Employers Exhale Relief, Governor Vetoes Ban on Employment Arbitration Agreements

by Sheppard Mullin Richter & Hampton LLP
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On October 11, 2015, Governor Brown vetoed Assembly Bill No. 465. AB 465 was one of the most closely watched, controversial employment related bills passed by the California Legislature in recent memory. Understandably, employers were nervous by the bill’s potential implications.

AB 465 sought to add Section 925 to the California Labor Code. If enacted, AB 465 would have effectively prohibited employers from requiring employees sign arbitration agreements as a condition of employment. The bill required that any waiver of any legal right by an employee must be knowing and voluntary, in writing, and may not be an express condition of employment. Further, AB 465 placed the burden of proving a knowing and voluntary waiver by the employee on the employer, who would have been required to prove that the waiver was not a condition of employment.

Effectively, AB 465 sought to prohibit employers from requiring new hires and/or current employees from signing arbitration agreements. Apparently the California Legislature forgot about AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), amongst other Supreme Court precedent, which makes clear that obstacles that stand in the way of the accomplishment and execution of Congress’ intent in enacting the Federal Arbitration Act (“FAA”) are preempted.

Governor Brown vetoed AB 465 and issued a strong veto message. After careful consideration, Governor Brown was “not prepared to take the far-reaching step proposed by this bill for a number of reasons.” The Governor specifically referenced the California Supreme Court’s protections afforded to employees pertaining to arbitration agreements as explained in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000). Those protections include a neutral arbitrator, adequate discovery, no limitations on damages or remedies, a written decision by the arbitrator, judicial review, and limitations on arbitration costs. Most importantly, the Governor acknowledged that “a blanket ban on mandatory arbitration agreements is a far-reaching approach that has been consistently struck down in other states as violating the Federal Arbitration Act.” The Governor also recognized that the U.S. Supreme Court is currently considering two arbitration related cases arising out of California that involve FAA preemption (DIRECTV, Inc. v. Imburgia and MHN Government Services, Inc. v. Zaborowski). We will keep a close eye on those cases in the forthcoming months.

Although California employers may exhale in relief today, they should not get complacent. Employers should use the veto of AB 465 as a reminder to review and update their arbitration agreements. Those agreements should comply with the requirements set forth in Armendariz, and should include express class action waivers. As some employers know, arbitration agreements can now be used as a sword to eviscerate class actions and potentially save companies significant amounts of money. Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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