Mary Siceloff

The State of California filed an appeal last week to challenge a federal court’s order barring California from enforcing a new state law that would curtail workplace arbitration agreements.  Unless the State takes some additional action, the lower court’s ban on enforcement of the new law, AB 51, will remain in effect during the appeal.

The new law would prohibit employers from requiring employees to agree to arbitrate claims alleging violations of the California’s Fair Employment and Housing Act and Labor Code.  Many employers are especially concerned that AB 51 could impose imprisonment and fines on those who try to condition employment on workers signing arbitration agreements.  However, proponents of the new law contend that it is needed to prevent employers from depriving mistreated workers of having their day in court (or in administrative agencies created to remedy workplace violations).

In rulings on January 31 and February 7, 2020, U.S. District Judge Kimberly Mueller (of the Eastern District of California, in Sacramento) issued a preliminary injunction barring the State from enforcing AB 51.  That preliminary injunction is not permanent, but would remain in place until the district court decides whether to issue a permanent injunction.  On February 19, 2020, the State filed its notice asking the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) to reverse the preliminary injunction.

Now that its appeal is on file, the State may ask either Judge Mueller or the Ninth Circuit to suspend enforcement of the preliminary injunction until the outcome of the appeal.  If the State were to proffer such a request, and if the courts were to grant it, such a ruling would allow the State to enforce the ban on arbitration agreements while the appeal is pending.

Regardless of whether the State seeks or obtains such a stay, employers who wish to secure arbitration agreements from employees should consult with competent legal counsel.  The district court case is Chamber of Commerce of the USA et al. v. Becerra et al., U.S. Dist. Ct. E.D. Cal. Case No. 2:19-cv-02456-KJM-DB.  The Ninth Circuit case is Chamber of Commerce of the USA et al. v. Becerra et al., Case No. 20-15291.

A federal court in Sacramento explained last week its rationale for temporarily barring the State of California from enforcing a new law, AB 51, that would curtail employment arbitration agreements.  The rationale set forth in that written order of February 7, 2020, strongly suggests (but does not guarantee) that the court is inclined to permanently enjoin the State from enforcing that new law.

By adding section 432.6 to the California Labor Code, AB 51 would have banned employers from requiring employees to agree to arbitrate claims alleging violations of California’s Fair Employment and Housing Act and Labor Code.  On December 30, 2019, U.S. District Judge Kimberly Mueller granted a temporary restraining order barring the State from enforcing that new law until a hearing could be held in early January 2020.

Then, in a ruling on January 31, 2020, the court converted its temporary restraining order into a preliminary injunction.  The preliminary injunction enjoins the State from enforcing AB 51 as it relates to arbitration agreements that are governed by the Federal Arbitration Act (“FAA”).  That preliminary injunction is not permanent, but will remain in place until the court decides whether to issue a permanent injunction.

Judge Mueller’s ruling last month did not “explain the reasoning” for issuing the preliminary injunction; however, she promised to do so “in a detailed, written order” that would be dispatched shortly thereafter.  On February 7, 2020, Judge Mueller issued that detailed written order in Chamber of Commerce of the United States, et al. v. Becerra, et al., U.S. Dist. Ct. E.D. Cal. Case No. 2:19-cv-2456.

The State had challenged the legality of issuing such an injunction, arguing that the plaintiffs did not have legal standing to bring the action and that the federal court lacked jurisdiction to hear the case.  Judge Mueller’s detailed written order rejects those arguments.

That detailed order also sets forth the court’s analysis on the following four factors:  (1) the likelihood of the plaintiffs succeeding on the merits of their claim that AB 51 runs afoul of the FAA, (2) the probability that plaintiffs would suffer irreparable harm absent a preliminary injunction, (3) the balance of the equities, and (4) whether ordering such an injunction is in the public interest.

The court was persuaded that the plaintiffs were likely to succeed on the merits for a number of reasons.  First, Judge Mueller agreed that AB 51 violates the FAA by treating arbitration agreements differently than other contracts.  Second, the court found that, by imposing penalties against employers who require their employees to enter arbitration agreements, AB 51 interferes with the FAA’s goal of promoting arbitration.

Given such circumstances, Judge Mueller was convinced that employers would be harmed if she declined to issue a preliminary injunction.  In that vein, she explained that employers who comply with AB 51 would sacrifice their federal right to require arbitration agreements under the FAA; meanwhile, employers who fail to comply with AB 51 may be subject to civil and criminal penalties.

The court ultimately concluded that the balance of the equities and the public interest supported issuing a preliminary injunction.  Judge Mueller elaborated that ensuring the supremacy of federal laws is of “paramount” importance.

While the court’s ruling is a good sign that it will at some point permanently bar the State from enforcing AB 51, it remains to be seen if the State can avoid that outcome.  And while this preliminary injunction is likely appealable, there is no indication yet as to whether the State will pursue such an appeal or merely continuing litigating in the trial court against the imposition of a permanent injunction.  As these developments unfold, employers who wish to secure arbitration agreements from employees should consult with competent legal counsel.

A federal judge in Sacramento has continued an order that temporarily bars the State of California from enforcing a new state law that would curtail employment arbitration agreements.  The new law, AB 51, which added section 432.6 to the California Labor Code, would have banned employers from requiring employees to agree to arbitrate claims alleging violations of certain state workplace laws; specifically, the Fair Employment and Housing Act and the Labor Code.

At a hearing on January 31, 2020, U.S. District Judge Kimberly Mueller converted her prior temporary restraining order into a preliminary injunction barring the state from enforcing the new law.  In the minute order memorializing that ruling, Judge Mueller stated that she would “explain [her] reasoning in a detailed, written order” that will be dispatched “[i]n the coming days.”  The case is Chamber of Commerce of the USA et al. v. Becerra et al., U.S. Dist. Ct. E.D. Cal. Case No. 2:19-cv-02456-KJM-DB.

In federal court, there are basically three types of injunctions that compel parties to do or stop doing a particular act; namely, 1) temporary restraining orders, 2) preliminary injunctions, and 3) permanent injunctions.  Courts generally issue temporary restraining orders and preliminary injunctions to preserve the status quo while deciding whether to issue a permanent injunction.  A court can issue a temporary restraining order without notice to the other party, while a preliminary injunction requires both notice to the other party and usually a hearing where each side presents their arguments.

Although not a guarantee that a permanent injunction will ensue, the issuance of a preliminary injunction is frequently a good sign that the court is strongly leaning in that direction.  Indeed, to obtain a preliminary injunction, the party asking for it must persuade the court that there is a likelihood of ultimately prevailing on the merits.

One aspect of the new law that has employers especially concerned is that it could impose imprisonment and fines on employers who try to condition employment on workers signing arbitration agreements.  According to employers, resolving workplace disputes through arbitration is better for everyone concerned because it is faster and more economical than litigating in court or in an administrative agency.  Employers say it is wrong to impose criminal penalties on them for trying to bolster such common-sense procedures, and that doing so runs afoul of the Federal Arbitration Act.

On the other hand, proponents of the new law contend that it is needed to prevent employers from depriving mistreated workers of having their day in court (or in administrative agencies created to remedy workplace violations).  They insist that, without the new law, employers can continue to coerce workers to sign away their legal rights, and that employees who sign away such rights are then “trapped in the employer’s handpicked arbitration system.”

Judge Mueller’s preliminary injunction is likely appealable, but there is no indication yet as to whether the State of California will pursue such an appeal or wait until the conclusion of the litigation.