure this bill falls outside the purview of the FAA."

The Senate Floor Analysis also states that the bill "follows the dictates of the Supreme Court that arbitration under the FAA is a matter of 'consent and not coercion' and protects employees from retaliation for not consenting to waive their rights. It is consistent with the bi-partisan legislation introduced in Congress, and moving in numerous other states, that would ensure victims of sexual assault and harassment are not forced into arbitration agreements."

And, "[w]hile the FAA has been interpreted to preempt many state regulations of arbitration, it does not apply here. This bill does not seek to invalidate any arbitration agreement that would be valid under the FAA. It does not make any category of claim arbitrable. It does not shift the burden of proof onto the party seeking to validate the agreement. Instead, it simply ensures that workplace arbitration agreements are entered into willingly and not through coercion."

AB 51 was obviously drafted with the knowledge that it would be challenged as violative of the FAA, and as such does not disfavor arbitration, but what it does emphasize is that an employer should not engage in unfair hiring practices, and that an employee who enters into any arbitration agreement, should enter voluntarily and free of coercion.

While the state will likely appeal for reconsideration of Judge Mueller's order, the real fix to the problem is the FAIR Act.

How Fair Act ties into AB51

The FAIR Act takes direct aim at FAA. Specifically, the FAIR Act would amend the FAA to: (1) invalidate arbitration agreements and class action waivers in consumer contracts and employment contracts on a going-forward basis and (2) invalidate current arbitration agreements/class waivers that have already been signed, but only regarding disputes that arise after the law goes into effect.

The FAIR Act is much more expansive and broader than AB 51. AB 51 can be viewed as a restraint approach, which should not implicate the FAA and avoid preemption. If the FAIR Act goes into effect, AB 51 would clearly not violate FAA, and AB 51 may perhaps even be amended to be broader. However, these ambitions are currently in a battle with a significant number of corporate entities and one can only hope for the principles of fairness and equity to prevail. There is an encouraging silver lining -- as pointed out by the state in Chamber of Commerce case -- that many employers in California (including Google, Facebook, eBay, Airbnb and Twitter) have either stopped requiring or never required waivers or arbitration agreements as a condition of employment.

In the wake of the #MeToo movement, it is imperative for our legislators and judges to comprehend the serious repercussions of mandatory arbitration upon victims of civil rights violations. It will be a better day for employees if AB51 is allowed to be enforced and if the FAIR Act is passed.