Episode 170: Arbitration Agreements: A Recap of Favorable Court Decision and What’s to Come

Welcome to the Workplace, a podcast by Cal Chamber. I'm Matthew Roberts, the Labor Law helpline manager and Employment Law Council with the California Chamber of Commerce. Hello everyone. It's always an exciting time around the Chamber when the court system gives California employers a win. And that is just what we got on February 15th from the 9th Circuit Court of Appeal. In a long awaited decision, the Ninth Circuit invalidated a California law that prohibited an employer from requiring a California employee to sign an agreement that the employee would arbitrate any claims arising out of their employment rather than file a lawsuit with the courts. This type of agreement is generally known as a mandatory arbitration agreement. And I know we've spoken about this issue in the past as well. And we're back with another update on this one. So joining me for a discussion of how we got to this point and what it means for the future is Ashley Hoffman, Cow Chambers Employment Law Advocate. Welcome back to the show, Ashley.

Thanks, Matthew.

All right, so let's start in your wheelhouse, really, and talk about the law itself and kind of the history surrounding where this law came from.

So AB51 passed in 2019, which means that it was set to take effect on January 1, 2020. Essentially, it banned employers from requiring employees to sign arbitration agreements as a condition of employment by imposing civil and criminal penalties if employers required that. AB51 is really the most recent in a string of laws attempted to vilify arbitration, some of which were nearly identical to AB51, including a 2018 bill vetoed by Governor Brown, SB3080 that did virtually the same thing because he felt like the law wouldn't pass judicial scrutiny under the faa. And it turns out he was right.

Yeah. So, okay, let's talk about the litigation history now, because As I understand, AB51 has never taken effect, even though it was supposed to take effect more than three years ago now because lawsuits were filed about it.

That is correct. So prior to taking effect, coalition of businesses, including Kau Chamber and the U.S. chamber, filed a lawsuit arguing that AB51 violated the FAA. The district court agreed with that and therefore was able to enter a injunction. So the bill did not take effect as it should have, January 1, 2020. And we've been in court ever since.

So when the trial court agreed with us that this violated the federal law, that really wasn't the end of this litigation history though, was it?

Yeah, this one's been interesting. So essentially the district court did agree with us. So there was an injunction in place. The ninth Circuit then in a split decision overturned the Trial court, however, there is a procedure where you and seek what's called en banc review at a court of appeals level. What that means is essentially you are asking for instead of a three judge panel, a larger judge panel, to really kind of retake a look at it. That's not something that's always granted. The judges kind of go back and forth debating whether or not to grant en banc review. But the good news was that because we requested en banc review, the trial court's injunction was put back into place.

And so what we got a couple days ago was actually the ninth Circuit, instead of granting en banc review, they actually voluntarily withdrew the old opinion and then reissued what we got on the 15th with one of the judges switching sides and making it two to one in our favor.

So that's really fascinating. And I'm not sure that I've seen that really in the employment law context where the ninth Circuit issues one decision, then decides to pull it back on its own and issue a completely different decision. So why did they change their mind then between the two decisions?

So it's interesting, I think in the original opinion, Judge Acuda's dissent was really strong. And that was really repeating a lot of our arguments that the AB51 was in fact preempted by the FAA. And so one of the judges did ultimately switch rather to going en blanc, which I think goes to show that judge probably was on the fence to begin with. That would be my guess. And so what the court held was, you know, there's a couple different theories under which laws can be preempted by the FAA. In here, it was clear that AB51 was what we call kind of discriminating against arbitration agreements, and that it was criminalizing the act of requiring employees to sign arbitration agreements as a condition of employment. And so when you have situations, we have laws that, you know, try to essentially undercut the faa. Right. By deterring formation or sometimes. On the other hand, if there is an arbitration agreement, but seeking to invalidate it, that will be enough to find preemption under the faa. And that's really what happened here.

Yeah, and for me, what I always found really interesting about this case was AB51 criminalizes and imposes civil penalties on making people sign the agreements. But in the law itself, once the agreements are in place, they're actually still enforceable as this kind of weird workaround that they TR that the state legislature tried to put in there, which creates this weird situation where an employer violates the law, but then can enforce the fruits of violating the law. It was kind of bizarre. So the decision from the ninth Circuit that we've got now I found interesting that kind of examined that and said this is kind of ridiculous.

To have that kind of situation. So with the decision in place now, where does that leave us as employers with arbitration agreements and with AB51? And really what does the future hold?

So procedurally, you know, the state of California, which is the opposing party, right, they are set with the task of defending California's laws. So it is up to them, the AG's office, whether they want to try and potentially request their own en banc review if they want to try and go up to the Supreme Court with a cert to see if the Supreme Court will take it on. But for now, employers can continue requiring mandatory arbitration agreement for California employees as a condition of employment. And you know, I within the legislature a lot of times there's a lot of attacks on arbitration. But our point of view, and there's definitely some research to back this up, is arbitration is often a more cost effective and efficient means of resolving a dispute. You know, it's, you're not being pounded with discovery for years, right? Dragging all of this out, really increasing expenses on both sides. So oftentimes it's actually better for the employee and the employer.

So one thing I also like to highlight with this is the ruling's fantastic. Employers can continue to require employees to sign arbitration agreements. But one thing I like to caution is that this doesn't give employers carte blanche to just put any kind of agreement in front of an employee. Right. What the FAA says really is that this just puts arbitration agreements on the same footing as other contracts and that then they're subject to regular contract laws. And contract laws have always been in place that says these agreements can still be unenforceable if they're procedurally or if their content within the agreements are unfair. So it's really important for employers who want to either start this process of using mandatory arbitration agreements or want to continue on with this process to regularly get their agreements drafted and reviewed by counsel to ensure that the agreements that we do require our employees to sign are still lawful and enforceable at the end of the day. So, Ashley, any final thoughts about the future of AB51 or mandatory arbitration agreements in general at the legislature? Have you been hearing anything as we start a new session?

Yeah, and I think you raise a really good point. Right. Just because you are allowed to have an employee sign arbitration agreement doesn't necessarily make it enforceable and you know, the plaintiff's bar will continue to challenge arbitration agreements just because someone signs it. I would expect that you are going to likely have to file a motion to compel. If you are trying to enforce it, they are probably not willingly going to go to arbitration. My own personal practice, I saw that happen one time. That was it.

So, you know, again, it will continue to be vilified in the legislature. It always is. It's very seen as very pro employer. Obviously, we highly disagree with that. There's data to show that employee claimants actually often win more and actually are spending less time in litigation and are coming out actually with higher awards. So we have seen already a bill this year, SB365, that takes an aim at arbitration, trying to say that even that if you are appealing a denial of a motion to compel, the trial court can never stay the trial court proceedings. So you would be basically forced to litigate while your appeal is pending, which undermines largely right. The benefits of arbitration. So this is definitely not the end, of course, in Viking river and the pending case before the California Supreme Court when it comes to arbitrating Poga claims, arbitration will absolutely continue to be a hot topic for years to come.

Well, Ashley, it was really my pleasure having you on today. Thank you for taking part in this show and discussion of arbitration agreements.

Yeah, thanks so much.

And thank you listeners for joining this discussion on the workplace. Please comment, share and subscribe to Cal Chamber's podcast by visiting calchamber.com.