Employers in the apparel and action sports industry deserve some good news every now and then. In a surprise move, on October 11th, Governor Brown vetoed AB 465 which outlawed the use of most mandatory arbitration agreements as a condition of employment, making California the only state in the country to have this particular prohibition. The bill provided only two narrow ways an arbitration agreement could be upheld as enforceable in the employment context: 1) the waiver of a jury trial must be knowing, voluntary, in writing, and not made as a condition of employment; and 2) if the employee is individually represented by legal counsel in negotiating the terms of the arbitration agreement. The stated rationale for the proposed law was concern about contracts that are coerced or involuntary. However, coercion and lack of consent have always been grounds to invalidate contracts. In addition, California law on employment arbitration agreements already requires the employer to pay for the arbitration, prohibits any limitations on employees’ remedies, and imposes other requirements to ensure fairness. In short, the proposed law was unnecessary at best.
Governor Brown seems to agree, because he picked up on the overbreadth and illegality of the bill and refused to sign it. In his veto message, Governor Brown indicated that he would not be willing to take such a far-reaching step proposed by the bill for a number of reasons. First, California courts have already addressed the concept of unfairness in arbitration agreements. Second, a blanket ban on mandatory arbitration agreements have consistently been struck down as violative of the Federal Arbitration Act (“FAA”).
Now, embarrassingly, there are two more arbitration cases pending before the U.S. Supreme Court that arise from courts in California. In MHN Government Services, Inc. v. Zaborowski, the issue is whether unfair portions of an arbitration provision can be severed but the arbitration provision as a whole enforced. Most experts believe that the U.S. Supreme Court will overrule the Ninth Circuit and hold that the arbitration provisions can and should be enforced. Also, in DIRECTV, Inc. v. Imburgia, this case involves whether an arbitration provision in a DIRECTV customer agreement was properly found to be unenforceable under California interpretation of contract rules.
By vetoing AB 465, it is clear that the Governor understands that California cannot impede upon a substantive federal right – the right for parties to agree to arbitrate their disputes. Indeed, employers should be allowed to require their employees to agree to arbitrate disputes that may arise during the course of employment. Arbitration in the employment context can provide many benefits for an employer. If the employer has a large number of employees, it can add a class action waiver clause in the arbitration provision and effectively wipe out the risk of a class action. In addition, arbitration can often-times be a swifter, less expensive and more efficient means at resolving certain disputes. Finally, depending on the issues in the case, arbitration will remove the risks of a run-away jury which every employer wants to avoid. Trial attorneys can put virtually any monetary theory of damages in front of a jury and push for extreme numbers. Juries have little guidance on how to respond and often times they are forced to negotiate with the most extreme members in order to reach a verdict. In some instances, juries return verdicts that are no different than picking a number out of a hat. In arbitration, although there is risk that a company could end up with an arbitrator whose decision is devoid of reason, the risk is far less. For this reason, employers should be thrilled with Governor Brown’s decision to veto AB465.
Gina Miller is a shareholder of Call & Jensen, whose practice focuses on employment and commercial matters. She has litigated and counseled clients in a variety of industries, including apparel and action sports. For more information on Gina Miller, please email her at firstname.lastname@example.org.