California employers can continue to use mandatory arbitration agreements – for now.

On February 6, 2020, Judge Kimberly Mueller of the U.S. District Court for the Eastern District of California issued a preliminary injunction halting enforcement of California Assembly Bill 51 (“AB 51”) as it relates to arbitration agreements in the employment context.  AB 51, which was passed last year, would have prohibited employers from requiring applicants and employees to sign an arbitration agreement as a condition of employment and would have imposed civil and criminal penalties on employers who did so.  SHLC has been watching AB 51 closely, and predicted last October that the new law would face legal challenges based on the Federal Arbitration Act (“FAA”).

Read our prior AB 51 blog posts here:

• New California Law Prohibits Employers from Requiring Applicants and Employees to Sign Arbitration Agreements
• Federal Court Delays Enforcement of New California Law Prohibiting Mandatory Employment Arbitration Agreements
• UPDATE: Federal Court Narrows Order that Blocked Enforcement of California Assembly Bill 51
• UPDATE: Federal Court Grants Preliminary Injunction Blocking Enforcement of California Assembly Bill 51

Last Friday, after a month of hearings, rulings and uncertainty, the court found that all provisions of AB 51 implicate the FAA and thus, AB 51 is preempted by the FAA with respect to the regulation of arbitration agreements specifically. Since the FAA permits (or at least does not prohibit) mandatory arbitration agreements, AB 51 is unenforceable as it relates to such agreements.  This means that, for now, employers can feel free to continue using the arbitration agreements that they have been using, even if they are “mandatory” (i.e., presented as a condition of employment).

What comes next?

The judge’s order was a preliminary injunction.  In essence, a preliminary injunction maintains the “status quo” in a case pending a full trial on the merits of the issues raised.  That means several things:  (1) the order was issued after a hearing but before a full trial on the matter; (2) the plaintiffs had to show a likelihood of succeeding on the merits of their challenge to AB 51 at trial; and (3) the plaintiffs had to demonstrate that they or their constituents would be irreparably harmed if the law was not enjoined (i.e., blocked) during the time it will take to prepare for and hold the trial. The court does this because—assuming it ultimately decides that AB 51 is unenforceable—permitting the enforcement of AB 51 during the time it takes to hold the trial would cause harm to those affected by AB 51.

It also means that the defendants in this case, representatives of the state of California, have the right to appeal the preliminary injunction ruling, which they may do. It is also possible that after a full trial on the merits of the case, the Court could change its ruling.

Thus, while the preliminary injunction order may be a good indication of the final decision the court is likely to reach, it is no guarantee of the ultimate outcome of the case.

Takeaways for California Employers

This ruling provides California employers with the option of continuing to use—or implementing for the first time—mandatory employment arbitration agreements. Employers who do not currently use arbitration agreements and class action waivers in their employment relationships should strongly consider it.  While every situation is unique, as a general matter, resolving employment-related disputes through binding, individualized, arbitration proceedings reduces the stress and cost to employers of potential employee complaints, which might otherwise take years to wind their way through the court system.

Therefore, in light of the recently issued preliminary injunction, employers are strongly encouraged to consult with qualified employment law counsel now regarding the use of arbitration agreements for all applicants and employees.

To access the court’s complete preliminary injunction order, click here.