{"id":10944,"date":"2026-06-12T19:38:07","date_gmt":"2026-06-12T19:38:07","guid":{"rendered":"https:\/\/usatrustedlawyers.com\/blog\/business-groups-challenge-ab-51\/"},"modified":"2026-06-12T19:38:07","modified_gmt":"2026-06-12T19:38:07","slug":"business-groups-challenge-ab-51","status":"publish","type":"post","link":"https:\/\/usatrustedlawyers.com\/blog\/business-groups-challenge-ab-51\/","title":{"rendered":"Business Groups Challenge AB 51"},"content":{"rendered":"\n
\n A coalition of business groups is challenging California Assembly Bill 51, California\u2019s recent legislation criminalizing mandatory arbitration agreements as a condition of employment or receipt of employee-related benefits, arguing that the initial formation of an arbitration agreement is covered by the Federal Arbitration Act<\/p>\n

Overview<\/p>\n

<\/strong><\/p>\n

In October 2019 California enacted Assembly Bill 51 (\u201cAB 51\u201d), which prohibits employers from requiring mandatory arbitration agreements as a condition of employment, continued employment, or receipt of employment-related benefits for claims arising under California\u2019s Labor Code or California\u2019s Fair Employment Housing Act (\u201cFEHA\u201d).\u00a0 AB 51\u2019s prohibition on mandatory arbitration agreements includes agreements that permit an employee to opt out of a waiver of rights, or to require an employee to take any affirmative action to preserve his or her rights.\u00a0 It also prohibits employers from taking adverse action against an employee or prospective employee for refusing to consent to arbitration.\u00a0 A violation of these restrictions is a misdemeanor.\u00a0 \u00a0<\/p>\n

AB 51 is set to take effect on January 1, 2020 and will apply only to contracts for employment entered into, modified, or extended on or after that date.\u00a0 The Bill carves-out severance agreements from its purview.<\/p>\n

On December 9, 2019, a coalition of business groups led by the Chamber of Commerce of the United States of America filed suit in the U.S. District Court for the Eastern District of California on behalf of their members, seeking a declaratory judgment that AB 51 is invalid with respect to arbitration agreements governed by the Federal Arbitration Act (the \u201cFAA\u201d), and an order permanently enjoining enforcement of AB 51 with respect to such agreements.\u00a0 The business coalition simultaneously filed a motion for a preliminary injunction to prevent the Bill from taking effect while the lawsuit is pending.\u00a0 The FAA applies to arbitration agreements in interstate commerce (other than to agreements involving certain transportation workers), so there may be agreements entered into by employers operating solely within California which would not be impacted by this case.\u00a0 The plaintiffs, however, argue that AB 51 will have sweeping effects on many California employment agreements.<\/p>\n

Assembly Bill 51<\/strong><\/p>\n

On October 10, 2019, California Governor Gavin Newsom signed into law AB 51, which amends California\u2019s Labor Code and the FEHA to place new restrictions on an employer\u2019s ability to require arbitration agreements in contracts for employment.\u00a0 In 2018, the California Legislature attempted to enact similar legislation with Assembly Bill 3080, but then-Governor Jerry Brown vetoed the bill, stating that it \u201cplainly violates federal law.\u201d\u00a0 \u00a0 \u00a0<\/p>\n

AB 51 amends the California Labor Code, which provides certain rights for employees in California, by adding Section 432.6.\u00a0 The new provision provides that a \u201cperson shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provisions of the [FEHA or California Labor Code] . . . including the right to file and pursue a civil action or a complaint . . . \u201d\u00a0 Cal. Labor Code \u00a7 432.6(a).\u00a0 AB 51 amends the FEHA, which protects employees from discrimination, to state, \u201c[i]t is an unlawful employment practice for an employer to violate Section 432.6 of the Labor Code.\u201d\u00a0 AB 51\u2019s amendments prohibit mandatory pre-dispute arbitration agreements for claims under the FEHA or California Labor Code in contracts for employment, if such agreement is a condition of employment or employment-related benefits.\u00a0\u00a0<\/p>\n

AB 51 also amends the California Labor Code to provide that \u201can agreement that requires an employee to opt out of a waiver or take any affirmative action in order to preserve their rights is deemed a condition of employment.\u201d\u00a0 Cal. Labor Code \u00a7 432.6(c).\u00a0 Even agreements that permit an employee to opt out of arbitration are prohibited.\u00a0 Employers also may not \u201cthreaten, retaliate or discriminate against, or terminate any applicant for employment or any employee\u201d if they refuse to consent to arbitration.\u00a0 \u00a7 432.6(b).\u00a0 Employees who are terminated, or applicants who are not hired, because they refuse to enter an arbitration agreement may sue for damages and attorneys\u2019 fees.<\/p>\n

