Two Centuries of Federal Precedent Given Effect

We’ve blogged several times the ongoing saga involving AB 51, California’s attempt to prevent the mandatory arbitration of employment claims largely by sanctioning employers who use such agreements. (Oct. 11, Dec. 30 and Jan. 16) Much of that saga currently focuses on the case of Chamber of Commerce of the United States of America v. Bacerra, No. 2:19-cv-02456 (E.D. Cal.), a case brought to challenge AB 51’s implementation. Most recently, we noted that the district court in that case, by minute order, had preliminarily enjoined AB 51’s enforcement. (Feb. 3) Several days later, on Feb. 6, the district court explained the reasons supporting that order in a 36-page opinion reiterating its decision to enjoin enforcement of the Act.

As most of us learned in high school, the Constitutional Convention was called in 1787 to address crippling issues caused by the weak central governing structure of the Articles of Confederation. Chief among the problems was that the 13 former colonies acted too much like 13 different countries over the intervening decade or so, making interstate commerce impracticable. After extensive debate, the framers of the Constitution concluded that a more centralized federal government was necessary, and that its laws would be binding on the states. To effect that principle, Article VI, Clause 2 of the Constitution (the “Supremacy Clause”) provides:

This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

It’s pretty clear. Federal law is “the supreme Law of the Land” and “the Judges in every State” are found to follow it. But in case of any ambiguity, Alexander Hamilton and James Madison spelled out what it meant in Federalist Nos. 33 and 34, and the Supreme Court relied upon it to invalidate state laws as early as 1796. And it’s been the law for well over 200 years. This provision was also unchanged and intact when California became a state in 1860. It hasn’t changed since then.

Similarly, the Federal Arbitration Act was passed in 1925 with the express purpose of being enacted because of judicial hostility to arbitration. In one of the earliest FAA preemption cases, decided more than 50 years ago, the Supreme Court found that that statute preempted California laws seeking to invalidate or restrict arbitration agreements even in cases brought in state court. Southland Corp. v. Keating, 465 U.S. 1 (1964). Only a few years ago, in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), the Supreme Court again visited FAA preemption of arbitration laws in California and similarly invalidated California law relating to limits on arbitration agreements.

So, given this history, the court’s decision and reasoning should not have come as a surprise to anyone, particularly AB 51’s drafters. Federal law, in this case the FAA, controls. And after addressing various standing and procedural arguments the court concluded at AB 51 was invalid for several reasons. First, it placed arbitration agreements on unequal footing to other types of contracts, an unremarkable conclusion, as the act provided both criminal and civil penalties for even requiring one in employment. Indeed, the court concluded that AB 51’s use of sanctions to prevent the use of such agreements was “the law’s fatal flaw.”

AB 51 also suffered from the equally fatal flaw that it interfered with the FAA’s goal of promoting arbitration. Criminalizing the use of such agreements, of course, would prove to be a particular deterrent. The court specifically rejected the argument that the act’s language purporting not to invalidate arbitration agreements otherwise enforceable under the FAA could salvage the plain import of its use of both criminal and civil sanctions. Because the law was preempted for these two reasons and because of the existence of irreparable harm to employers and the public interest, the court reaffirmed its decision to enjoin the act’s enforcement.

The bottom line: The district court relied on well-settled principles of law in invalidating AB 51, but expect lengthy appeals and more litigation.