Important Decision for California Employers Impacting Mandatory Arbitration Agreements

By XobeeAdmin on February 16, 2023 in Legal Update
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On February 15, 2023, a divided US Court of Appeals for the Ninth Circuit panel held that the Federal Arbitration Act (“FAA”) preempts California’s Assembly Bill 51 (“AB 51”), a 2019 measure that prohibited employers from requiring job applicants or workers to sign arbitration pacts.

The 9th Circuit’s ruling means that it is lawful for most employers to require employees to sign arbitration agreements in California.

Background:

On October 13, 2019, California Governor Gavin Newsom signed AB 51, a bill that essentially would have made it unlawful for a California employer to require job applicants or employees to sign an arbitration agreement as a condition of employment beginning January 1, 2020.

Violations of the law would have not only led to civil and criminal penalties but would have also been considered an “unlawful employment practice.” This means that employers would have been subject to the private right of action under the Fair Employment Housing Act (“FEHA”) set forth in Government Code Section 12960, which could have opened employers to retaliation claims associated with an employee’s refusal to sign a mandatory arbitration agreement.

As our office predicted here, AB 51 was subjected to legal challenges based on the FAA, which generally has been held by the U.S. Supreme Court to preempt state laws that interfere with the enforcement of otherwise valid arbitration agreements.

As discussed here, on December 30, 2019, a federal judge in the United States District Court for the Eastern District of California issued a temporary restraining order, which prohibited California government officials from enforcing the law until at least January 10, 2020.

On January 10, 2020, the same federal judge ordered that the temporary restraining order will remain in effect until January 31, 2020.

We also reported that on January 31, 2020, the federal court granted the plaintiffs’ request for a preliminary injunction. In so doing, the court ordered that California government officials were enjoined (i.e., prohibited) from enforcing AB 51 “where the alleged waiver of any right, forum, or procedure is the entry into an arbitration agreement covered by the FAA.”

As discussed here, on September 15, 2021, in the case of Chamber of Commerce of the U.S., et al. v. Bonta, et al., No. 20-15291 (9th Cir. Sept. 15, 2021), the U.S. Court of Appeals for the Ninth Circuit held that the FAA did not entirely preempt AB 51 and lifted the preliminary injunction that had been in place since January 1, 2020.  In a 2 to 1 majority opinion, the Ninth Circuit ultimately concluded that the FAA did not preempt AB 51 to the extent that AB 51 sought to regulate an employer’s conduct prior to executing an arbitration agreement. The panel held that the FAA preempts only that portion of AB 51 that imposes civil or criminal penalties on employers who have successfully executed arbitration agreements governed by the FAA.

The U.S. Chamber of Commerce thereafter filed a petition for rehearing en banc, which the Ninth Circuit deferred pending the U.S. Supreme Court’s decision in Viking River Cruises v. Moriana.

As discussed by our office here, on June 15, 2022, in Viking River Cruises v. Moriana, the United States Supreme Court held that California employers may include provisions in their arbitration agreements that require employees to bring only individual Private Attorneys General Act (“PAGA”) claims in separate arbitrations, rather than as a group in one case. It is possible this new development could change in the future due to anticipated decisions by the California Supreme or Appellate Courts, or by the California Legislature. However, at this time, employers should immediately take advantage of this ruling and make sure PAGA claims are included in employee arbitration agreements.

Following the Viking River Cruises v. Moriana decision, on September 22, 2022, the 9th Circuit Court of Appeals reinstated the injunction prohibiting enforcement of AB 51.

Yesterday, on February 15, 2023, a divided US Court of Appeals for the 9th Circuit panel held that the FAA preempts AB 51. U.S. Chamber of Commerce v. Bonta, 9th Cir., No. 20-15291, 2/15/23. The 9th Circuit joined the 1st Circuit and the 4th Circuit in finding that “the FAA preempts a state rule that discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement.” “Because the FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 is therefore preempted,” the panel majority said. Notably, the 9th Circuit found that all of AB 51’s provisions work together, and therefore, the appeals court declined to sever certain parts and uphold others.

Due to the 9th Circuit’s ruling, the odds are now overwhelmingly stacked against AB 51 . California could request a panel rehearing, petition that the decision be referred to the full 9th Circuit (“en banc”), or even appeal to the U.S. Supreme Court. However, the final outcome does not appear at all hopeful for proponents of the statute. California’s Attorney General’s office says they are “assessing” next steps in light of yesterday’s ruling, so stay tuned for any future developments.

What does this mean for California Employers?

The 9th Circuit’s ruling means that it is lawful for most employers to require employees to sign arbitration agreements in California.

Further, with the ruling in Viking River Cruises v. Moriana, California employers can expressly include provisions in their arbitration agreements that require employees to bring PAGA claims only in arbitration and only on an individual basis. Therefore, employers should immediately consult with qualified legal counsel to explore how to take advantage of these recent developments in the law.

We are long-time proponents of adopting workplace arbitration agreements with employees, and strongly encourage employers to consider working with our office or other qualified legal counsel to either adopt arbitration agreements for the first time or to update your current agreement so that it complies with California and federal law.  There are a number of important options and considerations for employers regarding the use of arbitration agreements in the workplace.  Of course, laws regarding workplace arbitration agreements change frequently, particularly in California, so it is important to have workplace arbitration agreements reviewed at least annually for compliance.

The topic of California workplace arbitration agreements will be discussed in more detail during SHLC’s upcoming Mid-Year California Employment Law Update webinar on June 21, 2023. Consult our events page for more information.