On October 10, 2019, California Governor Gavin Newsom signed Assembly Bill 51 (AB-51) into law. AB-51 became effective on January 1, 2020, adding Section 432.6 to the California Labor Code and Section 12953 to the California Government Code. AB-51 prohibits employers from entering into mandatory arbitration agreements for nearly all types of employment claims in California, including agreements with “opt-out” provisions. Violations are tantamount to a criminal misdemeanor, punishable by imprisonment, a fine, or both.

Similar anti-arbitration legislation had been vetoed previously by Governor Newsom’s predecessor, Jerry Brown, because of a breadth of case law suggesting a law of this type was preempted by the U.S. Arbitration Act (the FAA). State laws attempting to interfere with or otherwise standing as an obstacle to arbitration had been repeatedly struck down by the U.S. Supreme Court based on preemption theories.

On December 9, 2019, the U.S. Chamber of Commerce, joined by myriad other organizations, filed suit challenging the law in the U.S. District Court for the Eastern District of California on these preemption grounds, Chamber of Commerce of the USA, et al. v. Becerra, et al., Case No. 2:19-cv-02456-KJM-DB. On December 30, 2019, the court issued a temporary restraining order enjoining the State of California from enforcing AB-51 pending the court’s resolution of a pending motion for preliminary injunction that, if granted, would extend that injunction through the life of the case.

On February 7, 2020, the court granted the Chamber of Commerce’s Motion for Preliminary Injunction. In its order granting the motion, the court evaluated whether AB-51 interfered with the fundamental attributes of arbitration and whether AB-51 put agreements to arbitrate on unequal footing with other contracts in California. On February 20, 2020, the Court’s Order was appealed.

Because AB-51 singles out arbitration by placing uncommon barriers on employers who include, as a take-it-or-leave-it proposition, a mandatory arbitration clause, the court determined that AB-51 improperly placed arbitration agreements on unequal footing and that AB-51 was preempted by the FAA. Similarly, the court held that AB-51 is preempted by the FAA because it interferes with that federal statute’s goal of promoting arbitration. Indeed, while AB-51 artfully included language that it was not intended to invalidate arbitration agreements that are otherwise enforceable under the FAA, AB-51 does not exonerate employers from civil and criminal liability who require the agreement in the first place.

In practical terms, the court’s order enjoining the State of California from enforcing AB-51 means that employers can, for the time being, validly enter into agreements to arbitrate with their employees. Given precedent from the U.S. Supreme Court, employers can make these agreements a term of employment. Employers should be cognizant of the ruling on appeal from the Ninth Circuit and any further developments in the underlying litigation, as an adverse ruling could change this picture entirely.