On Friday, December 6, 2019, a business coalition led by the US Chamber of Commerce filed suit challenging a new California law that forbids employers from offering and entering into certain arbitration agreements with their workers. Signed into law by California Governor Gavin Newsom on October 10, 2019, Assembly Bill 51 (AB 51) will impose criminal liability on employers who require applicants or employees, “as a condition of reemployment, continued employment, or the receipt of any employment-related benefit,” to “waive any right, forum, or procedure for a violation of any provision of the California Fair Employment and Housing Act” and other related employment statutes. Additionally, AB 51 will impose criminal liability on employers who retaliate against applicants or employees who refuse to enter into banned mandatory arbitration agreements.

Scheduled to take effect on January 1, 2020, AB 51 would have sweeping consequences for employers that utilize arbitration agreements. Indeed, as the Senate Judiciary Committee’s analysis notes, “[g]iven the placement of the provisions of AB 51 in Chapter 2, Article 3 of the Labor Code, it is subject to Labor Code Section 433, which states that any violation of Article 3 is a misdemeanor. Accordingly, not only will the employer face civil liability for any violation of the various provisions of AB 51 […] but also an employer can face criminal charges.” In particular, violators of the new law may be charged with a criminal misdemeanor, which is punishable by imprisonment not exceeding six months, a fine not exceeding $1,000, or both.  Given the specter of criminal liability, employers unsurprisingly have voiced concern over the new law.

The Chamber’s lawsuit seeks declaratory and injunctive relief on the grounds that the Federal Arbitration Act (FAA) preempts AB 51. The FAA provides that arbitration agreements, like other contracts, “shall be valid, irrevocable, and enforceable,” unless they are the product of fraud or “unconscionability” or otherwise unenforceable as a matter of generally applicable contract law. The complaint relies on United States Supreme Court precedent, which “has repeatedly held that state laws that single out arbitration agreements for disfavored treatment are preempted.” The complaint likewise highlights the fact that the Supreme Court “has specifically recognized that California Labor Code provisions that disfavor arbitration are preempted.”

According to the Chamber, AB 51 “seeks to sidestep” the purview of the FAA by regulating “employer behavior prior to an agreement being reached, rather than invalidating an agreement once formed.” Quoting Supreme Court precedent, the Chamber contends, however, that “the FAA protects against not only discriminatory rules regarding the enforcement of arbitration agreements, but also rules governing what it takes to enter into them.”

The case is Chamber of Commerce of the United States of America et al. v. Becerra et al., case number 2:19-at-01142, in the US District Court for the Eastern District of California.