Working for Justice

Update to States-The Final Frontier: the Ninth Circuit Addresses Calif. AB 51

Posted October 26th, 2021 by Jeremy Heisler, Kate MacMullin and Andrew Melzer in Civil Litigation.

On September 14, 2021, the co-authors of this blog post published an article entitled States – The Final Frontier: How State Law and State Courts Can Provide Avenues for Justice and Resist the U.S. Supreme Court’s “Lochner Lite” Anti-Employee and Anti-Consumer Agenda. In that article, we discussed states’ efforts to provide protection from hostile federal arbitration jurisprudence—including enactment of laws that would prevent employers from imposing forced arbitration on their employees under certain circumstances.[1] We noted that when employees sue in court on their underlying legal claims, and rely on these state protections to avoid arbitration, they will inevitably face legal arguments that these laws are preempted by the Federal Arbitration Act (FAA). While states may not categorically exempt particular claims from arbitration, the question of whether the state law will survive the challenge generally depends on the wording and effect of the particular statute at issue.[2]

On September 15, 2021, one day after our article was published, the Ninth Circuit addressed one such challenge to a state law—Cal. Lab. Code § 432.6, referenced in our article, and other statutory provisions enacted through AB 51—in Chamber of Commerce of U.S. v. Bonta, 13 F.4th 766 (9th Cir. 2021). Accordingly, we follow up on our article to discuss this development.

The law at issue in Bonta was AB 51, a California law designed to prevent employees and job applicants from being required to waive their rights under the California Fair Employment and Housing Act (FEHA) or the California Labor Code as a condition of employment. Under AB 51, employers are not allowed to force employees to forfeit their statutory rights and remedies in order obtain or keep their jobs. Employees also may not threaten or retaliate against (fire, not hire, demote, discipline, or otherwise penalize) employees or job applicants for refusing to waive their rights or remedies. One manifestation of this rule applies to forced arbitration agreements, which waive an employee’s rights to pursue their claims in court and to try those claims to a jury of their peers.

AB 51 declares the forced imposition of such waivers—and retaliation or threats for refusal to succumb—to be an unlawful employment practice under the Labor Code. It lays out sanctions and deterrents for employers who force workers or job applicants to forfeit their rights as a condition of employment, including by requiring that they enter mandatory arbitration contracts and by punishing them for non-compliance. These statutory enforcement mechanisms include civil and criminal penalties. AB 51 also opens up legal avenues through which employees can safeguard their right to be free from forced waivers, such as seeking an injunction ex ante against imposition of such a waiver or suing for retaliation if they are punished by their employers for refusing to sign.

But, to avoid a potential conflict with the FAA, the Act does not invalidate arbitration agreements that an employer is able to extract successfully, and does not render such contracts unenforceable. Labor Code § 432.6(f) (“Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.”).[3] The law thus empowers employees with the tools to effectively resist forced arbitration but holds them to the “bargain” they have supposedly made if they fail to do so.

AB 51 was signed into law on October 10, 2019. But before it was slated to go into effect on January 1, 2020 (and to cover employment contracts entered, modified, or extended after that date), the Chamber of Commerce sought an injunction to prevent enforcement of the statute on the grounds that it was preempted by the FAA. The district court granted the injunction, see Chamber of Commerce of U.S. v. Becerra, 438 F. Supp.3d 1078 (E.D. Cal. 2020), and the decision was appealed to the Ninth Circuit.

