California’s Mandatory Arbitration Ban is Upheld (For Now) – What This Means for Employers

Orrick, Herrington & Sutcliffe LLP

On September 15, 2021, in a 2-1 decision, the Ninth Circuit upheld most of California’s law banning mandatory arbitration agreements and prohibiting employers from retaliating against applicants who refuse to sign an arbitration agreement. Chamber of Commerce of the United States of America, et al. v. Bonta, et al., No. 20-15291, --- F.4th --- (Sept. 15, 2021) (“Bonta”). This ruling will undoubtedly be challenged, but in the meantime, employers are faced with uncertainty regarding the continued use of mandatory arbitration agreements.

As we’ve previously reported here and here, AB 51, which was codified at Labor Code section 432.6, was a controversial law set to take effect on January 1, 2020. The law was intended to prohibit employers, as a condition of employment, from requiring employees to sign an arbitration agreement. The law also provided for criminal and civil penalties. Before Labor Code section 432.6 became effective, however, Chief U.S. District Judge Kimberly Mueller of the Eastern District of California issued an injunction preventing the State of California from enforcing the law, finding that it ran afoul of the Federal Arbitration Act (FAA), which favors arbitration agreements and prevents states from enacting laws that obstruct the purposes and objectives of the FAA.

The Ninth Circuit panel in Bonta court disagreed with the District Court, holding that Labor Code section 432.6 does not conflict with the FAA because it focuses on conduct occurring prior to the existence of an arbitration agreement and does not invalidate arbitration agreements that have been voluntarily entered into. The panel observed that the FAA’s purpose is to enforce consensual arbitration agreements and Labor Code section 432.6 only prohibits agreements that are not consensual. The panel partially agreed with the District Court, however, with regard to the statute’s imposition of civil and criminal penalties. The panel held that such penalties do run afoul of the FAA when applied to executed agreements (because this does not then regulate pre-agreement behavior), but the penalties are appropriate in situations where the employee refuses to sign the agreement.

Following Bonta, the Chamber is expected to petition the Ninth Circuit for a rehearing en banc and it has secured an extension until October 20, 2021 to do so. If the petition is denied, the Chamber is then expected to petition the U.S. Supreme Court for certiorari. If the Chamber seeks certiorari in the Supreme Court, the Ninth Circuit’s order will become effective seven days after the order unless it also requests and obtains a stay from the Ninth Circuit or the Supreme Court pending disposition of the petition.

Enforceability of Agreements Entered Into During Pendency of Injunction

The Ninth Circuit’s decision in Bonta raises many questions about the applicability of Labor Code section 432.6 to agreements covered by the FAA that were entered into while the injunction was in place if the Ninth Circuit’s decision survives appeal, and what its application to arbitration agreements means thereafter. 

Suppose, for example, that an employer continued its mandatory arbitration agreement program between January 31, 2020 and now. Many agreements were executed; however, in a few instances, employees refused to sign the agreement. Then the Bonta matter survives appeal. What happens next? The answer depends on whether conduct performed while protected by a preliminary injunction is shielded from liability later if the injunction is vacated.

At present, it is not clear whether a litigant would be successful in challenging a mandatory arbitration agreement that they declined to sign while the preliminary injunction was in effect. Employers can argue that conduct taken in accordance with a court-ordered preliminary injunction is shielded from liability. The purpose of a preliminary injunction is to preserve the status quo, and pre-AB 51, the status quo was that employers were permitted to enter into mandatory arbitration agreements with their employees. But whether courts agree with this common sense approach or not remains to be seen.

Potential for Penalties

As discussed above, the Ninth Circuit held that the imposition of statutory penalties and criminal liability for a violation of Labor Code 432.6 is preempted by the FAA for executed arbitration agreements and does not impact the enforceability of arbitration agreements that employees enter into. Conversely, the Court also held that, to the extent Section 432.6 regulates pre-executed agreement behavior, its enforcement mechanisms are not preempted by the FAA. Judge Ikuta’s dissenting opinion demonstrates how this leads to absurd results:

"if the employer offers an arbitration agreement to the prospective employee as a condition of employment, and the prospective employee executes the agreement, the employer may not be held civilly or criminally liable. But if the prospective employee refuses to sign, then the FAA does not preempt civil and criminal liability for the employer under AB 51’s provisions. In other words, the majority holds that if the employer successfully “forced” employees “into arbitration against their will,”. . . , the employer is safe, but if the employer’s efforts fail, the employer is a criminal.

Thus, while there may be civil or criminal liability for employers continuing their mandatory arbitration programs, such liability would not extend to or invalidate executed arbitration agreements. Rather, the impact and risk would be as to mandatory arbitration agreements that an employee declines to enter into.

Key Take-Aways

Although we are waiting to see how this case will develop in the appellate courts, employers should begin to consider what steps may be necessary to bring their arbitration agreement programs into compliance with Labor Code section 432.6. Employers should elect an option that fits their risk appetite. Aside from the riskiest option of continuing a mandatory arbitration agreement program as-is under the assumption the law will ultimately be deemed preempted by the FAA, these options may include, but are not limited to:

  • Continue to include language in the agreement that it is governed by the FAA and that the parties agree to arbitrate “to the fullest extent permitted by applicable law” or similar.
  • Carve out FEHA and Labor Code claims from the arbitration agreement, which are the statutes that Section 432.6 prohibits employers from compelling to mandatory arbitration.
  • Present arbitration agreements to employees with an affirmative opt-in procedure, as Section 432.6 only prohibits mandatory agreements or agreements with an opt-out or similar affirmative action requirement.
  • Suspend the mandatory arbitration agreement program until the preemption issue is resolved.

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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