AB 51 BARRED: MANDATORY ARBITRATION AGREEMENTS COVERED BY THE FAA FINALLY GIVEN THE GREEN LIGHT

We have been reporting on the saga surrounding Assembly Bill (AB) 51, a California law that went into effect in 2020 barring employers from compelling employees and potential hires to consent to arbitration as a condition of employment.  In a huge hit to employers, AB 51 made the use of mandatory arbitration agreements punishable by civil and criminal penalties. Litigation ensued in federal court where businesses argued that the new law was preempted by the Federal Arbitration Act (FAA). The Eastern District of California 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 preliminary injunction was thus issued against AB 51.

An appeal to the Ninth Circuit ultimately resulted in the lower court’s decision being upheld.  But this determination did not come easily or swiftly since at first a panel rejected the district court’s order, but then later reversed itself. The Ninth Circuit panel ultimately found that “AB 51’s deterrence of an employer’s willingness to enter into an arbitration agreement is antithetical to the FAA’s ‘liberal federal policy favoring arbitration agreement.’”  AB 51’s “hostility towards arbitration” was exactly what the FAA sought to prevent.

Instead of filing an appeal or asking for a rehearing, the State of California agreed that the parties would stipulate to a permanent injunction and dismissal with prejudice. With the arrival of 2024 came the Eastern District’s acceptance of the permanent injunction, effectively wiping out the potency of AB 51. The injunction prevents the State from enforcing AB 51 against any agreement “covered by the FAA.”  

So where do employers stand with arbitration agreements now that this lengthy legal battle has come to an end? With the gutting of AB 51, employers can once again require that employees sign arbitration agreements so long as they are covered by the FAA.

Employers should revisit their contracts to ensure they are covered by the FAA. While the scope of the FAA is indeed broad, applying to businesses involved in interstate commerce, it does not encompass “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” A U.S. Supreme Court case recently found that this exception extends to such workers as baggage handlers loading cargo onto planes crossing state lines.

Employers should also be mindful that even agreed-to mandatory arbitration agreements are void if found to be procedurally or substantively unconscionable. Questions? 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.