Ninth Circuit Removes Preliminary Injunction, Mostly Upholds California Law Prohibiting Mandatory Employment Arbitration Agreements

By SHLC on September 17, 2021 in Legal Update

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) (read the decision here), the U.S. Court of Appeals for the Ninth Circuit issued a decision regarding the future of California’s AB 51, which regulates employer use of mandatory arbitration agreements. The Ninth Circuit held that the Federal Arbitration Act (“FAA”) does not entirely preempt AB 51, and lifted the preliminary injunction that had halted the enforcement of AB 51 from early 2020 to September 15, 2021. This is a new decision and may still be subject to review. For example, the parties may ask the Ninth Circuit for a rehearing, or appeal to the U.S. Supreme Court. For now, however, AB 51 is in effect in California, and employers using arbitration agreements for their California employees should contact legal counsel to discuss compliance.

Background on AB 51 and the Preliminary Injunction

Effective January 1, 2020, AB 51 added section 432.6 to the California Labor Code and section 12953 to the Government Code. These sections broadly prohibit employers from requiring any applicant for employment or any employee, as a condition of employment, continued employment, or receipt of employment-related benefits, to waive any right, forum, or procedure to pursue a claim arising under the California Fair Employment and Housing Act (“FEHA”) or the California Labor Code.  This specifically includes “the right to file and pursue a civil action or a complaint with . . . any court or other governmental entity.”

Simply put, under AB 51, California employers may not require current or prospective employees to sign an employment arbitration agreement as a condition of employment, or a condition of receiving any job-related benefit. If employers wish to use employment arbitration agreements, they must be completely voluntary on the part of the employee or job applicant, and the employee or applicant may not be given any additional benefit as an incentive for signing.

On December 30, 2019, just two days before AB 51 was to take effect, a federal court in California found that AB 51 likely ran afoul of the FAA, in that it created an obstacle to the enforcement of private arbitration agreements according to the terms of the then new law. On this basis, the court issued a preliminary injunction, which prevented the State of California from enforcing the operative provisions of AB 51. This preliminary injunction has remained in place until this week, when it was vacated by the Ninth Circuit on September 15.

We discussed AB 51 in more detail in a 2020 blog.

The Ninth Circuit’s Decision

The Ninth Circuit was asked in the Chamber of Commerce of the U.S., et al. v. Bonta, et al case to interpret the FAA in relation to AB 51. The FAA is a federal law that generally requires courts to enforce arbitration agreements entered into between private parties according to their terms, including arbitration agreements between an employer and its employee.

In a 2 to 1 majority opinion, the Ninth Circuit ultimately held that AB 51 is not preempted by the FAA, because AB 51 does not inhibit the enforcement of arbitration agreements. Rather, AB 51 only regulates employer conduct prior to the formation of an arbitration agreement. According to the majority, AB 51 makes it unlawful for an employer to require that its applicants or employees sign an arbitration agreement. However, if the employer violates AB 51 and a mandatory arbitration agreement is signed by its applicant or employee, AB 51 does not create a defense to the enforcement of that agreement. In other words, if an employer uses mandatory arbitration agreements despite AB 51’s prohibition, the employer will violate the law, but a valid and enforceable arbitration agreement will nonetheless be created.  For that reason, AB 51 does not create an obstacle to the “enforcement” of any duly executed arbitration agreement, and is thus not preempted by the FAA. On this basis, the Ninth Circuit lifted the trial court’s preliminary injunction, clearing the way for AB 51 to take immediate effect.

In contrast, the Ninth Circuit did take issue with the civil and criminal penalties that AB 51 creates for employers who violate the law. The Court held that, under the FAA, a state “may not impose civil or criminal sanctions on individuals or entities for the act of executing an arbitration agreement.” The penalty provisions were therefore held to be unenforceable.

Employer Takeaways

One of the main questions is whether the Ninth Circuit’s decision will stand. The parties may “appeal” the Ninth Circuit 3-justice decision to the full Ninth Circuit or the U.S. Supreme Court. Therefore, this decision may not be the final word. Our firm will continue to monitor this case for further developments.

For the time being, however, it is appears that employers may not require applicants or employees to enter into mandatory arbitration agreements, even if the agreement includes an opt-out clause. At this point, per AB 51, all employment arbitration agreements should be completely voluntary. If an applicant or employee declines to sign an arbitration agreement, and the employer then refuses to hire the applicant, terminates the employee, or denies any job-related benefit, this could expose the employer to liability.

Therefore, in light of the recently issued decision, employers are strongly encouraged to consult with qualified California employment law counsel as soon as possible regarding the use of arbitration agreements for all applicants and employees.

This case and other new California laws for employers will be discussed at our upcoming WHAT EMPLOYERS NEED TO KNOW ABOUT…™ California New Year Employment Law Update LIVE Webinar on December 8, 2021. For more information on these and other events, visit our Events Page.