A new decision from the Ninth Circuit has once again altered the landscape regarding mandatory arbitration for California employers, reinstating California Assembly Bill 51's prohibition against requiring applicants or employees to sign arbitration agreements as a condition of employment.
On September 15, 2021, in Chamber of Commerce v. Bonta, a divided federal Ninth Circuit panel reversed parts of the federal district Court’s earlier decision that the Federal Arbitration Act (FAA) preempted AB 51 banning mandatory arbitration. This decision, if not stayed or overturned, will vacate portions of the District Court’s preliminary injunction issued in early 2020 to prevent the enforcement of AB 51 for FAA-covered arbitration agreements. The majority’s decision and dissenting opinion can be found here.
In 2019, California’s legislature passed AB 51, set to go live on January 1, 2020. AB 51 added Section 12953 to the California Government Code and Section 432.6 to the California Labor Code to outlaw forced arbitration of California Fair Employment and Housing Act (FEHA) and Labor Code claims. The bill states, “A person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provision of the [FEHA] or this [California Labor] code.”
AB 51 gave applicants and employees a right of civil action and contained strong anti-retaliation language to prevent an employer from seeking to, “threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee because of the refusal to consent to [arbitration].” Litigation thereafter ensued, and on December 30, 2019, the District Court issued a temporary restraining order preventing AB 51 from going into effect. On February 7, 2020, the District Court issued a preliminary injunction more permanently preventing the enforcement of AB 51, reasoning that the plaintiffs challenging AB 51 had met their initial burden of proof to show that AB 51 is likely preempted by the Federal Arbitration Act (“FAA”), “…because it discriminates against arbitration,” and “interferes with the FAA’s objectives.” The District Court’s decision was then appealed to the Ninth Circuit.
A divided Ninth Circuit panel has now reversed (in part) the District Court’s earlier decision, holding that under AB 51, employers cannot require employees and applicants to sign arbitration agreements as a condition of employment. As drafted, AB 51 applies to “contracts for employment entered into, modified, or extended on or after January 1, 2020.”
The court concluded that AB 51 did not violate the Federal Arbitration Act because it allows employees and applicants to choose to enter into arbitration agreements based on mutual consent. The court noted that AB 51 regulates only pre-agreement conduct and does not explicitly state that mandatory arbitration agreements, once entered into, are unenforceable: “Placing a pre-agreement condition on the waiver of “any right, forum, or procedure” does not undermine the validity or enforceability of an arbitration agreement -- its effects are aimed entirely at conduct that takes place prior to the existence of such an agreement.”
The court did determine that the criminal and civil sanctions attached to a violation of AB 51 were pre-empted by the FAA, finding they presented an obstacle to the “liberal federal policy favoring arbitration agreements.” This included AB 51's provision that a violation is a misdemeanor “punishable by imprisonment in a county jail, not exceeding six months or by a fine not exceeding one thousand dollars ($1,000), or both.” California Government Code Section 12953, which made any violation of AB 51 “an unlawful employment practice,” and subjected employers to civil sanctions including state investigation and private litigation, was also preempted. The Ninth Circuit panel affirmed the preliminary injunction as to those portions of the District Court's ruling, vacated in part the District Court’s preliminary injunction preventing AB 51’s enforcement, and remanded the matter back to the District Court for further proceedings consistent with its ruling.
The dissent remarked that California’s anti-arbitration legislation was “like a classic clown bop bag, no matter how many times California is smacked down for violating the Federal Arbitration Act (FAA), the state bounces back with even more creative methods to sidestep the FAA.” It further noted that, “AB 51 is the poster child for covertly discriminating against arbitration agreements and enacting a scheme that disproportionately burdens arbitration.” This appeared to lay the groundwork for en banc review or U.S. Supreme Court review.
Notably, the Ninth Circuit’s decision does not immediately lift the District Court’s preliminary injunction; this would occur only after the Ninth Circuit issues its mandate and relinquishes jurisdiction over the case. This could take several weeks or longer, and it is possible that the preliminary injunction could remain in place for the foreseeable future. If a petition for rehearing with the Ninth Circuit or review with the U.S. Supreme Court is filed by the U.S. Chamber of Commerce, the Chamber likely will move to stay issuance of the Ninth Circuit’s mandate as well. If granted, the District Court’s preliminary injunction would remain in effect during the review process, and the status quo would continue.
Though it is unlikely that the Ninth Circuit panel will have the last word in this dispute, the Ninth Circuit's issuance of a mandate in the coming weeks would prevent employers from requiring applicants or existing employees to sign arbitration agreements as a condition of employment. If AB 51 stands, arbitration agreements entered into by employees or applicants as a mandatory condition of employment will not be enforceable, and employers may be held liable for retaliating against employees or applicants who refuse to sign such agreements.
Given the uncertainty of what will happen with AB 51 in the future, employers may wish to refrain from forcing applicants or employees to sign arbitration agreements as a condition of employment, and should review their employment policies, applications, offer letters, employment contracts and arbitration agreements to ensure compliance with AB 51. Watch for further updates on this hotly-contested issue!
For questions regarding arbitration agreements or to address other employment law issues, contact the employment attorneys at LightGabler.