Fate Of Mandatory Arbitration Agreements In California In Flux

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A recent 9th Circuit ruling has cast doubt on employers’ ability to implement mandatory arbitration agreements for workers, and whether (and to what extent) there will be civil and criminal penalties for doing so. Until the issue is finally resolved by the courts, employers should assess their tolerance for risk and proceed with caution before mandating such agreements.

On September 15, 2021, in Chamber of Commerce of the United States of America, et al. v. Rob Bonta, in his official capacity as Attorney General of the State of California, et al. (case number 20-15291) a divided three-judge panel of the 9th Circuit Court of Appeals vacated the January 2020 preliminary injunction against enforcement of AB 51, and upheld portions of the 2019 California law prohibiting employers from making arbitration agreements a condition of employment. The 9th Circuit determined that Labor Code § 432.6 applied only in the absence of an agreement to arbitrate, and expressly provided for the validity and enforceability of agreements to arbitrate. Employers may face criminal and civil sanctions where prospective or current employees refuse to execute an arbitration agreement, but the amount and extent of these potential sanctions remains unclear.

Further, because this ruling creates a circuit split with the 1st and 4th Circuits (which the majority is interestingly silent on), the 9th Circuit en banc (a full panel of the 9th Circuit rather than a panel of three (3) judges) or the U.S. Supreme Court will likely have the final word on these issues. However, there are some immediate key considerations for employers with ongoing mandatory arbitration programs, who must now assess the risks of doing so.

Recommended Next Steps for California Employers

Unless and until the 9th Circuit en banc or the U.S. Supreme Court reviews this ruling and provides much needed clarity on the use of mandatory arbitration agreements, the 9th Circuit’s holding serves as a warning sign to employers as they may face criminal and civil sanctions if the current or prospective employee refuses to execute the agreement.

Going forward, employers in California will have to choose how to proceed with arbitration agreements, which is a fact-specific inquiry based on their tolerance for risk,

Option 1: Pause Use of Mandatory Arbitration Agreements

The most risk-averse option is to pause the use of mandatory arbitration agreements until some appeal is filed and/or the law is clarified.

Option 2: Stay the Course and Proceed With Mandatory Arbitration Agreements

An employer with a greater appetite for risk may wish to continue their use of mandatory arbitration agreements, as the current ruling may be stayed upon appeal and some further court should ultimately rule that AB 51 is preempted by the FAA.

Option 3: Sustain Arbitration Agreements on a Purely Voluntary Basis

A more middle-of-the-road option is to keep using arbitration agreements, but only on a voluntary (as opposed to mandatory) basis, at least until the legal issues resolve themselves. Notably, simply allowing the employee to opt-out of arbitration is not good enough to make the agreement voluntary under AB 51. Presumably, if the agreement is not a condition of hire, and there is no repercussion for refusing to sign, then the risk of simply offering an agreement is reasonably mitigated.

The statute only applies to arbitration agreements that were entered into, modified or extended on or after January 1, 2020. § 432.6.(h). Thus, agreements entered into prior to January 1, 2020 are presumably enforceable.

Further, the 9th Circuit ruling does not invalidate these already existing executed arbitration agreements, nor subject the employer to criminal or civil penalties.

Procedural History/Background

On October 10, 2019, California Governor Gavin Newsom signed into law California Assembly Bill 51, 2019 Cal. Stats. Ch. 711 (AB 51), which prohibits any employer from requiring prospective or current employees, as a condition of employment, continued employment or the receipt of any employment-related benefit, to waive any right, forum or procedure for a violation of any provision of the California Fair Employment and Housing Act and the Labor Code. Cal. Lab. Code § 432.6. Employers who violate this statute could be liable for a misdemeanor, punishable by imprisonment, and/or by a fine, and civil sanctions. See Cal. Lab. Code § 23; Cal. Gov’t Code §§ 12960–12965.

Section 1 of AB 51 declares that “it is the policy of this state to ensure that all persons have the full benefit of the rights, forums, and procedures established in the California Fair Employment and Housing Act . . . and the Labor Code.” Pursuant to this policy, AB 51 was enacted with the “purpose of . . . ensur[ing] that individuals are not retaliated against for refusing to consent to the waiver of those rights and procedures and to ensure that any contract relating to those rights and procedures be entered into as a matter of voluntary consent, not coercion.”

