New California Law Banning Arbitration Agreements May Have Little Impact on Employers

October 18, 2019

A new California law (AB 51), which prohibits new mandatory arbitration agreements regarding disputes arising under California employment laws, does not apply to any agreement, mandatory or voluntary, that is enforceable under the Federal Arbitration Act (FAA).

The new law has limited impact for two reasons:

  • First, it only applies to arbitration agreements executed, modified, or extended on or after January 1, 2020, effectively grandfathering existing agreements.

  • Second, it explicitly states: “[n]othing in [the law] is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act”—most arbitration agreements are enforceable under the FAA.

The new law is subject to FAA preemption.  Earlier this year, the U.S. District Court for the Southern District of New York struck down New York’s similar ban on arbitration agreements, which also included a FAA carve-out, on FAA preemption grounds.

Outlook: AB 51 will likely be challenged in court and meet the same fate as the New York law.  However, this will give Democrats in Congress another reason to press the Senate to pass the FAIR Act next year or after the 2020 election.