United States: Is California's Latest Assault On Arbitration Constitutional?

Seyfarth Synopsis. Pending California legislation would make a mandatory arbitration agreement an unlawful practice under the Fair Employment and Housing Act, and a crime. How could that be consistent with the Federal Arbitration Act?

Under current law, California businesses can insist that employees and contractors enter valid agreements to resolve disputes in front of a neutral arbitrator instead of a judge and jury. These agreements also may waive employee participation in class actions.

California is a repeat offender in making unconstitutional attacks on arbitration agreements. The FAA declares that arbitration agreements are entitled to judicial enforcement to the same extent that contracts generally are. Because federal law thus protects arbitration agreements from discrimination, state laws hostile to arbitration are preempted under the U.S. Constitution's Supremacy Clause.

Yet California officials have continued to defy this constitutional reality. On no fewer than five occasions the United States Supreme Court has found it necessary to strike down California statutes or judicial decisions that have discriminated against arbitration agreements. California lawmakers nonetheless remain hostile to these agreements and—like Don Quixote tilting at windmills—continue to sally forth against an invincible foe.

The latest quixotic effort comes in the form of Assembly Bill 3080, sponsored by Assembly Member Lorena Gonzalez Fletcher. AB 3080 would forbid businesses to require arbitration in any agreement with an employee or independent contractor entered into on or after January 1, 2019. The bill would prohibit even those agreements that permit an individual to opt out. And the bill has bite: it would amend the FEHA to authorize discrimination lawsuits against businesses that require arbitration agreements, and it would place its substantive provisions within an article of the Labor Code that subjects any violator to criminal prosecution.

Now, we know what you're thinking: how could such a measure possibly pass constitutional muster, and isn't the bill so ridiculous that it would never pass in the first place? Take the second question first: Assembly Member Gonzalez Fletcher has repeatedly authored bills that have become law over strenuous objections of the California Chamber of Commerce. Her legislative track record is impressive. And her colleagues in Sacramento are not known for rebuffing the entreaties of the plaintiffs' bar—who have never much liked arbitration.

As to the federal constitutional issue, however, your question is powerful, as the defenses offered for AB 3080 are unsound. The first defense is that the bill would affect only mandatory agreements (though the bill, in an Orwellian twist, would consider an agreement mandatory even if it provides for an opportunity to opt out of it). This defense ignores the point that courts routinely have invoked the FAA to protect arbitration agreements imposed as a condition of employment. Contracts presented on a take-it-or-leave-it basis—and accepted either formally or through continued employment—are fully enforceable so long as they are not unreasonably one-sided, and arbitration agreements can meet that test. FAA preemption thus applies regardless of whether the arbitration agreement is called "mandatory" or "voluntary."

The second defense of AB 3080 is likewise disingenuous. This defense notes that AB 3080 does not expressly declare arbitration agreements unenforceable, and suggests that judicial enforceability really is all that the FAA is about. And, this defense continues, "What would be the harm of the new law, anyway? Couldn't we just wait to see how a court rules on it?"

This defense disregards Supreme Court teaching, which holds that the FAA preempts any state law that "stands as an obstacle" to enforcing arbitration agreements. (It was this rationale that the Supreme Court invoked to foil California's attempt to ban class-action waivers in arbitration agreements.) AB 3080 would threaten to turn employers into criminals—and to subject them to discrimination lawsuits—merely for making arbitration a condition of employment. How could creating that in terrorem effect for businesses not be creating an obstacle to enforcement of arbitration agreements?

And why should a business be required to risk criminal sanctions or a lawsuit, or both, if it wants to insist that employees and independent contractors agree to a fair form of dispute resolution that is cheaper and quicker than formal litigation?

One might think that persons threatened by encroachments upon their federally protected rights would have the full-throated support of the entire legal community. But not so here, even though AB 3080 would create for California businesses the prospect of civil and criminal actions that would chill the exercise of a federally guaranteed freedom to contract. The constitutional demise of AB 3080—should it become law—is inevitable, once the matter reaches a court. But would the new law's threats to contracting businesses so discourage arbitration agreements that the issue never gets there?

Perhaps it's too soon to fret. Recall that Governor Brown, in 2015, vetoed a bill that would have made California the first state to ban arbitration agreements imposed as a condition of employment. He noted that employees in arbitrations enjoy "numerous protections" and that the Legislature's "far-reaching approach" was one of the sort that courts had struck down in other jurisdictions. He also wanted to await the wisdom of arbitration cases then pending before the United States Supreme Court.

Events since 2015 have only confirmed the view that state laws discriminating against arbitration agreements are unconstitutional. It remains to be seen whether Governor Brown, if presented with a passed version of AB 3080, will use his veto again or will instead leave the defense of mandatory arbitration agreements in the hands of California businesses that are principled and hardy enough to risk civil and criminal sanctions while defending their federal right to contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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