Governor Should Reject Renewed Attack on Arbitration

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

Assemblywoman Lorena Gonzalez has again gotten to the Governor’s Desk a measure to preclude the use of arbitration agreements in employment disputes. While last year’s effort also passed the Legislature, AB 3080 was vetoed by Governor Jerry Brown, just as he had done with a narrower bill in 2015.

Assemblywoman Gonzalez has pursued AB 51 to see if this likely federally-preempted bill will be treated differently by Governor Gavin Newsom. However, the Governor should veto AB 51 on the same basis that Governor Brown did: “It plainly violates federal law.”

The Federal Arbitration Act (FAA) provides that agreements to arbitrate “shall be valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In reviewing AB 51, Governor Newsom should accept the U.S. Supreme Court’s views on the reach of the FAA and how the Court has consistently rejected state efforts to limit the use of arbitration.

More than three decades ago, the high court explained the purpose of the FAA. In Southland Corp. v. Keating, the US Supreme Court held: “In enacting Section 2 of the FAA…Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.”

In re-emphasizing this point, the U.S. Supreme Court in DIRECTV, Inc. v. Imburgia criticized California for discriminating against consumer arbitration agreements. In the opinion authored by Justice Breyer, the Court stated, because California applied an invalid state law to only arbitration agreements and no other contracts, such an application did not place arbitration agreements on “’equal footing’” with other contracts and, therefore, was preempted by the FAA.

Similarly, the California Supreme Court issued Sanchez v. Valencia Holding Co., in which Justice Liu wrote the opinion that held the Consumer Legal Remedies Act (CLRA), which prohibited any waiver of the provisions of that law, was preempted by the FAA. The state Court determined that the CLRA’s anti-waiver provisions interfered with the “fundamental attributes of arbitration, such as speed and efficiency, and thus disfavors arbitration as a practical matter.”

Thereafter, the United States Supreme Court held in Kindred Nursing Centers, LP v. Clark that a Kentucky statute violated the FAA by singling out arbitration agreements for disfavored treatment. In a 7-2 opinion authored by Justice Kagan, the Court held the FAA not only preempts any state law rule that discriminates against arbitration, but also “any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.”

The proponents of AB 51 argue that their bill only deals with contract formation and is needed to protect workers’ rights. However, the Court rebuffed Kentucky’s argument that the state was merely regulating contract formation and would likely do the same with AB 51. The high court said Kentucky’s claimed principle of protecting fundamental constitutional rights was simply a pretext to discriminate against arbitration.

In addition, last year, a California Court of Appeal 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, 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 light of these consistent decisions by the United States and California Supreme Courts, it is highly unlikely that any California statute, such as that contained in AB 51, would be upheld by the courts. As a result, Governor Newsom should veto this bill that limits 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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