California Law Limiting Mandatory Arbitration Agreements is Mostly Upheld by the Ninth Circuit

Stokes Wagner

On September 15, 2021, the Ninth Circuit lifted an injunction and mostly upheld a California law, known as Assembly Bill 51 (“AB-51”), that prohibits mandatory arbitration agreements. AB-51 invalidates mandatory arbitration agreements that are a condition of employment, including mandatory agreements that allow an employee to “opt-out” of the arbitration provisions.

While we expect an immediate appeal of the ruling to the Supreme Court, barring a petition for rehearing or request for a stay pending that appeal, the Ninth Circuit ruling’s paves the way for AB-51 to take effect.

California passed AB-51 in October 2019 and the law was set to take effect on January 1, 2020. However, due to due to legal preemption challenges brought by various business groups, the law never went into effect. In February of 2020, these preemption challenges led to a United States District Court Judge granting an injunction which effectively blocked the implementation of AB-51.

Now, over a year later, the Ninth Circuit majority has partially reversed the District Court Judge’s Order and mostly lifted the injunction. The Ninth Circuit, however, affirmed that certain sections of the law were indeed invalid, specifically the sections that allowed for criminal penalties against employers who mandated these agreements. Importantly, the majority concluded that, despite the business groups’ arguments, AB-51 largely is not preempted by the Federal Arbitration Act (FAA) or conflict with the U.S. Supreme Court’s precedent surrounding arbitration. The majority ruled that AB-51 does not invalidate the creation of arbitration agreements but merely mandates that arbitration agreements between workers and their employers “be consensual.”

While an appeal would continue to prevent AB-51 from going into effect, employers may consider reviewing their arbitration agreements to assess whether such agreements are enforceable under the FAA and/or are a condition of employment.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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