AB 51 was enacted with an effective date of January 1, 2020. Cal. Lab. Code § 432.6(h). On Dec. 9, 2019, the U.S. Chamber of Commerce, along with other business groups, brought action seeking injunctive relief, and seeking a declaration that AB 51 was preempted by the Federal Arbitration Act (FAA). On January 31, 2020, the district court issued a preliminary injunction, and concluded that plaintiffs-appellees were likely to succeed on the merits of their claim.

The 9th Circuit Holding and Its Implications

The 9th Circuit in Chamber of Commerce of the United States of America, et al. v. Bonta, et al., in a 2-1 decision, reversed, in part, the district court’s conclusion that California Assembly Bill 51 is preempted by the FAA; affirmed the district court’s determination that some of the civil and criminal penalties associated with AB 51 were preempted; vacated the district court’s preliminary injunction enjoining AB 51’s enforcement; and remanded to the district court for further proceedings.

The 9th Circuit held that Government Code § 12953 and Labor Code § 433 are preempted to the extent that they apply to executed arbitration agreements covered by the FAA. The 9th Circuit stated that “the regulation of pre-agreement employer behavior in § 432.6 does not run afoul of the FAA, but the civil and criminal sanctions attached to a violation of that section do.” In explaining its decision, the court differentiated between the regulation of pre-agreement conduct in § 432.6, and enforcement mechanisms, stating, “[s]ection 432.6 is not preempted by the FAA because it is solely concerned with pre-agreement employer behavior, but the accompanying enforcement mechanisms that sanction employers for violating § 432.6 necessarily include punishing employers for entering into an agreement to arbitrate.”

The 9th Circuit’s holding is narrow. The panel held that California Labor Code § 432.6 neither conflicted with the language of § 2 of the FAA nor created a contract defense by which executed arbitration agreements could be invalidated or not enforced. But because the 9th Circuit held that the FAA does not preempt California regulation of pre-agreement behavior in the absence of an arbitration agreement, California employers may be liable for civil and criminal penalties in circumstances where a prospective or current employee fails or refuses to execute, an arbitration agreement.

In a colorful and spirited dissent, Judge Sandra Ikuta stated that AB 51 is a blatant attack on arbitration agreements, contrary to both the FAA and longstanding Supreme Court precedent, and further refers to California’s pervasive and ever-creative methods to sidestep the FAA as “a classic clown bop bag.” Judge Ikuta further states that AB 51 criminalizes offering employees an agreement to arbitrate, even though the arbitration provision itself is lawful and enforceable once the agreement is executed. Judge Ikuta’s dissent states: “In case the effect of this novel holding is not clear, it means that 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.”

Judge Ikuta gives the following example to illustrate the illogical nature of this ruling: “This tortuous ruling is analogous to holding that a statute can make it unlawful for a dealer to attempt to sell illegal drugs, but if the dealer succeeds in completing the drug transaction, the dealer cannot be prosecuted. Needless to say, such a bizarre approach does not apply to any other contracts in California.”

Potential 9th Circuit En Banc or Supreme Court Review

Judge Ikuta’s dissent set forth the issues to be reviewed by the 9th Circuit en banc or the U.S. Supreme Court. The U.S. Chamber of Commerce is likely to seek this review, which would stay the effect of the 9th Circuit holding. A stay would effectively continue the limbo that employers are in regarding mandatory arbitration agreements.

The decision at issue was published on September 15, 2021, but is not effective until the court issues its formal mandate. Unless an extension for time has been granted, the U.S. Chamber has 14 days to file a petition for rehearing or rehearing en banc. Fed. R. App. P. 35(c); Fed. R. App. P. 40(a)(1).

For the Supreme Court to review the 9th Circuit decision, a petition for certiorari is due 90 days from the date of the decision or from the order denying a petition for rehearing, whichever is later. U.S. Sup. Ct. R. 13. The Supreme Court does not require a party to seek rehearing or rehearing en banc before filing a petition for writ of certiorari. The U.S. Chamber of Commerce may move to stay the mandate pending the filing of a petition for a writ of certiorari in the Supreme Court.

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