In Bonta, the Ninth Circuit overturned the district court’s decision to grant a preliminary injunction against implementation and enforcement of AB 51. The court held that AB 51 was largely not preempted by the FAA. The majority emphasized that AB 51 applied on an even-handed basis to all waivers of rights and remedies—not just arbitration agreements. Moreover, the Act was only designed to ensure that such waivers were “voluntary and consensual,” rather than coercive and unwanted.[4] In the majority’s view, the law does not discriminate against arbitration agreements, because it enables the formation and enforcement of voluntary arbitration agreements on a neutral basis with other employment contracts. Instead of disfavoring arbitration, it simply regulates pre-agreement conduct by prohibiting employers from forcing employees or applicants to sign such agreements as a condition of employment. And, indeed, the law skirts FAA preemption by clarifying that any agreements obtained in violation of its provisions are valid and enforceable.[5]

The majority did find, however, that the provisions of AB 51 that allowed for civil and criminal penalties to be levied against employers who successfully compel workers to sign arbitration agreements was preempted by the FAA. Citing Supreme Court precedent, the Ninth Circuit held that “a state. . . may not impose civil or criminal sanctions on individuals or entities for the act of executing an arbitration agreement.”[6] This aspect of the decision is certainly dispiriting, because it takes the stuffing out of the statute when an employer’s efforts to flout the law actually bear fruit—in the form of forced arbitration agreements from employees who are either uninformed about their legal rights or unable to withstand the pressure to accede to their employer’s demands.

Yet, all hope is not lost. The majority seems to have left untouched the parts of AB 51 that allow employees or job applicants to seek an injunction against the imposition of a coercive arbitration agreement or to pursue a legal claim if they refuse to sign and then face retaliation.

In contrast, employees who have already signed an agreement appear to have limited recourse following Bonta. They may report violations to state authorities, who can then seek to enjoin the imposition of similar contracts against other employees.[7] Further, if they are retaliated against for objecting to, protesting, or resisting the agreement—despite ultimately signing—or for encouraging or supporting other workers’ efforts to do so, they may have a similar Labor Code retaliation claim.[8]

So, what does this decision mean for California employees and job applicants? If your employer or prospective employer tries to force you to sign an arbitration agreement as a condition of employment (meaning that you won’t get hired for a new job or will get punished or fired at your current job if you refuse to sign), you have various options. If you refuse to sign the agreement, you may be able to pursue the following remedies under AB 51:

1. Seeking a restraining order and injunction against the employer’s attempt to force you to enter an arbitration agreement as a condition of hire or continued employment. Such an order would be used to prevent the employer from continuing to pressure you and also protect your job.

2. If the employer retaliates against you for objecting to or refusing to sign the agreement, bringing a claim for damages, civil penalties, and attorneys’ fees and costs under (a) Labor Code § 432.6 and Cal. Govt. Code §§ 12953 and 12965; (b) Labor Code § 1102.5, which prohibits employers from retaliating against employees who complain about, report, or refuse to participate in an activity that would violate the law; (c) Labor Code § 98.6, which prohibits retaliating against employees who engage in conduct protected by the Labor Code; and/or (d) the Private Attorneys General Act (PAGA), Labor Code § 2699.

The employee may also pursue injunctive or equitable relief—in the form of reinstatement or other measures—as part of such a suit.

Violations of these laws may also give rise to a cause of action for unlawful business practices under California’s Unfair Competition Law (UCL), Bus. & Prof. Code §§ 17200, et seq., providing additional avenues for relief and an extended four-year statute of limitations.

3. If the employer fires you for objecting to or refusing to sign the agreement, bringing a common law claim for wrongful termination in violation of California public policy.[9] In this manner, AB 51 appears to abrogate Lagatree v. Luce, Forward, Hamilton & Scripps, 74 Cal. App. 4th 1105 (1999), which held that terminating an employee for refusing to sign a compulsory arbitration agreement does not implicate a substantial public policy and thus does not give rise to a tort claim.

Under this common law tort, employers would be liable for compensatory damages and, potentially, punitive damages under the standards set forth in Cal. Civ. Code § 3294. In addition to the statutes cited above, a prevailing employee on a wrongful discharge claim may be able to seek an award of attorney’s fees under Cal. Code Civ. P. § 1021.5 (depending on whether the criteria are deemed satisfied) and costs under § 1032.

