California attempts to ban mandatory (even opt-out voluntary) pre-dispute arbitration agreements

On October 10, 2019, the Governor of California signed into effect California’s AB 51, which bans mandatory pre-dispute arbitration agreements. This new law continues California’s struggle to find a way to limit pre-dispute arbitration, in direct conflict with the Supreme Court’s recent cases upholding such arbitration.

AB 51 prohibits even otherwise-voluntary pre-dispute arbitration agreements are banned if they would require an “opt out” or “any (other) affirmative action” by the employee to preserve the right to litigate not arbitrate, quoting sec. 432.6(c). AB 51 contains a 1-sided attorney fees clause, which allows a worker but not an employer to recover attorney fees if successful in litigation over the enforceability of an arbitration agreement. Additionally retaliation against a worker who refuses to agree to a pre-dispute arbitration agreement is prohibited, as is conditioning new or continued employment on such an agreement. According to sec. 432.6(h), AB 51 only applies to “contracts for employment entered into, modified, or extended on or after January 1, 2020,” at which time AB 51 will take effect.

It is anticipated that AB 51 will spark immediate litigation as it appears to stand in flat conflict with (and is therefore preempted by) the federal Fair Arbitration Act (FAA), as the Supreme Court has already ruled in a number of recent cases, including its recent decision in Lamps Plus and Epic Resources. 

Indeed it is so easy to anticipate such legislation that the California legislature itself preemptive responded to such challenges when it passed AB 51 by arguing it was somehow only addressing how pre-dispute arbitration agreements could be entered into in the state of Colorado, which seems to be the very thing that the Supreme Court has been saying states may not do as Congress preempted the field with its FAA. California’s argument frankly seems to make little sense and is expected to find no support within the Supreme Court’s recent line of arbitration cases.

Employers should carefully re-consider any arbitration agreement in California and anticipate that, unless AB 51 is blocked by the courts, they risk becoming a test case for litigation if they require pre-dispute arbitration agreements there after 1/1/2020, even if their agreement is otherwise-voluntary on the basis of an opt-out provision