Ninth Circuit’s Ruling on California’s AB 51 Creates Further Uncertainty for California Employers Using Mandatory Employment Arbitration Agreements

Wilson Sonsini Goodrich & Rosati

A recent federal appellate court ruling has once again introduced uncertainty for California employers as to whether they may require mandatory arbitration of employment disputes. In 2019, California passed Assembly Bill 51 (AB 51), making it unlawful, as a condition of employment, continued employment, or the receipt of any employment-related benefit, to require applicants or employees to waive any “right, forum, or procedure” for a violation of the Fair Employment and Housing Act (FEHA) and/or the California Labor Code (Labor Code). Violating the law subjects offending employers to the imposition of civil and criminal sanctions. The law undoubtedly applies to arbitration agreements, in particular those entered into, modified, or extended on or after January 1, 2020. Before AB 51 could take effect, on December 30, 2019, a federal district court issued a temporary restraining order halting enforcement of the law temporarily, and in January 2020, that court issued a preliminary injunction enjoining its enforcement.

On September 15, 2021, in Chamber of Commerce of United States v. Bonta,1 the U.S. Court of Appeals for the Ninth Circuit partially reversed the lower court’s decision and lifted the preliminary injunction that had kept the new law from taking effect. Although the Ninth Circuit agreed that the civil and criminal sanction provisions of AB 51 should be invalidated, at least in part, the court upheld those portions of the law prohibiting employers from requiring arbitration agreements as a condition of employment or from retaliating against employees or applicants who refuse to sign arbitration agreements.

This alert provides additional detail about AB 51 and the implications of the Ninth Circuit’s decision. California employers that have entered into arbitration agreements with their California employees after January 1, 2020, intend to enter into such arbitration agreements in the future, or are otherwise considering utilizing arbitration agreements for their California employees should review this alert closely and consult with legal counsel about the implications of the Ninth Circuit’s decision on their arbitration agreements and practices.

What Does AB 51 Do?2

Absent limited circumstances, AB 51 prohibits California employers from requiring employees or applicants, as a condition of employment, continued employment, and/or the receipt of employment-related benefits, to waive any “right, forum, or procedure” for a violation of FEHA and/or the Labor Code. This of course includes the right to bring such claims in court and to have a jury decide the case. Notably, as to an employee's pursuit of such claims, this prohibition would also prohibit the use of class action waivers or jury trial waivers that are increasingly common in employment arbitration agreements.3 In connection with this prohibition against requiring mandatory arbitration of FEHA or Labor Code claims (or any other such waiver of a “right, forum, or procedure”), AB 51 also prohibits employers from threatening, retaliating, or discriminating against, or withholding employment from, employees or applicants for refusing to agree to mandatory arbitration of these claims. In addition to constituting an unlawful employment practice under FEHA, violations of the law may subject an employer to civil and criminal sanctions, including up to six months’ imprisonment in a county jail or a fine of up to $1,000, as well as injunctive relief for which the employer would have to pay the plaintiff’s attorney fees.

Why AB 51 Did Not Take Effect on January 1, 2020

At the eleventh hour, right before AB 51 was slated to take effect, the U.S. Chamber of Commerce, with the help of a coalition of businesses and the California Chamber of Commerce, challenged AB 51 in federal court, arguing that it violated a provision of the Federal Arbitration Act (FAA) that requires arbitration agreements to be treated in the same manner as any other contract. This legal challenge led to the lower court issuing a preliminary injunction stopping AB 51 from going into effect. California state officials thereafter appealed that decision to the Ninth Circuit in an effort to revive AB 51.

