On The Case

In California, mandatory arbitration wins again

(Reuters) - In the latest victory for proponents of mandatory arbitration, U.S. District Judge Kimberly Mueller of Sacramento on Friday enjoined California officials from enforcing a new law that would have barred employers from requiring workers, as a condition of their employment, to waive “any right, forum or procedure” for resolving employment disputes. The law, which had been scheduled to take effect on Jan. 1, would have imposed civil and misdemeanor criminal penalties on employers that required workers or prospective workers to agree to restrictions on their ability to enforce employment rights.

You’ll notice that my description of the now-blocked California law did not include the words “mandatory arbitration.” That was not an accident: The statute itself mentions arbitration only in a clause that explicitly says the law is not intended to invalidate arbitration agreements that are otherwise enforceable under the Federal Arbitration Act. California Attorney General Xavier Becerra’s office, which defended the law before Judge Mueller, argued in its brief opposing the preliminary injunction motion, that the statute’s drafters were all too aware of Supreme Court precedent upholding mandatory arbitration provisions. They wrote the law with those cases in mind, the AG’s office said, taking care to target employers’ conduct rather than arbitration provisions. The state asserted before Judge Mueller that the FAA only protects arbitration agreements, so FAA pre-emption can’t apply to a law that doesn’t address those agreements, according to court filings and a transcript of a January 10 hearing.

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Judge Mueller has not yet issued an opinion explaining her decision, but it seems clear that the law’s challengers – the U.S. Chamber of Commerce and several California business groups – convinced her that legislators can’t get around the FAA just by drafting a law that doesn’t use the word “arbitration.” The Chamber’s lawyers at Mayer Brown cited the Supreme Court’s 2017 ruling in Kindred Nursing Centers v. Clark for the proposition that the FAA protects not just enforcement of arbitration agreements but also formation of contracts mandating arbitration. According to Mayer Brown (which just so happens to have won the Kindred case at the Supreme Court), the ruling means that California can’t evade FAA pre-emption just by arguing that its law applies broadly to employer conduct.

“Calling it employer behavior doesn’t change anything,” argued Mayer Brown partner Donald Falk at the Jan. 10 hearing. “You can’t launder a statute that has illegal provisions.”

A spokeswoman from the California AG’s office said it is reviewing Judge Mueller’s decision. Mayer Brown’s Andrew Pincus said that the purpose of the FAA is to protect parties’ right to enter an arbitration agreement, so the idea that a company could be prosecuted criminally for requiring employees to agree to mandatory arbitration “is not something the law is going to tolerate.”

Mayer Brown’s briefs to Judge Mueller repeatedly emphasized the benefits of arbitration, which the firm characterized as a faster, cheaper and more informal alternative to litigation. The Chamber cited a May 2019 study, funded by the Institute for Legal Reform, that compared outcomes in 10,000 employment arbitration cases to 90,000 cases litigated to a conclusion in federal court between 2014 and 2018. The study, which did not include employment class actions, found that in the small percentage of cases that reached an adjudicated conclusion, employees were more likely to win – and typically recovered more money – in arbitrations. So by requiring workers to arbitrate, Mayer Brown argued, business are actually assuring their workers that employees “can make use of alternative dispute resolution procedures to avoid the expense and complexity of traditional litigation in court," according to its motion for a preliminary injunction.

For me, it was tough to read Mayer Brown’s paeans to arbitration without thinking about the thousands of workers who have attempted to assert arbitration demands, as required in their employment contracts, only to see their employers refuse to pay the requisite fees to launch their cases. Granted, only a handful of companies have so far been targeted in mass arbitration and it’s not fair to assume that all businesses would respond by casting doubt on workers’ rights to arbitrate. In fact, another new California law penalizes companies that refuse to pay arbitration fees by, among other things, voiding mandatory arbitration provisions and stripping businesses of the right to compel arbitration.

Mayer Brown and the Chamber seem to have the better of the arguments over FAA pre-emption and the law prohibiting employers from requiring workers to agree to waive the right to pick their forum. We’ll have to wait until Judge Mueller issues an opinion to figure out how the California AG might be able to salvage the law. But it’s important to remember that mandatory arbitration provisions are not supposed to be a way for employers to shut down disputes with their workers.

California companies will still be able, thanks to the Supreme Court and this new preliminary injunction, to impose restrictions on how employees assert their rights. Now it’s up to courts and arbitration services to make sure mandatory arbitration isn’t a mirage.