Mandatory Arbitration Agreements are Unenforceable in California, Again

Ervin Cohen & Jessup LLP

Ervin Cohen & Jessup LLP

In a year of tough decisions for California employers, the Ninth Circuit just issued another mixed bag of legal decisions to navigate, this time regarding the enforceability of mandatory arbitration agreements.

CA Labor Code § 432.6 and Chamber of Commerce of the United States v. Bonta

In October, 2019, California passed Assembly Bill 51, which became codified as Labor Code § 432.6, effective January 1, 2020. This law provided that employers could not require employees to sign a mandatory arbitration agreement as a condition of employment. In addition, it created civil and criminal penalties if employers violated this statute. Almost immediately, the Chamber of Commerce for the United States sought a preliminary injunction suspending enforcement of the law, on the basis that it was preempted by the Federal Arbitration Act. In Chamber of Commerce of the United States v. Becerra, the preliminary injunction was granted and employers were thus permitted to continue using mandatory arbitration agreements pending a disposition on the merits. (Chamber of Commerce of the United States v. Becerra (9th Cir. 2020) 438 F.Supp.3d 1078.)

On September 15, 2021, a three-judge panel for the 9th Circuit handed down its ruling, dealing a double blow to employers; first declaring that Labor Code 432.6 was not preempted by the Federal Arbitration Act and then vacating the preliminary injunction. In effect, this means that mandatory arbitration agreements entered into on or after this decision, to the extent that they are considered “pre-employment conditions” are likely unenforceable. Further, employers are prohibited from discriminating or retaliating against an employee who refuses to sign an arbitration agreement. (See Chamber of Commerce of the United States v. Bonta (9th Cir. 2021) D.C. No. 2:19-cv-02456KJM-DB, certified for publication.)

Employers received a small victory, however, as the criminal and civil penalties in Labor Code § 432.6 were held to be barriers to enforcement of arbitration agreements and therefore were preempted by the Federal Arbitration Act. Thus, the Court severed these preempted provisions, while leaving the remainder of the statute intact. 

Moving Forward

All eyes are now on the Chamber of Commerce of the United States to see if it will request that the decision be considered by the entire 9th Circuit en banc or whether it will appeal to the United States Supreme Court for a final ruling. Unless and until any future rulings are issued, employers should consider providing voluntary arbitration agreements to any employee hired after this decision. To avoid running afoul of Labor Code § 432.6, employers should work with an experienced employment attorney in creating and distributing voluntary employment arbitration agreements on a go-forward basis.

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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