AB 51 Update: Federal Court Preliminarily Enjoins California Law Restricting Employment  Arbitration Agreements

AB 51 was set to take effect January 1, 2020; however, on December 29, 2019, the U.S. District Court for the Eastern District of California temporarily restrained state officials from enforcing the law pending a full preliminary injunction hearing. In so doing, the Court explained that AB 51 “raise[s] serious questions regarding whether the challenged statute is preempted by the [Federal Arbitration Act (the “FAA”)] as construed by the United States Supreme Court.” Section 2 of the FAA expressly makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

On January 10, 2020, the Court heard oral argument on Plaintiff’s Motion for a Preliminary Injunction. The Court granted the Motion by minute order on January 31, 2020. On February 7, 2020, the Court issued a 36-page Order confirming and explaining its ruling. The Court held that the Plaintiffs were likely to succeed on the merits for two reasons: (1) AB 51 violates § 2 of the FAA because it treats arbitration agreements differently from other contracts, and (2) AB 51 conflicts with the purposes and objectives of the FAA. According to the Court, “AB 51 is preempted by the FAA because it singles out arbitration by placing uncommon barriers on employers who require contractual waivers of dispute resolution options that bear the defining features of arbitration."

Turning to the other requirements for a preliminary injunction, the Court reasoned that Plaintiffs established they would suffer irreparable harm: “[I]f California employers continue to rely on the mandatory arbitration agreements they have reasonably understood were allowable under the FAA as construed by the Supreme Court, they face the risk of potential criminal and civil penalties if they are found to have violated the new law.” The Court also held that the equitable and public interest factors weighed in favor of preliminary injunctive relief. “Plaintiffs have satisfied their burden of showing AB 51 is incompatible with the FAA and they are likely to suffer irreparable harm if it takes effect. The likelihood of this harm outweighs defendants’ interest in advancing a policy seeking to enhance employee rights with respect to mandatory arbitration because defendants do so at the expense of arbitration rights governed by the FAA.”

This ruling suggests that the Court will ultimately issue a permanent injunction invalidating AB 51 on preemption grounds. The case will likely be appealed to the Ninth Circuit and maybe even to the Supreme Court, so it may be a while before there is a final ruling.