Mandatory Arbitration Is On the Ropes Again In California

Ninth Circuit Partially Upholds AB-51’s Attack on Mandatory Arbitration

Written by Stephen Rossi and Teresa Greider

California’s “AB-51” is a controversial law that limits employers’ ability to enter into arbitration agreements with employees, and provides possible civil and criminal penalties for employers that make arbitration agreements a mandatory condition of employment. In February 2020, a District Court in California issued a preliminary injunction barring the enforcement of any part of AB-51 against arbitration agreements protected by the Federal Arbitration Act (“FAA”) (which covers most employees, certain transportation workers being the largest exception). The Court reasoned that the law was preempted by the FAA because it impermissibly put arbitration agreements on unequal footing to other agreements in violation of the FAA’s rule that arbitration agreements are enforceable except when invalidated by generally applicable rules of contract.

But on September 15, 2021, the federal Ninth Circuit Court of Appeals reversed part of the District Court’s injunction. In a 2-to-1 decision, the Court held that California employers cannot require employees to sign arbitration agreements as a condition of employment or discriminate against them for refusing to agree. The Court reasoned that AB-51 addressed only “pre-agreement” behavior, which is not affected by the FAA’s rules regarding invalidating existing agreements.  Under the ruling, any existing arbitration agreements will be upheld even if they were entered into in violation of AB-51.

The Ninth Circuit also partially kept in place the District Court’s injunction preventing enforcement of the civil and criminal penalties associated with AB-51.  The majority said the penalties for existing employment agreements are preempted by the FAA because they conflict with the purpose of the FAA by punishing employers for entering into arbitration agreements. As pointed out by Judge Ikuta in her dissent, the Court’s reference to executed agreements may mean employers can still be liable for requiring arbitration agreements when the agreement is not actually executed.  In other words, employers can be cited when they unsuccessfully mandate arbitration, but not when they successfully mandate it — a surprising result that is sure to be a focus of future challenges to the law. Potential penalties include civil sanctions, which could subject an employer to state investigation and private litigation, and make violations a misdemeanor, punishable by imprisonment of up to six months, and/or a fine of up to one thousand dollars.

What’s Next for California Employers

The Ninth Circuit’s ruling is not effective until it issues its mandate, which means there is nothing to do yet. If and when the mandate issues (which is not likely to occur for weeks and possibly never depending on how far appeals go), employers will have three options.  The first, and most conservative, approach is to make arbitration agreements voluntary. A middle ground is to continue to “require” arbitration agreements, but follow the terms of AB-51 closely by not making them a condition of employment or otherwise discriminating against any employee who does not agree. The riskiest approach will be to continue requiring mandatory agreements.

It is worth noting that this case is well situated for review by the United States Supreme Court. Judge Ikuta’s dissent said that the majority’s ruling conflicted with Supreme Court precedent and pointed out that it splits the Ninth Circuit from First and Fourth Circuit decisions. Judge Ikuta described the Court’s “bizarre approach” to the penalty issue as analogous to “mak[ing] it unlawful for a dealer to attempt to sell illegal drugs, but if the dealer succeeds in completing the drug transaction, the dealer cannot be prosecuted.” Considering those issues, the current make-up of the Supreme Court, and the Supreme Court’s history of overturning California’s attempts to limit arbitration, there is a better than average chance that the Supreme Court will review the case.

The mandate is on hold until at least October 6, 2021 while the Chamber of Commerce likely seeks en banc review before the full Ninth Circuit. If en banc review is granted, that will further stay the mandate. If the Ninth Circuit does not review the decision, the Chamber may ask the Court to stay the mandate while it files a petition of writ of certiorari with the Supreme Court. If granted, that would stay the mandate for at least several more months while that process plays out.

The next step for employers will depend on each employers particular circumstances. Employers with questions about their arbitration agreement practices should seek guidance from employment counsel.

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