Ninth Circuit Revives California Law Prohibiting Employers From Mandating That Employees Sign Arbitration Agreements

By Swerdlow Florence Sanchez Swerdlow & Wimmer

September 22, 2021

On September 15, 2021, the Ninth Circuit revived parts of a controversial California law that prohibited mandatory employment arbitration agreements.

In 2019, California passed AB 51, which prohibited employers from requiring employees and applicants to sign, as a condition of employment, agreements to arbitrate disputes arising under the California Fair Employment and Housing Act (“FEHA”) and the California Labor Code.  AB 51 also prohibited employers from discriminating or retaliating against employees and applicants for refusing to sign such arbitration agreements.  The law subjected employers to criminal misdemeanor charges and civil penalties for violations of its provisions.

However, in early 2020, as AB 51 was set to go into effect, a federal district court judge in Chamber of Commerce v. Bonta issued a preliminary injunction against AB 51, holding that the law was unenforceable because it was preempted by the Federal Arbitration Act (“FAA”).  Generally, federal preemption is the invalidation of a state law that conflicts with federal law.  The FAA is a federal law that requires written arbitration agreements to be enforced as any other contract and generally prohibits states from putting arbitration agreements on unequal footing with other contracts.  

In a blow to employers, the Ninth Circuit has now partially reversed the lower court injunction, holding that AB 51 is not preempted by the FAA.  The Ninth Circuit reasoned that AB 51 does not invalidate existing arbitration agreements, but rather regulates parties’ conduct prior to entering into arbitration agreements (for example, employer conduct requiring employees to enter into agreements as a condition of employment).  The Ninth Circuit reasoned that because AB 51 is “aimed entirely at conduct that takes place prior to the existence of any arbitration agreement,” the law can coexist with the FAA because it does not “undermine the validity or enforceability of an arbitration agreement.”   

In partial win for employers, the Ninth Circuit majority agreed with the district court that AB 51’s criminal and civil penalties are preempted for executed arbitration agreements and remain enjoined.  

The implications of this decision are that, once the preliminary injunction is lifted, AB 51 will make it unlawful for employers to require applicants and employees to execute arbitration agreements as a condition of employment, but where any employee or applicant actually signs an arbitration agreement under such mandatory conditions, the civil and criminal penalties of AB 51 would be preempted and would not apply.  

In a fiery dissent, Judge Sandra Ikuta noted the absurdity of this arrangement: “[I]f the employer offers an arbitration agreement to the prospective employee as a condition of employment, and the prospective employee executes the agreement, the employer may not be held civilly or criminally liable.  But if the prospective employee refuses to sign, then the FAA does not preempt civil and criminal liability for the employer under AB 51’s provisions.”  Judge Ikuta made the additional following observation: “This tortuous ruling is analogous to holding that a statute can make 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. Needless to say, such a bizarre approach does not apply to any other contracts in California.”

For now, the preliminary injunction against AB 51 remains in effect until the Ninth Circuit issues its formal “mandate,” relinquishing jurisdiction of the case back to the district court.  If a petition for rehearing or rehearing en banc is filed, the mandate will automatically be stayed pending a decision on the petition.  In addition, if review is sought by the United States Supreme Court, and if the Supreme Court agrees to hear the matter, then the preliminary injunction against AB 51 could remain in place.  

Employers in California should now evaluate what steps to take – if any – regarding execution of mandatory arbitration agreements going forward.  Employers should continue to monitor the status of the preliminary injunction against AB 51 and determine their risk tolerance level in deciding whether to continue any mandatory arbitration agreement programs or move to making the execution of arbitration agreements voluntary.  

Contact your SFSSW attorney if you have questions how about the Ninth Circuit’s opinion affects your company’s ongoing use of mandatory arbitration agreements.