Legislature Should Reject Renewed Attack on Arbitration Agreements – Part 2

Chris Micheli
Chris Micheli is a Principal with the Sacramento governmental relations firm of Aprea & Micheli, Inc.

While no longer the state’s chief executive, Governor Brown studiously considered two bills that were intended to preclude employment arbitration and he vetoed both bills. He most recently did so last September with AB 3080 (Gonzalez) when he said:

“In my veto message of a similar bill in 2015, I referred to recent court decisions that invalidated state policies which unduly impeded arbitration. I also wanted to see how future United States Supreme Court decisions developed before endorsing a broad ban on mandatory arbitration agreements.

“The direction from the Supreme Court since my earlier veto has been clear – states must follow the Federal Arbitration Act and the Supreme Court’s interpretation of the Act. DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 468 (2015).

“This bill is based on a theory that the Act only governs the enforcement and not the initial formation of arbitration agreements and therefore California is free to prevent mandatory arbitration agreements from being formed at the outset. The Supreme Court has made it explicit this approach is impermissible. In 2017 Justice Kagan, an appointee of President Obama, writing on behalf of a near-unanimous Supreme Court, clearly rejected the assertion that the Federal Arbitration Act has no application to contract formation issues:

‘By its terms, . . . the Act cares not only about the “enforce[ment]” of arbitration agreements, but also about their initial “valid[ity]”-that is, about what it takes to enter into them. Or said otherwise: A rule selectively finding arbitration contracts invalid because improperly formed fares no better under the Act than a rule selectively refusing to enforce those agreements once properly made. Precedent confirms that point.” Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S. Ct. 1421, 1428 (2017).

“Since this bill plainly violates federal law, I cannot sign this measure.”

There is no reason that Governor Newsom should view AB 51 differently – the bill is taking the same approach as last year’s AB 3080 and the outcome should be the same.

In addition, on March 14, 2018, the California Court of Appeal for the 2nd District ruled that a previously-enacted California statute was preempted by the FAA. AB 2617 (Weber) was enacted in 2013 to prohibit arbitration agreements being made as a condition of a consumer contract. However, in Saheli v. White Memorial Medical Center, 21 Cal.App.5th 308, the appellate court ruled that AB 2617 was preempted under the FAA as it placed a special restriction on arbitration agreements that was not imposed on other contracts

In fact, the Court of Appeal said that AB 2617 “unquestionably discriminate[s] against arbitration by placing special restrictions on waivers of judicial forums and procedures in connection with claims brought under those acts. In effect, sections 51.7 and 52.1 deem an agreement to arbitrate such claims unenforceable unless the party seeking to enforce it proves (1) the other party knowingly and voluntarily agreed to arbitration, and (2) the arbitration agreement was not made a condition of a contract for goods or services or of providing or receiving goods or services. For the reasons we discuss, we conclude these restrictions are preempted by the FAA.”

This state court case also responds to the claim of the proponents of AB 51 that the bill merely requires an employee to voluntarily agree to arbitration. However, just like the Kindred Nursingcase addresses arguments made by AB 51’s proponents, so too does this case. As a result, both state and federal appellate courts have considered and rejected the arguments that are being made by those who support AB 51.

In light of all these consistent decisions by the United States Supreme Court, as well as the California Supreme Court, it is highly unlikely that any California bill such as AB 51, will be upheld by the courts. As a result, state legislators should refrain from enacting any bill that discriminates against the use of arbitration or applies limitations against the use of arbitration.

 

Chris Micheli is an attorney and lobbyist at the Sacramento governmental relations firm of Aprea & Micheli, Inc.

 

 

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