What AB 51’s Preliminary Injunction Means for California Employers

U.S. District Court Judge Kimberly Mueller formalized on February 7 her order halting enforcement of and invalidating in full an anti-arbitration law identified by the California Chamber of Commerce as a job killer—AB 51 (Gonzalez; D-San Diego).

In this episode of The Workplace podcast, CalChamber Executive Vice President and General Counsel Erika Frank is joined by special guest Donald M. Falk, partner at Mayer Brown, to discuss the CalChamber’s successful legal challenge to AB 51 that he helped lead and what steps employers should take now that a preliminary injunction has been issued.

Preliminary Injunction Granted

AB 51 banned employers from, as a condition of employment, entering into arbitration agreements for claims brought under the Fair Employment and Housing Act and Labor Code, Frank reminds listeners. The bill was signed into law by Governor Gavin Newsom last fall, and shortly thereafter, a coalition of businesses led by the CalChamber filed litigation, arguing that AB 51 conflicted with federal law.

After considering all briefing, Judge Mueller granted the CalChamber’s request for a preliminary injunction in full. The ruling recognizes that placing businesses at risk for criminal penalties for a practice that has long been supported both by California and federal law was excessive.

Of particular concern to employers were provisions of the law that placed on employers the extraordinary burden of criminal penalties punishable by imprisonment and fines.

Judge Mueller acknowledged this concern in her order, writing “…because the employer may be sanctioned specifically for requiring an arbitration agreement as a condition of employment…AB 51’s design does not comport with the equal footing principle and its effort to avoid FAA [Federal Arbitration Act] preemption fails.”

The order went on to point out that a provision in AB 51 stating it is not intended to invalidate a written arbitration agreement otherwise enforceable under the FAA “does not exonerate employers who require the agreement in the first place. Given the penalties imposed on employers found to violate AB 51, the court finds that the law also interferes with the FAA and for this reason as well is preempted.”

Appeal Is Possible

The preliminary injunction issued last week means that the responsible government officials cannot enforce AB 51 against California employers for entering into arbitration agreements that are covered by the FAA—which is most employment-related arbitration agreements, Falk says.

Now that a preliminary injunction has been issued, the decision can be appealed, and if it is appealed, employers can expect an appellate decision within the year or shortly after. Falk tells Frank that the CalChamber would very likely win on appeal, and in the U.S. Supreme Court—if the case winds its way there.

Takeaways for Employers

Employers can sigh with some relief following the preliminary injunction, but the road is still long until they receive a final resolution, Frank says. In the meantime, employers can continue to require disputes to be resolved by arbitration, Falk says.

He stresses that now is a good time for employers to revise their current employment agreements and/or establish new arbitration agreements while the new law cannot be enforced against employers.

One warning for employers, however: A provision of AB 51 that still is enforceable is a ban on “supercharged” confidentiality agreements, as a condition of employment, that would forbid an employee from contacting a government agency about a problem, Falk cautions. This portion of the law is not affected by the FAA and remains undisturbed by last week’s preliminary injunction.

Because of this, Falk recommends that employers have counsel look at any employment agreement they have that requires confidentiality (regardless of whether it’s connected to an arbitration agreement), to ensure it doesn’t run afoul of the undisturbed part of AB 51 and incur civil or criminal liabilities.

Frank points out that the world of arbitration has been evolving over the years and employers do see litigation challenging poorly drafted or outdated arbitration agreements.

Falk agrees. “I think it’s always a good idea if your arbitration agreement in your employment application or employee handbook or employee agreement has not been reviewed by counsel that are well-versed in this area of employment and arbitration law [to] have somebody take a look, because now, especially with this confidentiality and reporting provision, [there] are criminal penalties, and you don’t want to find yourself in criminal court because of something that someone put into your employment agreement 20 years ago and never really thought about,” Falk says.

Legal Documents

The legal documents related to the case, Chamber of Commerce of the United States of America, et al. v. Xavier Becerra, et al., can be viewed at www.calchamber.com/legalaffairs.