February 21, 2023

Employers May Require Arbitration Agreements as Condition of Employment, Federal Appeals Court Holds

After more than three years of litigation, the Ninth Circuit has held that AB 51, California’s attempt to ban mandatory employment arbitration agreements, is unenforceable.

The History of AB 51 in the Courts

California enacted AB 51 in October 2019. The bill, which added section 432.6 to the Labor Code, was designed to prevent employers from requiring employees to enter into agreements to arbitrate claims under the Fair Employment and Housing Act (“FEHA”).  In January 2020, the U.S. District Court for the Eastern District of California issued a preliminary injunction preventing AB 51 from being enforced, on the theory that AB 51 was likely preempted by the Federal Arbitration Act (“FAA”).  Then, on Sept. 15, 2021, in Chamber of Commerce v. Bonta, the Ninth Circuit Court of Appeals vacated the preliminary injunction against AB 51, holding, over a vigorous dissent, that AB 51 was not preempted by the FAA.

In October 2021, the U.S. Chamber of Commerce petitioned for rehearing en banc (to vacate the decision and have it reheard by the full court). The Ninth Circuit deferred consideration of the petition for rehearing until after the Supreme Court decided Viking River Cruises, Inc. v. Moriana. In August 2022, a majority of the Ninth Circuit panel voted to grant a rehearing and withdraw the panel opinion.

The Ninth Circuit’s New Decision

On Feb. 15, 2023, the Ninth Circuit issued a new opinion, this time affirming the district court’s issuance of a preliminary injunction and finding that AB 51 is preempted by the FAA.

In the new opinion, written by Judge Sandra Ikuta (who dissented in the original opinion), the Ninth Circuit court agreed with the First Circuit and Fourth Circuit that the FAA preempts state rules, such as AB 51. Specifically, the court held that AB 51 discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement, and thereby conflicts with Congress’ intent (in enacting the FAA) to embody a national policy in favor of arbitration. The court also noted that the Supreme Court has established an equal-treatment principle that requires courts to place arbitration agreements on equal footing with other types of contracts, and that state rules like AB 51 impermissibly interfere with arbitration when they discriminate against arbitration directly or disfavor contracts with the defining features of arbitration.

What’s Next?

For now, the preliminary injunction issued in January 2020 will remain in effect (as it has since its issuance). 

While this decision is a win for employers in California, it may not be the last word on AB 51.  Further appeals are possible, and perhaps likely, particularly given the dissent penned by Judge Carlos Lucero (who had written the original majority opinion).  As we have previously suggested, this case may very well be destined for the United States Supreme Court, where so many other California arbitration cases have ended up. 

We will continue to monitor this case and report on important developments.  Contact Payne & Fears LLP if you have questions about this case or AB 51.

Disclaimer: Please contact your Payne & Fears attorney for current guidance on the subject matter of this article.