A separate and preexisting provision of the California Labor Code provides that it is a misdemeanor to violate the provisions of the California Labor Code governing contracts and applications for employment.\u00a0 Cal. Labor Code \u00a7 433.\u00a0 Under this provision, employers who violate \u00a7 432.6 may now face misdemeanor charges, and employees and applicants may report employers for criminal sanctions.\u00a0<\/p>\n

There are certain express limitations to \u00a7 432.6.\u00a0 First, the provision applies only to contracts \u201centered into, modified, or extended on or after January 1, 2020.\u201d\u00a0 \u00a7 432.6(h).\u00a0 Second, it \u201cdoes not apply to a person registered with a self-regulatory organization\u201d under the Securities Exchange Act of 1934, \u201cor regulations adopted under that act pertaining to\u201d arbitrating disputes. \u00a7 432.6(e).\u00a0 Third, it does not apply to \u201cpost[-]dispute settlement agreements or negotiated severance agreements.\u201d\u00a0 \u00a7 432.6(g).\u00a0\u00a0<\/p>\n

AB 51\u2019s FAA Limitation\u00a0<\/strong><\/p>\n

The FAA makes arbitration agreements \u201cvalid, irrevocable, and enforceable\u201d unless unenforceable on equity grounds.\u00a0 The FAA governs interstate arbitration agreements (other than those entered into with transportation workers).\u00a0 The California Legislature, recognizing AB 51\u2019s potential conflict with the FAA, added the following language to \u00a7 432.6:\u00a0 \u201cNothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the FAA.\u201d\u00a0 \u00a7 432.6(f).\u00a0 The language is intended to limit \u00a7 432.6 to regulating employer behavior before an employment agreement is formed, not once the agreement is reached, such that a court could deem pre-employment to be beyond the purview of the FAA.\u00a0\u00a0<\/p>\n

Business Groups Challenge AB 51<\/strong><\/p>\n

On December 9, 2019, a coalition of business groups led by the Chamber of Commerce of the United States of America filed suit in the U.S. District Court for the Eastern District of California on behalf of their members, seeking a declaratory judgment that AB 51 is invalid with respect to arbitration agreements governed by the FAA, and an order permanently enjoining enforcement of AB 51 with respect to such agreements.\u00a0\u00a0<\/p>\n

The plaintiffs allege that because AB 51 impedes the ability of employers to enter into arbitration agreements it is preempted by the FAA, and is therefore invalid under the Supremacy Clause of the United States Constitution.\u00a0 They argue that the FAA preempts any state legislation governing the conditions for entering into arbitration agreements, and is not limited only to the enforceability of such agreements once formed.\u00a0 The complaint highlights the criminal liability imposed on employers who violate AB 51\u2019s amendments to the California Labor Code, and it underscores how the legislation is intended to prevent employers from freely exercising their right to enter into arbitration agreements with employees and prospective employees.\u00a0\u00a0<\/p>\n

To support their claims, plaintiffs cite recent Supreme Court precedent holding that the FAA preempts \u201cany state rule discriminating on its face against arbitration\u201d or \u201cany rule that covertly accomplishes the same objective by disfavoring contracts that . . . have the defining features of arbitration agreements.\u201d\u00a0 Kindred Nursing Centers, Limited Partnership v. Clark, 137 S. Ct. 1421, 1426 (2017).\u00a0 The key issue before the district court is whether the FAA preempts any state law that discriminates against the initial formation of an arbitration agreement, in addition to the enforceability of such agreement once it is formed.\u00a0\u00a0<\/p>\n

Plaintiffs filed a motion for preliminary injunction to maintain the status quo while the lawsuit is pending.\u00a0 Plaintiffs argue they are likely to succeed on the merits of their challenge to AB 51 because Supreme Court precedent makes clear that the FAA preempts laws like AB 51.\u00a0 Plaintiffs further assert that they will suffer irreparable harm if AB 51 is permitted to take effect because refusal to comply exposes the plaintiffs to criminal and civil penalties and lawsuits, and that AB 51 could impact many California employment agreements because compliance would require them to alter their relationships with their workers and incur significant costs, because the only practical approach for employers to ensure compliance with AB 51 is to cease entering into pre-dispute arbitration agreements.\u00a0 Plaintiffs highlight that these costs cannot be recovered with monetary damages because any such recovery would be barred by California\u2019s sovereign immunity, which it will not waive.\u00a0 Finally, plaintiffs argue that arbitration serves a public benefit because it reduces the cost and complexity associated with litigation, and is more efficient that court litigation.<\/p>\n

The hearing on plaintiffs\u2019 motion for a preliminary injunction is set for January 10, 2020.\u00a0 \u00a0<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

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