Episode 48: What AB 51’s Preliminary Injunction Means for California Employers

Hey, podcast listeners, be sure to listen to the end of today's podcast for breaking news.

Welcome to the Workplace, a podcast by Cal Chamber. I'm Erica Frank, Cal Chambers, General counsel and Executive Vice president. And we have a special guest on the podcast today, we have Donald Falk, a partner at the Mayer Brown law firm. Welcome, Don.

Thanks, Erica.

And Don is here for a very special reason. He has been working and was retained by Cal Chamber on our successful legal challenges to Assembly Bill 51. As our listeners know, Assembly Bill 51 attempted to ban mandatory arbitration agreements made as a condition of employment that require the arbitration of any dispute arising under the Labor Code or the Fair Employment and Housing Act. The bill was signed into law by Governor Newsom, and shortly thereafter, Cal Chamber filed litigation along with a number of other business associations, and Don Falk led the charge. Don, what was the big deal with AB51?

Well, AB51 is the latest in a long line of legislative and judicial attempts in California to impede or frankly abolish arbitration as a practical matter for for either employees or consumers. This bill, of course, concerned employees only. And what employers like about arbitration is it's quick, it's relatively inexpensive, it reaches a fair result in a short amount of time and usually creates less hostility than litigation, particularly class action litigation. And especially since the Concepcion decision by the U.S. supreme Court nine years ago, arbitration agreements have generally required individual dispute resolution, which means that class actions are generally not available under an arbitration regime unless the agreement says so, and none of them do. Now, what is a big deal is for the plaintiff's bar. The plaintiff's employment bar. Employment litigation has been huge in California, even with what the legislature said was a two thirds rate among employers who use arbitration to resolve disputes. The remaining third have made for a very lucrative litigation practice among the plaintiffs bar. And by crafting what effectively is a ban on employment arbitration, at least it would require many, many more steps for an employer to successfully enter into an agreement with an employee. But. But removing arbitration from the table would open the door to many more class actions. And of course, they did it in a kind of a strange way in this bill.

Right. So let's just refresh our memories as well with AB51. It only applied to arbitration agreements entered into from January 1, 2020 forward. So it didn't throw out, so to speak, those arbitration agreements that had been entered into before January 1, 2020, correct?

That's correct. But it also applied to modifications and so forth. So any employer who revised their employment agreement and had arbitration as one of the conditions of employment, along with all the other things that are conditions of employment. Those agreements, if they contained arbitration agreements, would be illegal and subject the employer to civil penalties or even misdemeanor prosecution.

Right. So that was where the real teeth lied with this bill. Not only it was saying, employers, you can no longer enter into these mandatory arbitration agreements that historically have been held valid at the state of California, but also to say, and employers, if you do, you could be criminalized. Is that an overstatement?

No, it's not an overstatement at all. In fact, it's something that the proponents and the Attorney General's Office claimed was the reason this bill was sustainable under the Federal Arbitration Act. They said it allows current and future arbitration agreements to be enforced according to their terms. It just penalizes the employer for entering into the agreement. And that's a separate proceeding and a separate environment. That just doesn't matter because the agreement will be enforced. The employer will just perhaps go to jail because they put this provision into one of the sections of the Labor Code that carries criminal penalties.

And we know there's several studies that have been conducted throughout the years that demonstrate why arbitration is beneficial for the employer and, of course, the employee, mainly getting that resolution of a dispute in a more timely fashion and honestly, more affordable than our judicial system can be. When you start to talk about the time and the expense of each side getting attorneys.

Oh, absolutely. And what little data has been compiled in a responsible way has shown that employee plaintiffs do a little bit better in arbitration on the whole than they do in litigation.

So to keep the spirit of arbitration alive, we reached out to you to help us try and stop AB51 from taking effect and declaring AB51 unlawful, so to speak, in California. So tell us a little bit about the litigation.

Sure. What we did because we wanted to stop this bill in its tracks, we needed to get an injunction against the government officials who are responsible for enforcing the act. So we sued the Labor Commissioner and the Attorney General and the Director of the Department of Fair Employment and Housing so that they would be barred from enforcing this law, because, remember, this law's main effect is that it subjects employers to penalties. Now, there could be private litigation that attempted to do this, but the main threat is from the Attorney General and the government enforcement agencies who are, frankly, hot to trot because they're not big fans of arbitration either. So we brought this action in Eastern District of California here in Sacramento, and immediately were successful in getting a temporary restraining order because the law was going to come into effect on January 1, then we had our hearing on the preliminary injunction. And after an hour of argument, very lively argument from both sides, the court called for a little bit of supplemental briefing and after receiving that, issued her preliminary injunction, which means that the government defendants in this case can't enforce AB51 against California employers for entering into arbitration agreements that are covered by the Federal Arbitration act, which is most employment related arbitration agreements.

