Arbitration Agreements Can Be A Condition of Employment Once Again
Arbitration Agreements Can Be A Condition of Employment Once Again

The saga of challenges to mandatory employment arbitration agreements is almost over. After three years of challenges, the United States Chamber of Commerce successfully appealed the enactment and enforcement of California’s Assembly Bill 51 (“AB 51”), which was originally intended to take effect on January 1, 2020. This piece of legislation would have banned the use of mandatory arbitration agreements as a condition of employment, and went so far as to include civil and criminal penalties on employers who violated the statute. 

After a federal district court granted a preliminary injunction, blocking the enforcement of AB 51, in a 2-1 decision, the Ninth Circuit initially upheld the intended prohibition of mandatory arbitration agreements, while striking down the language related to penalties. However, the United States Chamber of Commerce appealed for an en banc hearing to determine the issue. Before the Ninth Circuit could rule on the en banc request, the United States Supreme Court pushed back on the Ninth Circuit’s continued attempts to nibble at the edges of the Federal Arbitration Act (“FAA”), particularly as applied to California’s state laws.  Following this ruling, and taking its cue from the United States Supreme Court, the Ninth Circuit withdrew its prior ruling and agreed to a rehearing of the United States Chamber of Commerce’s appeal. As a result, the three-judge panel reversed itself and, in a 2-1 decision, upheld the lower court’s decision granting a preliminary injunction that blocks California’s ban on mandatory arbitration.

Importantly, while the Ninth Circuit held that AB 51 is preempted by the FAA, it only upheld the existing preliminary injunction issued by the federal district court. The United States Chamber of Commerce still must succeed on the ultimate merits of the underlying claim that the arbitration ban should be permanently struck down.  However, this appears to be all but a forgone conclusion. By holding that the FAA preempts AB 51, the Ninth Circuit has given both parties a very strong indication as to how it will rule on the merits; namely that AB 51 cannot be enforced as it is in direct conflict with federal law. While California’s Attorney General could appeal the decision to be heard by the full Ninth Circuit or the U.S. Supreme Court, it is unlikely that a different outcome would result. For now, the Attorney General’s office has put out a statement indicating that they are “assessing” next steps in light of the recent ruling.

The Takeaway:

The Ninth Circuit’s ruling means that, for the foreseeable future, California employers may once again require that employees sign arbitration agreements as a condition of employment. As always, we strongly encourage employers to seek experienced legal counsel with preparing these agreements in order to comply with the plethora of other California laws that are still in effect and designed to limit the employer’s ability to compel arbitration of disputes with its employees.

Stay tuned for any further developments with the challenges to AB 51 as employers throughout the state wait for the final chapter on this issue.


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