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Last year, Governor Gavin Newsom signed AB 51, which effectively outlawed mandatory arbitration agreements with employees – a new version of a bill that prior Governor Jerry Brown had vetoed repeatedly while he was in office.

The law allows workers to pursue damages and attorneys’ fees and open criminal cases against employers who discriminate and retaliate against them for declining arbitration contracts.

The analysis of the Senate Rules Committee demonstrated that the legislature was well aware that a bill prohibiting arbitration agreements could be challenged as being preempted by the Federal Arbitration Act (“FAA”).

As the bill’s author stated, “The Supreme Court has never ruled that the FAA applies in the absence of a valid agreement. AB 51 regulates employer behavior prior to an agreement being reached. Further, understanding the Courts’ hostile precedence toward policies that outright ban or invalidate arbitration agreements, AB 51 does neither. Both pre-dispute and post dispute agreements remain allowable and the bill takes no steps to invalidate any arbitration agreement that would otherwise be enforceable under the FAA. The steps help ensure this bill falls outside the purview of the FAA.”

Courthouse News reports that this past January, U.S. District Judge Kimberly Mueller blocked state officials from enforcing key provisions of the bill that regulate agreements governed by the Federal Arbitration Act. The Obama appointee agreed with a coalition of business groups led by the U.S. Chamber of Commerce that AB 51 unfairly regulated or singled out arbitration agreements in comparison to other contracts.

The ruling was appealed to the 9th Circuit Court of Appeals, and the matter was set for oral argument this December.

Arguing employers could retaliate against workers, a California Justice Department attorney told a Ninth Circuit panel Monday it should overturn a judge’s ruling that federal law preempts the state’s pro-worker bill barring arbitration requirements as conditions of employment.

Proponents of the bill say it protects workers in food service, hospitality and retail who are increasingly being forced to sign away their rights to sue in exchange for being hired.

The chamber argued the bill would unfairly expose California businesses to civil and criminal penalties and force them to both alter hiring practices and spend more on dispute resolution.

California Deputy Attorney General Chad Stegeman told the Ninth Circuit AB 51 was crafted to complement the Federal Arbitration Act – referred to during oral arguments as the FAA – and that it doesn’t undermine arbitration but rather targets employers’ “discriminatory intent” toward workers.

“It’s a matter of consent. An employer can’t fire an employee because of their refusal to arbitrate,” Stegeman said, adding Mueller’s ruling exposes workers to unfair contracts. “The court created a new substantive right to force arbitration. But there’s no such right derived from the FAA.”

Andrew Pincus of Mayer Brown, an attorney for the chamber, told the panel the Federal Arbitration Act clearly preempts state laws that block formation and enforcement of arbitration agreements.

Supreme Court precedent directly applies in situations described in AB 51 where workers must weigh the benefits of nonnegotiable employment contracts even if they don’t have the same bargaining power, Pincus said.

The panel took the matter under submission and did not indicate when it would rule.