In a 2-1 split decision, a three-judge panel of the Ninth Circuit Court of Appeals partially revived AB 51, California’s ban on employer mandated arbitration agreements, holding that California’s prohibition on mandatory arbitration agreements is not preempted by the Federal Arbitration Act (FAA).
By way of background, in 2019, California enacted AB 51, which made it unlawful for employers to mandate arbitration agreements. Specifically, AB 51 states that California employers “shall not threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee because of the refusal to consent to the waiver of any right, forum, or procedure for a violation of California Fair Employment and Housing Act or [the California Labor Code], including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court.” Almost immediately after going into effect, the U.S. District Court for the Eastern District of California issued an injunction in the case Chamber of Commerce v. Bonta, prohibiting enforcement of AB 51 on the ground that it was preempted by the FAA, which prohibits states from disfavoring arbitration agreements.
Now, the Ninth Circuit has overruled the district court in part―holding that California’s prohibition on mandatory arbitration agreements is not preempted by the FAA, but also that the enforcement provisions (criminal penalties and civil liability) are preempted by the FAA. As an aside, the court noted it may be permissible to impose arbitration in instances when both the employer and the employee agree.
The Ninth Circuit’s decision was sharply criticized in the lone dissenting opinion for creating ambiguity and leading to inconsistent outcomes, stating “the majority holds that if the employer successfully ‘forced’ employees ‘into arbitration against their will,’ … the employer is safe, but if the employer’s efforts fail, the employer is a criminal.”
The case is going back to the district court—and in light of the dissent, maybe the district court will rule against AB 51 upon remand or perhaps the U.S. Supreme Court will take this on.
The court’s decision raises just as many questions as it answers. Given the ambiguities in the court’s ruling, as noted by the dissent, and the uncertain path AB 51 faces moving forward, navigating employee arbitration agreements in the meantime is fraught with potential pitfalls. In light of the Ninth Circuit’s ruling and shifting sands, California employers with employee arbitration agreements, whether mandatory or voluntary, should consult their legal counsel for guidance.
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