On February 7, 2020, United States District Court Judge Kimberly J. Mueller issued a decision explaining her prior order blocking enforcement of California's new law restricting arbitration agreements, AB 51. As described in our prior advisory, the law prohibits mandatory arbitration agreements as a condition of employment in California and was set to take effect January 1, 2020.

On December 30, 2019, the court issued a temporary restraining order, halting enforcement of the law. In January 2020, the court heard oral argument on Plaintiffs' motion for a preliminarily injunction and considered supplemental briefing. On January 31, 2020, the court issued a minute order granting the motion as to agreements covered by the Federal Arbitration Act (FAA), and stated a more detailed opinion would follow.

In her 36-page decision, Judge Mueller held that Plaintiffs had shown the FAA likely preempts AB 51. The court explained that arbitration agreements must be placed on an equal footing with other contracts, and, in fact, "the equal-footing principle provides the foundation for determining whether a state law discriminates against arbitration agreements in some way."

The court explained that under AB 51, arbitration agreements are not on equal footing with other contracts because "[i]n its expressed purpose, and its operation, AB 51 singles out the requirement of entering into arbitration agreements and thus subjects these kind of agreements to unequal treatment." The court further explained that placing '"arbitration agreements in a class apart from ‘any contract,' [] is the law’s fatal flaw."

The court also found that AB 51 interferes with the purposes and objectives of the FAA – specifically, to promote arbitration – and is preempted on this additional basis. The court found that criminal and civil sanctions potentially imposed on employers found to violate AB 51 would "likely have a deterrent effect on employers' use of arbitration agreements." Because AB 51 inhibits the goal of the FAA to promote arbitration, it is likely preempted.

There is no specific deadline for the injunction, and it will likely remain in place until the case is ultimately resolved at the federal district court level or on appeal. While the order is a substantial positive development for employers who rely on arbitration agreements, this decision also remains limited to agreements covered by the FAA.

Employers are encouraged to review their agreements to ensure they are covered by the FAA, and compliant with existing law.