So to give folks a little primer on what we're all talking about here, for our non lawyers that listen, we brought the litigation in federal court and that was the Eastern District Court, federal court in Sacramento. We were able to receive temporary relief, which was the temporary injunction. And then on January 31st, we receive the full order, the minute order, I should say, on the preliminary injunction.

Right. Which means that that law can't be enforced.

Unless and until another court takes a different view of the issue. And that, you know, there may be ways to enforce it privately, but that's of much less concern to employers, especially now that we have a decision on the books that we hope when the federal district judge issues her order, will be a thorough and convincing explanation of why the Federal Arbitration act, which was created to promote arbitration, preempts or displaces this state law.

So Don, what does that mean now? So obviously this is a huge victory for employers that utilize arbitration agreements. But what does this mean? What would be the next steps now that we have that preliminary injunction?

Well, the next steps, there are two things that could happen, and in fact they could both happen. A preliminary injunction is immediately appealable and it goes up on a pretty quick track to the federal Court of Appeals for the Ninth Circuit, and the state may take that course, in which case we'd have an appellate decision probably within the year or shortly thereafter. It's possible they will do that because the legal issues really control this case. There aren't facts to be developed that are going to matter. The other thing that is going on, that can be going on, that will be going on from our point of view is that we'll seek a permanent injunction. And because we don't think there's any additional factual development to be done here, that the law is what it is and it's facially invalid to the extent it applies to arbitration agreements covered by the Federal Arbitration act. We think a preliminary injunction should be entered right away without any further, any further proceedings. And then there can be a single appeal, because otherwise there'd be an appeal of the preliminary injunction, which for practical purposes would decide the issues of the permanent injunction, but we could find ourselves doing the same thing twice in the Ninth Circuit unless, you know, we perhaps reach agreement with the state or things just turn out in a way that we can just do it all at once, which I think all sides will prefer.

Okay. So while employers can sigh a little bit of relief with the ruling that we received on the preliminary injunction, the road is still rather long until we get a final resolution on this issue. So in the meantime, what are some tips that we should be providing employers as to what this ruling means to them, what this means for the existing arbitration agreements that they have, and what are some things that they should look out for and perhaps seek counsel about?

Well, the main thing it means is that employers can continue to require disputes to be resolved by arbitration when they are issuing and distributing their applications and their employment agreements. They can continue doing that. They can revise their agreements to do that. They can have new arbitration agreements with current employees. All that is okay while this injunction is in force. And I would say I think we are very likely, very likely to win on appeal and certainly if this ever gets to the Supreme Court of the United States. But this is a good time to revise your agreements while the law can't be enforced against them and just to make sure you have the most possible coverage for your employees in the near future. But there's one sort of warning point here, and AB51 did two things. It not only effectively dropped these penalties on employers who enter into arbitration agreements, it also said that it was unlawful to have as a condition of employment these sort of supercharged confidentiality agreements that would forbid an employer from contacting a government agency about a problem, and that part is not affected by the Federal Arbitration act is still in force. So what I would say the main takeaway, besides this is a good time to revise your arbitration agreements, is to have counsel look at any agreement, any part of your employment agreement, whether connected with the arbitration proceeding or not, that requires confidentiality. Have someone look at it and make sure it's not falling afoul of what could be civil penalties or criminal liability under the undisturbed part of AB51.

And I actually think that's an excellent takeaway, regardless, simply because the world of arbitration has been evolving over the years, whether it's at the state or federal court. And you could tell me if I'm wrong, but employers do see litigation challenging the arbitration agreements that they have, oftentimes because they were poorly drafted or they just didn't have counsel take a look at them as the years progressed or.

They had the round counsel take a look at them. I think that's true. There are a lot of arbitration agreements that have not been material change despite the huge changes in the law, which have been generally favorable toward the enforcement of arbitration agreements, but have also singled out some features that really have nothing to do with arbitration but wound up as part of an arbitration agreement. Those features have been denied enforcement and sometimes can affect the enforceability of what otherwise would be a lawful arbitration agreement. So I think it's always a good idea if your arbitration agreement and 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. Have somebody take a look, because now, especially with this confidentiality and reporting provision, those 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.

Fantastic. That's an excellent takeaway and a great place to end today's podcast. Thank you so much again, dawn, for being here today to bring the great news to California employers related to your arbitration. And thank you all for listening to the workplace. Please subscribe, share and comment about Cal Chambers podcast by visiting calchamber.com.

So you made it to the end. And I bet you're wondering what that breaking news is. Well, shortly after we recorded the podcast, we received Judge Mueller's 36 page order invalidating AB51, which is fantastic news for California employers and employees. And for those who would like to get a read of the order, go to calchamber.com to download the order and other papers related to this case.