Mandatory Arbitration Is Off The Ropes in California!

Reversing Itself, Ninth Circuit Invalidates California’s Ban on Mandatory Employment Arbitration Agreements

Written by Stephen Rossi

In 2018, California passed a controversial law called AB-51 (now Labor Code Section 432.6) that prohibited California employers from requiring arbitration agreements as a condition of employment – on pain of jail time and civil penalties.  AB-51 was immediately challenged and preliminarily enjoined under the Federal Arbitration Act (“FAA”), which was passed almost 100 years ago to combat judicial “hostility” towards arbitration and preempts any law that discriminates against arbitration agreements.

In a surprise twist, however, in 2021 the Ninth Circuit held in a confusing 2-1 decision that AB-51 was at least partially enforceable, leaving employers wondering what the decision meant, as we previously reported. That decision was relatively short-lived, however, as the original three-judge panel vacated its own decision in August 2022, perhaps realizing its error after the Supreme Court issued one more decision in a long line of cases reaffirming the importance of enforcing arbitration agreements just like any other agreement.[1]

Now, the Ninth Circuit has issued its new decision in Chamber of Commerce v. Bonta, authored by Judge Sandra Ikuta (who had previously written a strong dissent to the original decision) and the result is a complete victory for employers. As hoped for, the Court held that “AB 51 is preempted by the FAA” because it “discriminates against arbitration agreements,” imposes a “severe” burden on formation of arbitration agreements, and “singles out arbitration provisions as an exception to generally applicable law.” In short, “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 agreements.”

What’s Next for California Employers

Assuming no further review by the Ninth Circuit (it could still review this decision further, including en banc), it is unlikely that the Supreme Court will review the decision because it has historically favored arbitration and has a history of striking down laws similar to AB-51.  Thus, for any employer already requiring mandatory arbitration agreements or considering implementing them, the threat of AB-51 is likely to be abated in the future so long as the FAA governs the applicable agreement. This occurs when the agreement touches on interstate commerce (such as when the employer engages in business across state lines), but there are some exceptions such as for certain transportation workers. 

Employers should contact their employment counsel to discuss the merits of requiring arbitration in the context of their particular workforce, to determine whether the FAA applies, and also to review their arbitration agreement to ensure it meets all other legal requirements for enforceability (of which there are many, especially under California law).

[1] See vacation of original decision after the Supreme Court’s Viking River Cruises v. Moriana decision).

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