Ban On Mandatory Arbitration Agreements Lifted
February 21, 2023
Last year, we reported on California being in a state of flux regarding mandatory arbitration agreements in the workplace. It appears now that the 9th Circuit has resolved the situation by formally rejecting Assembly Bill 51 (“AB 51”), a 2020 California law that barred employers from compelling employees and potential hires to consent to arbitration as an employment condition, by virtue of its preemption by the Federal Arbitration Act (FAA). In a 2-1 panel decision in Chamber of Commerce of the United States of America v. Bonta, the court held that AB 51 prevents the formation of arbitration agreements, thus violating the FAA’s stated purpose of encouraging arbitration – welcome news for employers.
Looking back: Passage of AB 51 and subsequent litigation
In 2019, California Governor Gavin Newsom signed AB 51, a pro-worker law and the first and broadest of its kind, to limit workplace arbitration agreements. In essence, the law subjected employers to civil and criminal (up to 6 months in jail!) sanctions for requiring arbitration agreements of particular claims in employment contracts. AB 51 specifically added Labor Code section 432.6 to allow employees and job applicants to sue employers in court for violations of the Fair Employment Housing Act (FEHA) or provisions of the Labor Code despite the existence of an arbitration agreement barring such actions. In order for the law to not conflict with the FAA, however, the Legislature crafted the language to exclusively focus on pre-arbitration agreement activity so as to not bar the actual enforcement of arbitration agreements.
Businesses were quick to jump on this problematic law prompting the United States and various chambers of commerce to seek a preliminary injunction at the federal district court level. Their reasoning? The FAA wholly preempts AB 51. An Eastern District of California judge agreed concluding that AB 51 (1) “is preempted by the FAA because it discriminates against arbitration” and (2) “interferes with the FAA’s objectives.”
A Ninth Circuit Court of Appeals panel last year held in a 2-1 decision that AB 51 is not preempted by the FAA, thus rejecting most of the district court’s order. The majority opinion carefully distinguished between consensual versus conditional agreements in the pre-agreement phase. In other words, imposing penalties on employers for these arbitration agreements does not conflict with the FAA if the contract is made conditional upon employment. However, if the arbitration agreement was consensual between employer and employee, no criminal or civil sanctions may be imposed. The dissent left open the possibility of further litigation. Soon after, the panel withdrew its decision to reconsider the issue.
Fast forward to today
In its latest move, the Ninth Circuit panel has reversed itself, siding with the earlier district court ruling. The court reviewed earlier Supreme Court rulings which disapproved of state laws burdening arbitration agreement formation in direct conflict with the FAA. It noted that although “AB 51 does not expressly bar arbitration agreements,” the law “disfavors the formation of agreements that have the essential terms of an arbitration agreement” and imposes a “severe” burden on formation of arbitration agreements by way of civil and criminal sanctions on any employer who violates its terms.
Although the United States Supreme Court may eventually weigh in and decide AB 51’s final fate, until then, employers in California can once again require mandatory arbitration agreements. But let’s not forget that even agreed-to mandatory arbitration agreements are void if found to be procedurally or substantively unconscionable. Please contact Rosasco Law Group APC for advice regarding arbitration agreements in your workplace, whether it be proper drafting of a new agreement or an attorney review of an existing one.
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