On February 15, 2023, in Chamber of Commerce v. Bonta, a divided three-judge Ninth Circuit Court panel affirmed a district court ruling that AB 51 is preempted by the Federal Arbitration Act (FAA). As result of this highly-anticipated decision, it is now more clear that California employers can safely require applicants and employees to sign arbitration agreements as a condition of hire or continued employment. With this holding, the Ninth Circuit panel did an abrupt about-face and reversed its own prior decision from September 2021, in which it upheld portions of AB 51 to ban the use of mandatory arbitration agreements as a condition of employment.
A discussion of the long and complicated litigation history of AB 51, as well as guidance about what this means for California employers, is set forth in more detail below.
In the fall of 2019, California enacted AB 51, legislation that should have become effective January 1, 2020. AB 51 sought to prohibit employers from requiring applicants to sign arbitration agreements as a condition of employment, and notably, would have created criminal and civil penalties for requiring employees or job applicants to forfeit their right to sue in court.
Just before the law took effect, however, the U.S. Chamber of Commerce and other business groups filed a lawsuit in federal court challenging AB 51. They asserted (among other things) that the FAA preempted AB 51, and sought an injunction. In January 2020, a federal district court granted the U.S. Chamber of Commerce’s request for a preliminary injunction, halting enforcement of AB 51 as the litigation continued.
The State of California appealed, and on September 21, 2021, the same divided federal Ninth Circuit panel that issued this month's ruling found that the FAA did not entirely preempt AB 51’s ban on mandatory arbitration. The panel held that AB 51 did not invalidate or render unenforceable arbitration agreements covered by the FAA because AB 51 addressed only the regulation of “pre-agreement employer behavior.” The panel did find, however, that the FAA preempted AB 51 with respect to the civil or criminal penalties that could be imposed on employers who executed arbitration agreements covered by the FAA.
On October 20, 2021, the U.S. Chamber of Commerce filed a petition for rehearing to appeal that September 21, 2021 decision. In December 2021, the Ninth Circuit panel issued an order deferring its decision on the rehearing petition until the United States Supreme Court decided another case involving the restriction of arbitration agreements under California law.
In June 2022, the United States Supreme Court held in Viking River Cruises v. Moriana that California law regarding PAGA (including portions of the 2014 California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles LLC) was preempted by the FAA. Although the Court did not go so far as to hold that the FAA preempts California’s ban on blanket PAGA representative action waivers, it held that the FAA does preempt California opinions holding that PAGA actions cannot be divided into separate individual and non-individual claims through an otherwise valid arbitration agreement. You can find our prior legal update on this case on our website here.
Following the United States Supreme Court’s Viking River decision, on August 22, 2022, the Ninth Circuit granted a rehearing on Chamber of Commerce v. Bonta, withdrew its September 21, 2021 opinion, and submitted the case for panel reconsideration.
In its reconsidered February 15, 2023 decision, the Ninth Circuit reversed course and held the FAA preempts not only state laws affecting the enforceability of executed arbitration agreements, but also state laws that discriminate against the formation of arbitration agreements. The court found that FAA preempted AB 51 because AB 51 discriminated against the formation of mandatory arbitration agreements by criminalizing the act of entering into such agreements.
The panel majority indicated that the FAA has a “liberal federal policy” that favors arbitration agreements, and that AB 51’s penalty-based scheme to inhibit arbitration agreements even before they are created not only deters employers from entering into arbitration agreements generally, but also violates the 'equal treatment principle' inherent in the FAA. The panel reasoned that, "[b]ecause 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 also rejected the State’s argument that AB 51’s penalty provisions could be severed from the remainder of the statute.
This may not be the final word on mandatory arbitration agreements in California, but it’s close. The State of California could request a rehearing by the Ninth Circuit or appeal the matter to the United States Supreme Court. Based on the Ninth Circuit’s February 15, 2023 ruling coupled with the Viking River decision, however, it is likely that in a further appeal, both courts would rule against AB 51 and again find that it is preempted by the FAA.
If either Court agrees to hear the matter on an appeal, the current injunction preventing enforcement of AB 51 would remain in full effect until the Court reaches a decision on the matter. If the State of California accepts the Ninth Circuit Court’s current decision, the matter will return to the district court to proceed to a final determination on the legality of AB 51. Notably, when the district court originally issued its preliminary injunction, it opined that the Chamber of Commerce is likely to prevail on the merits (i.e., that the ultimate holding will likely be that the FAA preempts AB 51). The State of California could also create new legislation attempting to ban mandatory arbitration (AB 51 was the State’s third attempt, and likely not its last).
In the wake of this most recent Bonta decision, we are cautiously optimistic that the uncertainty surrounding the enforcement of AB 51 that has plagued employers since September 2019 appears to be over. Going forward, employers can feel more comfortable requiring that applicants sign a mandatory arbitration agreement as a condition of hire. This means that employers can return to including arbitration agreements with their employment applications or offer letters, and inform applicants in writing that signing the agreement is a prerequisite to employment with the company.
It also appears that employers may be able to require existing employees to sign mandatory arbitration agreements as a condition of continued employment. This means not only that employers may return to distributing arbitration agreements with their employee handbooks, but also may require employees to sign the arbitration agreement along with the handbook acknowledgement.
That said, however, it is best to refrain from terminating an employee who refuses to sign the agreement. Instead, consider having a discussion with the employee to address any questions or concerns they may have. If the employee still refuses to sign the agreement, consider sending a follow-up memorandum, reminding the employee that agreeing to arbitration is a mandatory condition of employment and noting that the employee's continued employment after being informed of the arbitration requirement will be considered an acceptance of the arbitration agreement. While it is not guaranteed that the agreement will be enforced with this implied acceptance, certain case law has provided as much and we remain optimistic that the federal court's current trend toward favoring arbitration would allow the employer to enforce even an unsigned agreement with proper notice and documentation.
For those employers that moved to voluntary pre-hire arbitration agreements as they patiently awaited AB 51 finality, or employers who entered into mutual arbitration agreements with existing employees, those signed agreements remain valid and enforceable for current employees (assuming, of course, that the agreements were properly drafted and implemented).
As action items, employers should promptly review their current employment arbitration policies in their handbooks, employment applications, offer letters and employment contracts as well as their stand-alone arbitration agreements in light of the most recent Bonta decision. Employers seeking to restructure these documents to require applicants to sign a mandatory arbitration agreement as a condition of hire, or existing employees to sign such an agreement as a condition of continued employment, should consult with their employment counsel to ensure proper drafting. This is particularly important after last year's Viking River case, as new language is required in the arbitration agreement to take advantage of its protections related to arbitration of PAGA disputes.
Remember as well that employers should always retain all previously-signed arbitration agreements in the employee's personnel file. It is possible that one version may be enforceable even if another version is not. This depends upon the current state of the arbitration laws, which are always in flux. The fact that an employee signed multiple arbitration agreements is also good evidence to dispute a claim by the employee that they did not sign the agreement, did not intend to be bound by the agreement or did not know what they were signing.
Be sure to follow LightGabler's legal updates for further developments and contact us to update your arbitration agreements and procedures on an annual basis. Doing so will help to ensure ongoing compliance with the latest requirements in this ever-changing landscape of arbitration law.
For questions regarding arbitration agreements or to request assistance with revising offer letters, employment agreements and arbitration agreements, contact the employment attorneys at LightGabler.