From Lexology, Robin Samuel and Christina Taylor provide a superb analysis of California’s prohibition of mandatory arbitration agreements and the likelihood that the prohibition is not enforceable. Robin and Christina write:
At first glance, the law appears to render mandatory arbitration in employment agreements obsolete, and many have been quick to trumpet this “sea change” in California law. But federal law, specifically, the Federal Arbitration Act, has not changed. The FAA preempts any state law that “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress [in the FAA] . . . .” AT&T Mobility LLC v. Concepion, 131 S. Ct. 1740, 1753 (2011). And the odds are good that courts will quickly find AB 51 to be just such a preempted obstacle.
The drafters of AB 51 virtually concede as much. The statute attempts to save itself by declaring “Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act [FAA].” And while plaintiffs’ lawyers will predictably argue that this exception applies only to arbitration agreements voluntarily entered into by employees, the flaw in that argument is easy to spot. AB 51 excepts all FAA-governed arbitration agreements from its scope, including those that employees or applicants are required to sign. A plain reading of the statute shows that it does not apply to any FAA-governed arbitration agreement, regardless of whether the agreement is mandatory or voluntary.
And even if mandatory arbitration agreements are subject to AB 51, the result is the same. Employers can look to New York’s experience as a predictor of how AB 51 will fare. In Latif v. Morgan Stanley, the U.S. District Court for the Southern District of New York held that New York’s version of AB 51 was preempted to the extent it conflicted with the FAA. Under the FAA, arbitration agreements only may be invalidated with defenses that apply generally to any contract. The court in Latif cited U.S. Supreme Court precedent in holding “defenses that apply only to arbitration” or relate only to the fact that an arbitration agreement is at issue will not invalidate the agreement. And the court rejected the plaintiff’s argument that the state law specifically banning mandatory employment arbitration agreements was a defense that applied universally or neutrally to all contracts. The court noted, “The FAA sets forth a strong presumption that arbitration agreements are enforceable and this presumption is not displaced by [the New York state law]…the analysis is straightforward: the conflicting rule is displaced by the FAA.”