More Details on Two New California Laws Impacting Arbitration
Posted on Categories Arbitration, Arbitration Agreements, Legislation, StateTags , , , ,

By George H. Friedman, SAA Editor-in-Chief

As reported in SAA 2019-39 (Oct. 16), California Governor Gavin Newsom within days of each other signed into law two new statutes that will impact arbitration. As promised, here are more details.

The Governor signed into law AB-51, a bill essentially banning mandatory arbitration of employment discrimination, sexual harassment, and wage law disputes. Just three days later, he signed SB-707, a law that will impact arbitration fees and costs in consumer and employment cases, and address panel diversity. As we explain below, neither law is necessarily a complete “slam dunk” preemption candidate.

AB-51: A Limited Ban on Some PDAAs

AB-51 was introduced last March, passed by the legislature this summer, and signed by the Governor on October 10. The new law doesn’t expressly bar predispute arbitration agreements (“PDAA”), but amends Labor Code section 432.6(a) to provide: “A person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, or as a condition of entering into a contractual agreement, require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provision of the California Fair Employment and Housing Act (Part 2.8 (commencing with Section 12900) of Division 3 of Title 2 of the Government Code) or this code, including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation” (emphasis added). The statute also states that an employer can’t “threaten, retaliate or discriminate against, or terminate” an employee or job applicant who refuses to consent to waiver.

AB-51: Preemption Avoidance Carveouts?

The statute has some carveouts seemingly included to avoid Federal Arbitration Act (“FAA”) and federal securities acts preemption. From its introduction, the bill has had an SRO carveout: “This section does not apply to a person registered with a self-regulatory organization as defined by the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78c) or regulations adopted under that act pertaining to any requirement of a self-regulatory organization that a person arbitrate disputes that arise between the person and his or her employer or any other person as specified by the rules of the self-regulatory organization.” And the law provides that nothing contained in it “is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act (9 U.S.C. Sec. 1 et seq.).” Last, it does not invalidate existing PDAAs; it goes into effect January 1, 2020, for “contracts for employment entered into, modified, or extended” on or after that date.

AB-51: New Governor, New result

If this seems familiar, recall that as reported in SAA 2018-37 (Oct. 3), then-California Governor Jerry Brown vetoed AB 3080, a similar bill (ed: with no FAA or existing PDAAs carveouts). Governor Brown’s Veto Message expressed his concerns that the proposed law was an FAA preemption candidate. As we correctly surmised in our past editorial comments, “We’re guessing the sponsors expect a more favorable reaction from current Governor Gavin Newsom.” What’s also different this time around is the language recognizing the supremacy of the FAA and the statutory language exempting existing PDAAs. We asked SAC Board of Editors Member and long-time neutral Paul Dubow for his take on the new law: “The exception for contracts covered by the FAA is interesting. There are often situations where draftspersons state that the contract will be covered by California law because they want to take advantage of provisions in California law outside of the arbitration field and they do so without thinking about California arbitration law. Will a contract that affects interstate commerce and would normally be subject to the FAA be covered by AB-51 because the contract specifies California law?”

SB-707: Focus on Arbitration Fees

This amendment to California’s arbitration statute aims to address the “procedural limbo and delay workers and consumers face when they submit to arbitration, pursuant to a mandatory arbitration agreement, but the employer fails or refuses to pay their share of the arbitration fees.” The bill’s other aim is addressing “the alarming lack of diversity in the arbitration industry, which calls into question the ability of the industry to fairly adjudicate claims brought by an increasingly diverse work force in California.” A staff analysis states that SB-707 (ed: presented essentially verbatim):

  • Provides that, where any drafting party fails to pay the fees necessary to commence or continue arbitration, within 30 days after such fees being due to be tendered to the arbitrator, the drafting party is held to have materially breached the arbitration and is in default of the agreement.
  • Gives consumers or employees several remedies in the event a drafting party breaches the arbitration agreement by failing to pay the arbitration costs and fees.
  • Would permit, should the drafting party fail to pay the costs necessary to commence arbitration, the employee or consumer to remove the matter to court or move to compel the arbitration.
  • Provides that, in the event that the drafting party fails to pay the fees or costs necessary to continue an arbitration currently in progress, the employee or consumer can move the matter to court, seek a court order compelling the payment of the fees, continue the arbitration and permit the arbitrator to seek collection of their fees, or pay the costs and fees and seek those fees from the drafting party at the conclusion of the arbitration regardless of the ultimate outcome.
  • To deter drafting parties from failing to pay arbitration costs and fees in a timely manner, this bill imposes mandatory monetary sanctions on any drafting party found to be in default of an arbitration agreement for failure to pay costs and fees, and permits the imposition of additional evidentiary, terminating, or contempt sanctions, as the court or arbitrator sees fit.

SB-707: Focus on Arbitrator Diversity

The bill’s other aim is addressing “the alarming lack of diversity in the arbitration industry, which calls into question the ability of the industry to fairly adjudicate claims brought by an increasingly diverse workforce in California.” How? The staff analysis says that SB-707: “Requires an arbitration company that administers, or is otherwise involved in a consumer arbitration, to also include in the required report the demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of all arbitrators as provided by the arbitrator.” The effective date is not clear from the face of the bill; we assume it is immediate.

(ed: *Given the FAA carveout in AB-51, one wonders to which situations the new law will apply? Many SRO employees are not included, nor are workers covered by an existing PDAA. And the part exempting PDAAs enforceable under the FAA seems to gut the prohibition on PDAAs entered into after January 1st. So, what’s left? We suppose an argument can be made that the new law bars employers from enforcing the PDAAs, but in our view that would run afoul of the FAA. Stay tuned! **Dorsey & Whitney LLP, published in the October 17 JDSupra an excellent, short analysis of AB-51, “Five FAQs on California’s New Ban on Mandatory Arbitration Agreement.” ***We reported in SAA 2019-29 (Jul. 31) on Latif v. Morgan Stanley & Co., LLC, No. 18cv11528 (S.D.N.Y. June 26, 2019), where the District Court held in a case of first impression that the FAA preempts a 2018 amendment to New York’s arbitration statute – CPLR § 7515 – banning PDAAs covering sexual harassment claims. The Court, however, noted that a bill expanding the PDAA bar to employment discrimination claims in general was sitting on Governor Cuomo’s desk, and “held” it preempted in advance of enactment. The Governor nevertheless signed the bill into law and it went into effect October 11. ****The first half of SB-707 to us is also an FAA preemption candidate, although the panel diversity data-gathering aspect seems fine to us. Recall that FINRA already publishes arbitrator (and mediator) panel demographics data.) (SAC Ref. No. 2019-40-01)

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