These various protections provide employees significant incentives to challenge employers on any unlawful attempt to impose an arbitration agreement as a condition of employment. An employee aggrieved by an employer’s unlawful practices may in some cases also pursue a class action or representative PAGA action on behalf of other workers. If an employer seeks to impose compulsory arbitration on a group of employees en masse, both injunctive relief and per-employee penalties may be appropriate. Further, employees may report violations to state agencies and entities, which may then pursue relief on their behalf as well as that of other affected workers.

Therefore, while the Bonta decision is not an out-and-out win for employees, it still leaves open various potential pathways through which savvy employees or job applicants can vindicate their rights under AB 51. As we suggested in our article, states can and should follow California’s example and continue to experiment with ways to resist the Supreme Court’s hostile arbitration jurisprudence.[10]

Footnotes

[1] See States – The Final Frontier: How State Law and State Courts Can Provide Avenues for Justice and Resist the U.S. Supreme Court’s “Lochner Lite” Anti-Employee and Anti-Consumer Agenda (“Article”), at p. 135, 144 n.44
[2] See id. (arguing that a “neutrally-framed law” that bars employers from imposing mandatory waivers of employees’ substantive and procedural rights—not just the right to sue in court—”may not necessarily be doomed.”)
[3] In the legislative history, the bill’s proponents note that “AB 51 would not selectively invalidate arbitration contracts because improperly formed… AB 51 simply gives the worker the option of whether or not to form the contract in the first place.” S. Judiciary Analysis at 10.
[4] Bonta, 13 F.4th at 771-72.
[5] Id. at 775-76, 779-80; see also Harper v. Charter Commc’ns LLC, 2021 WL 4784417, at *9 (E.D. Cal. Oct. 13, 2021) (citing and applying Bonta).
[6] Id. at 781 (citing Kindred Nursing Centers Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1426 (2017)).
[7] Apart from AB 51, these employees may also argue against the formation, validity, or enforcement of their arbitration clauses under general contract defenses such as fraud, duress, or unconscionability—as long as the same principles would apply to any other contract. See, e.g., id. at 779; Harper, 2021 WL 4784417, at *9; OTO, L.L.C. v. Kho, 8 Cal.5th 111 (2020); see generally 9 U.S.C. § 2; AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011).
[8] It may also be possible to argue that an employer’s independent, pre-agreement conduct in threatening the employee to enter the contract—as opposed to the act of entering or executing the agreement—remains sanctionable. Whether this position is foreclosed by Bonta is yet to be seen. The greater and more abusive the threats, the more likely such behavior is to be seen as a separate, free-standing ground for a § 432.6(b) claim.
[9] See generally Tameny v. Atl. Richfield Co., 610 P.2d 1330, 1331 (Cal. 1980) (holding that “when an employer’s discharge of an employee violates fundamental principles of public policy, the discharged employee may maintain a tort action and recover damages traditionally available in such actions”); Prue v. Brady Co./San Diego, 196 Cal. Rptr. 3d 68, 75–76 (Cal. App. 2015) (“It is settled that an employer’s discharge of an employee in violation of a fundamental public policy embodied in a constitutional or statutory provision gives rise to a tort action.”).
[10] See Article, at pp. 135–36.

Jeremy Heisler is the Vice-Chairman and a Founding Partner of Sanford Heisler Sharp. Throughout his legal career, Mr. Heisler has had notable success in employment class actions and complex multi-party and multi-state litigation, producing more than $400 million in benefits to class members.
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Kate MacMullin is an Associate in the New York office of Sanford Heisler Sharp, LLP, a national law firm with offices in Washington, DC, New York, California, Tennessee, and Maryland. She received her B.A. magna cum laude from Brown University and her J.D. magna cum laude from Harvard Law School.
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Andrew Melzer is a partner in the New York office of Sanford Heisler Sharp. Mr. Melzer is Co-Chair of the Firm’s wage and hour practice and has helped return millions of dollars of lost wages to employees in presuit negotiations, active litigation, and trials.
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