Mandatory Arbitration Agreements in California: Down, But Possibly Not Out

Ervin Cohen & Jessup LLP

Ervin Cohen & Jessup LLP

Businesses and attorneys alike have kept a close eye on the developments surrounding the challenge to California Assembly Bill 51 (now codified as Labor Code section 432.6). Most recently, in a 2-1 decision, the 9th Circuit Court of Appeals declared that the Federal Arbitration Act (“FAA”) did not preempt the new law which bars California employers from utilizing mandatory arbitration agreements or from requiring an employee to sign an arbitration agreement as a condition of employment.  One month after this decision came down, the Chamber of Commerce of the United States filed a petition for rehearing before the full panel of the 9th Circuit Court of Appeal. 

What Does the Petition for Rehearing Mean for Employers?

Pursuant to federal appellate law, the timely filing of a petition for rehearing postpones the issuance of the mandate until disposition of the petition. In effect, this means that until the 9th Circuit rules on the petition for rehearing, the trial court’s preliminary injunction on enforcement of Labor Code section 432.6 will remain in place. This effectively allows employers to continue to require employees to sign arbitration agreements as a condition of employment. 

However, attempting to keep up with the ongoing appellate tug-of-war may be headache-inducing for any employer trying to comply with then-current law on arbitration agreements.  One safe option would be for employers to use this time to transition to voluntary arbitration agreements while the injunction is still in effect.  Voluntary arbitration agreements have always been permitted, and if the petition for rehearing is denied in the coming weeks or months, employers relying upon voluntary agreements will already be in compliance with Labor Code section 432.6 without having to worry about rolling out any last-minute changes.

In the event that the 9th Circuit does agree to hear the matter en banc, the injunction will continue until a final decision is reached.  Historically, however, federal appellate courts rarely grant petitions for rehearing by the full panel of judges.  Rule 35 of the Federal Rules of Appellate Procedure explicitly provides that an en banc rehearing “is not favored and ordinarily will not be ordered unless (1) en banc consideration is necessary to secure or maintain uniformity of the court’s decisions or (2) the proceeding involves a question of exceptional importance.”

Because this is the first appellate challenge to Labor Code 432.6, it is unlikely that the 9th Circuit will determine that such consideration is necessary to secure or maintain uniformity of the court’s decisions.  On the other hand, it is possible that the 9th Circuit will take up the issue of maintaining the uniformity of past federal decisions which have routinely held that the FAA has preempts state laws that sought to limit arbitration rights.

While a petition for rehearing may also be granted if “the proceeding involves a questions of exceptional importance,” employers should not place much hope on the petition being granted on this basis.  Citing other federal judges, Senior Judge Jon O. Newman of the 2nd Circuit once wrote, perhaps facetiously, that no case is truly appropriate for en banc rehearing because “it is either so unimportant as to fail to meet the criteria of Rule 35(b) or so important that the Supreme Court will surely grant certiorari!”

The Takeaway?

Employers trying to keep up with the developments surrounding enforcement of Labor Code section 432.6 maybe best served by preemptively complying with the statute by converting to voluntary arbitration agreements until 9th Circuit (or United States Supreme Court, if certiorari is sought and granted) provides finality to the question.  Regardless, stay tuned here for further developments. 

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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