The Ninth Circuit’s Decision

In its September 15, 2021, decision, the Ninth Circuit held that the FAA did not invalidate the portions of AB 51 that the plaintiff argued would essentially prohibit California employers from utilizing mandatory arbitration agreements covering FEHA and/or Labor Code claims as a condition of employment. The court also upheld the part of AB 51 that prevented employers from retaliating against employees or applicants who refuse to sign such arbitration agreements. Specifically, the court found that these portions of the law do not conflict with the FAA because the FAA concerns itself primarily with protecting the enforceability of arbitration agreements, whereas AB 51 focuses on, and makes impermissible, certain pre-agreement behavior. It explained that AB 51 “does not make invalid or unenforceable any agreement to arbitrate, even if such agreement is consummated in violation of the statute.” Instead, reading AB 51’s prohibition narrowly, the court explained that the law merely requires employers to ensure that any arbitration agreements entered into with California employees that cover FEHA and/or Labor Code claims are entered into consensually by the parties, not as a mandatory condition of employment that an applicant or employee must accept.

The Ninth Circuit did affirm, however, that the criminal and civil sanctions against employers who violate the new law are invalid “to the extent that they apply to executed arbitration agreements covered by the FAA.” Specifically, the Ninth Circuit held that “the imposition of civil and criminal sanctions for the act of executing an arbitration agreement directly conflicts with the FAA and such an imposition of sanctions is indeed preempted” by the FAA. The consequence of the court’s decision appears to be that employers no longer face the prospect of criminal or civil sanctions for violations of AB 51 where there exists an executed arbitration agreement covered by the FAA. However, because the court’s holding as to such sanctions is expressly limited to those circumstances where there exists an executed arbitration agreement covered by the FAA, its decision raises questions as to whether an employer might still be subject to criminal and civil sanctions in those situations where the employer attempted to impose a mandatory arbitration agreement covered by the FAA, but fails to obtain the execution of such an arbitration agreement. An employee who prevails in enforcing AB 51’s protections may be entitled to recover his or her attorneys’ fees.

What Now? How Should California Employers Respond to the Ninth Circuit’s Decision?

The Ninth Circuit’s decision vacated the lower court’s preliminary injunction enjoining the enforcement of AB 51 as to arbitration agreements covered by the FAA, and sent the matter back to the lower court for further proceedings. Unless the Ninth Circuit’s mandate is stayed, AB 51’s provisions are in full force and effect. Given AB 51’s far-reaching and significant ramifications for California employers and their use of mandatory arbitration in California, a further appeal of the court’s ruling is likely. Such an appeal could result in a stay of this Ninth Circuit panel’s decision.

Until then, California employers should review their arbitration agreements to assess whether they are enforceable under the FAA and/or AB 51. California employers should similarly consider whether they are otherwise requiring applicants or employees, as a condition of employment, continued employment, or the receipt of an employment-related benefit, to otherwise waive any “right, forum, or procedure” for a violation of FEHA or Labor Code claims.

While many California employers will likely let the dust settle before deciding what actions to take with respect to their use of arbitration agreements in California, if any, they should at least understand the risks associated with taking that approach in the absence of a further stay of the Ninth Circuit’s mandate. Other employers may elect to amend their arbitration agreements now. Still others may consider eliminating their use of arbitration agreements altogether (notwithstanding the potential benefits of utilizing them to mitigate legal risks). In making these decisions, California employers should contact their employment counsel to fully understand the risks and benefits of employment arbitration agreements, and to discuss their approach to such agreements moving forward.4

Wilson Sonsini Goodrich & Rosati is closely following the ongoing litigation around AB 51 and all developments relating to arbitration agreements in California. 

[1] __ F.4th __, 2021 WL 4187860 (9th Cir. Sept. 15, 2021).

[2] For additional information, please refer to Wilson Sonsini’s previous alert on AB 51, “California Law Makes Employers' Use of Mandatory Arbitration Agreements Perilous” (October 25, 2019).  

[3] While this alert focuses on arbitration agreements and the resulting forum shifting associated with such agreements, the plain language of AB 51 is not limited to them. Rather, it addresses any “right, forum, or procedure.” How AB 51 might affect other forum selection provisions affecting claims for alleged FEHA or Labor Code violations is not addressed in this alert. 

[4] For Wilson Sonsini’s prior discussion of the use of class action waivers in mandatory employee arbitration agreements, please see “U.S. Supreme Court Permits Employer Use of Class Action Waivers in Employee Arbitration Agreement” (May 22, 2018).

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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