Ninth Circuit Restores California’s Ban on Mandatory Employment Arbitration Agreements

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Q: May employers require that employees enter into agreements as a condition of employment, mandating them to arbitrate employment-related claims?

A: Not without risk. California Assembly Bill (AB) 51 bans mandatory arbitration agreements as a condition of employment, but before the statute went into effect, a California federal district court entered an injunction effectively blocking enforcement of AB 51. On September 15, a Ninth Circuit panel reversed the district court’s injunction. The Ninth Circuit panel’s decision does not take effect immediately, however, and it is very likely that the panel’s decision will be challenged and that further legal filings will result in the district court’s injunction remaining in effect for some period of time. In the meantime, California employers that continue to use mandatory arbitration agreements face risk and uncertainty.

Refresher on AB 51

On October 10, 2019, Governor Gavin Newsom signed the controversial AB 51 into law, which was supposed to go into effect on January 1, 2020. Notably, AB 51:

  • Prohibits mandatory arbitration agreements for any claims arising under the California Fair Employment and Housing Act (FEHA) or the California Labor Code as a condition of employment or receipt of any employment-related benefit. Cal. Lab. Code § 432.6.
  • Imposes criminal and civil penalties for employers that violate its provisions — including “imprisonment in a county jail, not exceeding six months, or … a fine not exceeding one thousand dollars ($1,000), or both,” as well as injunctive relief and attorney’s fees to a prevailing plaintiff for enforcing his/her rights. Cal. Lab. Code §§ 23, 432.6, 433.
  • Protects against retaliation and discrimination for those employees who refuse to consent to a mandatory arbitration agreement or who file a claim to enforce AB 51. Cal. Lab. Code § 432.6.; Cal. Gov. Code § 12953.
  • Applies to agreements entered into or modified on or after January 1, 2020. Cal. Lab. Code § 432.6.
  • Does not apply to arbitration agreements otherwise enforceable under the Federal Arbitration Act (FAA). Cal. Lab. Code § 432.6.

The U.S. and California Chambers of Commerce and other national and state organizations filed suit in an attempt to block AB 51 on the basis that it is preempted by the FAA. The U.S. District Court for the Eastern District of California issued a temporary restraining order before AB 51 was scheduled to go into effect, followed by a preliminary injunction in January 2020. The preliminary injunction meant that California employers could continue to utilize mandatory employment arbitration agreements without fear of criminal or civil penalties under AB 51 — until now.

Ninth Circuit’s Ruling

In Chamber of Commerce of the U.S. v. Bonta, the Ninth Circuit issued a 2-1 decision, upholding AB 51’s prohibition on mandatory employment arbitration agreements as a condition of employment and vacating the District Court’s preliminary injunction, which had blocked enforcement of AB 51. The court noted that AB 51 does not run afoul of the FAA because it regulates only “pre-agreement employer behavior” that does not undermine validity or enforcement of an arbitration agreement that has already been executed. According to the court, the FAA “was focused on the enforcement and validity of consensual written agreements to arbitrate” and recognizing FAA preemption “for instances in which there is no agreement to arbitrate at issue would expand the scope of the FAA far beyond its text.” The decision also emphasized that AB 51’s stated intent — “to assure that entry into an arbitration agreement by an employer and employee is mutually consensual”— is consistent with congressional intent for the FAA to not preempt state laws, requiring that arbitration agreements be voluntary.

Although the Ninth Circuit upheld AB 51’s prohibition on arbitration agreements as a condition of employment, the court invalidated AB 51’s civil and criminal penalties as preempted by the FAA, but only “to the extent that they apply to executed arbitration agreements covered by the FAA.” With this caveat, the flip side of this holding is that these penalties are not preempted (and will apply to employers), where an employee does not actually sign a mandatory arbitration agreement. Thus, employers apparently are exposed to criminal and civil penalties for conditioning employment or benefits on execution of an arbitration agreement when employees do not sign the agreement, but they are not exposed to such sanctions if an employee does sign the agreement, even though the employer presented it as a mandatory condition of employment.

The dissent cited two key objections to the majority opinion: (1) It conflicts with the U.S. Supreme Court’s guidance in Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S.Ct. 1421 (2017) (which held that the FAA invalidates state laws that impede or burden the formation of arbitration agreements), and (2) it unnecessarily creates a circuit split with the First and Fourth circuits (which have held that workarounds and “covert efforts to block the formation of arbitration agreements are preempted by the FAA”) without strong reason to do so.

Does This Mean Employers Should Comply With AB 51 Immediately?

The Bonta opinion is not likely the last word about the validity of AB 51. There is ample opportunity for the U.S. Chamber of Commerce to petition for rehearing en banc or file a writ of certiorari in the Supreme Court, or both, and the U.S. Chamber of Commerce has already requested an extension of time for a possible rehearing petition, strongly signaling that a rehearing request is forthcoming.

While the Ninth Circuit remanded the case to the District Court, its decision (namely, lifting the District Court’s preliminary injunction) does not become effective until the court issues a formal mandate. However, a rehearing petition would automatically stay the court’s mandate for up to a few months, thereby leaving the District Court’s injunction on AB 51 intact. Other legal filings may further stay the District Court’s injunction, such as a petition for writ of certiorari in the Supreme Court. A petition for writ of certiorari in the Supreme Court would not automatically stay the mandate, but it could further stay the issuance of the mandate potentially throughout the Supreme Court’s final review if the Ninth Circuit grants such a request.

Given the likely delay in issuing the mandate (and corresponding lift on AB 51’s injunction) based on the Chamber of Commerce’s anticipated rehearing petition, employers should consult legal counsel about whether, when, and to what extent AB 51 applies to existing and continuing arbitration programs and practices, so they are ready to act once the dust around AB 51 finally settles. If any part of AB 51 survives further judicial scrutiny, employers using arbitration agreements will need to ensure that such agreements are purely voluntary.

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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