On February 7, 2020, Chief U.S. District Judge Kimberly Mueller of the Eastern District of California issued a detailed order explaining the court’s January 31, 2020 grant of a preliminary injunction enjoining the State of California from enforcing AB 51.
As we explained in previous coverage, AB 51 was scheduled to go into effect on January 1, 2020, and would have prohibited mandatory workplace arbitration agreements. Under AB 51, employers may not, “as a condition of employment, continued employment, or the receipt of any employment-related benefit, require an applicant or employee to waive any right, forum, or procedure” for Fair Employment and Housing Act (“FEHA”) and Labor Code claims. Violations of the new statute carry hefty consequences, including criminal penalties.
In response, business organizations opposing AB 51 filed suit and obtained a temporary restraining order preventing enforcement of the law on December 30, 2019. The plaintiffs also filed a motion for preliminary injunction, which was granted by Judge Mueller on January 31, 2020. The court issued a more detailed order on February 7, 2020, holding that the plaintiffs have satisfied their burden of showing AB51 is likely preempted by the Federal Arbitration Act (“FAA”) and thus are likely to succeed on the merits of their claim.
Likelihood of Success on the Merits
On the merits, the court found that the plaintiffs met their burden of showing they are likely to succeed on the merits of their claim that AB 51 is preempted by the FAA because it discriminates against arbitration and interferes with the FAA’s objectives. Order at 17. The court found that AB 51 violated the FAA because it treats arbitration agreements differently from other contracts – the law was aimed entirely at arbitration agreements and put arbitration agreements in a category of their own and on unequal footing with other contracts. Id. at 20-21. Judge Mueller moreover found that AB 51 interfered with the FAA given the civil and criminal sanctions imposed on employers for violating the law. Id. at 25.
Likelihood of Irreparable Harm in the Absence of Preliminary Relief
As to irreparable harm, the court found that the plaintiffs had sufficiently shown that if AB 51 were to take effect, California businesses relying on mandatory arbitration agreements would be forced to choose between risking penalties by continuing to utilize arbitration agreements and foregoing the use of arbitration agreements altogether to avoid the law’s penalties. Id. at 29-30. The court explained that there is no adequate legal remedy for this harm, such as an award of damages, since the State of California is immune from suit under sovereign immunity. Id.
Balance of Equities and Public Interest
Lastly, the court found that the equitable and public interest factors weigh in favor of a preliminary injunctive relief. Id. at 32-33. It reasoned that the plaintiffs have satisfied their burden of showing AB 51 is incompatible with the FAA and are likely to suffer irreparable harm if it takes effect. This likelihood of harm outweighs defendant’s interest in advancing a policy seeking to enhance employee rights because defendants do so at the expense of FAA arbitration rights. The court noted that in the unlikely event that AB 51 is later found compatible with the FAA and not preempted, the State would be minimally harmed by delayed enforcement whereas plaintiffs would be irreparably harmed without the injunction. And the public interest would “always” be served by preventing a violation of a party’s constitutional rights. Id. at 33.
Conclusion
In light of this order, California businesses that condition employment on consent to an arbitration agreement can breathe a sigh of relief. Judge Mueller explicitly noted that it was unlikely that the law would be found valid given the FAA. The State is likely to appeal the preliminary injunction to the Ninth Circuit. Nonetheless, pending final judgment in this lawsuit, AB 51 is enjoined. Stay tuned for updates as this case progresses.
