On Oct. 10, California Governor Gavin Newsom signed into law an attempt by California’s Legislature to limit arbitration of claims under California’s Fair Employment and Housing Act (“FEHA”). FEHA prohibits harassment, discrimination and retaliation on the basis of various protected characteristics, such as gender, age, disability or national origin.
Taking effect Jan. 1, 2020, AB 51 amends the California Labor Code to provide the following:
- An employer cannot require that an employee agree to arbitrate any potential claim under FEHA as a condition of employment;
- An employer cannot threaten, retaliate or discriminate against an applicant for employment or an employee for refusing to consent to arbitration of a potential claim under FEHA; and
- An agreement that requires an employee to opt-out of a waiver or to take action to retain their rights “is deemed a condition of employment.”
Further, violation of the law constitutes an “unlawful employment practice” under FEHA and is a criminal misdemeanor.
AB 51 is the California Legislature’s most recent attempt to limit arbitration agreements. In 2014, then-Governor Brown signed into law a bill (AB 2617) which outlawed mandatory arbitrations for goods and services, but a California appellate court subsequently concluded the law was preempted by the Federal Arbitration Act (“FAA”). In Saheli v. White Memorial Medical Center, 21 Cal. App. 5th 308 (2018), the California Court of Appeals, Second District concluded AB 2617 was preempted by the FAA because the law “unquestionably discriminate[s] against arbitration by placing special restrictions on waivers of judicial forums and procedures in connection with claims brought under those acts.” The court explained:
The . . . legislative history clearly shows the motivating force behind the enactment of Assembly Bill 2617 was a belief that arbitration is inherently inferior to the courts for the adjudication of Ralph Act and Bane Act claims. In accordance with this dim view of arbitration, the Legislature placed special restrictions on waivers of judicial forums and procedures in connection with such claims. In practice, such restrictions discourage arbitration by invalidating otherwise valid arbitration agreements. It is precisely this sort of hostility to arbitration that the FAA prohibits.
In 2015, Governor Brown vetoed a bill (AB 465) which would have banned mandatory arbitration as a condition of employment, noting that such a ban would be preempted by the FAA. He stated:
. . . a blanket ban on mandatory arbitration agreements is a far-reaching approach that has been consistently struck down in other states as violating the FAA. Recent decisions by both the California and United States Supreme Courts have found that state policies which unduly impede arbitration are invalid.
Just last year, the California Legislature passed another bill (AB 3080) which would have prohibited arbitration agreements for wage and hour, discrimination, harassment, and retaliation claims, but Governor Brown vetoed that as well, explaining that the bill “plainly violated federal law.”
AB 51 was introduced earlier this year and passed the Legislature in September, despite substantially similar language to those either found by a court to be preempted by the FAA or vetoed by Governor Brown. While the California Legislature continues these attempts to limit arbitration, the FAA still remains a potential barrier to such legislation.
The Impact of FAA Preemption
The new California legislation declares that “[n]othing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the [FAA].” See Section 432.6(f). Existing U.S. Supreme Court precedent certainly indicates that the new legislation would be preempted. Indeed, the AT&T Mobility LLC v. Concepcion opinion clearly points in that direction. See 563 U.S. 333 (2011). In Concepcion, which involved California law, the Court reiterated that “[t]he principal purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms.” Id. at 344.
Broadly speaking, the Court held that class-action waivers within arbitration provisions that are subject to the FAA are enforceable. Specifically, the Court reasoned that requiring the availability of class arbitration irrespective of the arbitration agreement’s language was inconsistent with the FAA and would “sacrifice the principal advantage of arbitration – its informality – and make the process slower, more costly, and more likely to generate procedural morass than final judgment.” The Court ultimately held that the FAA preempts state law when “[i]t stands as an obstacle to the accomplishment and execution of the full purpose and objectives of Congress.” Id. at 334. Indeed, the Court declared: “[a]lthough §2’s savings clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” Id. at 343.
The Court’s decision in DirectTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015), also supports the conclusion that the new California law would be preempted by the FAA. In Imburgia the Court held that the FAA preempted a California law interpretation of an arbitration agreement based on a legal rule that the state’s courts applied only in the arbitration context. The Court reasoned that Section 2 of the FAA preempts a state-law interpretation of an arbitration agreement where the interpretation “does not rest ‘upon such grounds as exist . . . for the revocation of any contract.’” Id. at 466.
What About Those in the Transportation Industry?
So given the broad impact of the FAA, is there anything in the new law for companies to be concerned about? The answer is a qualified yes. Companies operating in the transportation industry with drivers who deliver goods and passengers could be impacted. The potential impact all depends on the interpretation courts ultimately give to the FAA Section 1 exception. See our Jan. 17, 2019, March 12, 2019, April 29, 2019 and Sept. 13, 2019, blog posts regarding the Section 1 exemption and the uncertainty created by New Prime v. Oliveira, 139 S. Ct 532 (2019), in the transportation industry.
Section 1 excludes from the FAA’s coverage “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1. But the courts differ over the requirements for workers to fit within the exception. Must the workers transport only goods or will carrying passengers qualify, and must the drivers cross state lines? Can workers qualify without transporting or handling goods? Thus, those in the gig economy could be dramatically impacted. See Rittmann v. Amazon Com, Inc., 383 F.Supp. 1196 (W.D. Wash. 2019), (9th Cir. appeal docketed, No. 19-35281, May 3, 2019); Wallace v. GrubHub Holdings, Inc., 2019 WL1399986 (N.D. Ill, Mar. 28, 2019), (7th Cir. docketed, Nos. 19-1564 and 19-2156, Mar. 28, 2019); Borgonia v. G2 Secure Staff, 2019 U.S. Dist. LEXIS 70224 (N.D. Cal., Apr. 25, 2019).
If workers fall within the FAA Section 1 exclusion, then companies would be required to rely on state law to arbitrate. This is where the negative impact of the new California law would be felt because arbitration would not be an option. Thus, FAA preemption secures the right to arbitrate for some industries – but not all.
The impact of the new California legislation will be severely limited by the FAA, except for those transportation workers ultimately found to fall within the Section 1 exemption.