California Employment Arbitration Law Ruled Invalid by the Ninth Circuit

California attempted to prohibit employers from imposing mandatory arbitration provisions as a condition for employment in 2019 by enacting Assembly Bill 51. Under this law, employers could not require either applicants or current employees to “waive any right, forum, or procedure” for labor code violations. Application of A.B. 51 to employers was stayed pending judicial review after being challenged as preempted by federal law. Reversing its own prior decision, a divided panel from the Ninth Circuit invalidated the law just last week by ruling it as preempted by the Federal Arbitration Act (“FAA”). This recent decision means that California employers can now reinstate mandatory arbitration agreements in their employment contracts.

A.B. 51 was promulgated with specific intent to avoid conflict with federal law, such as preemption of the FAA or conflict with Supreme Court precedent, by focusing on conduct prior to entering into an arbitration agreement. This law uniquely criminanlized entering into mandatory arbitration agreements but permitted the enforcement of them; California hoped the bill’s structure would avoid conflict with federal law that expressly encourages the forum of arbitration. The Ninth Circuit initially upheld the validity of most of A.B. 51’s requirements in September 2021, partially reversing an injunction against the application of the law. But after the California Chamber of Commerce and the United States Chamber of Commerce argued that a recent decision from the Supreme Court of the United States invalidates A.B. 51, the Ninth Circuit panel voted “sua sponte” to revisit their earlier decision partially upholding the law. The June 2022 decision by the highest court, Viking River Cruises v. Moriana, held that the FAA not only preempts state laws that prohibit arbitration agreements but also those laws that attempt to limit such agreements.

U.S. Circuit Judge Sandra S. Ikuta, one of the Ninth Circuit panel members, strongly dissented in the panel’s initial ruling that partially upheld A.B. 51. Judge Ikuta opined in her dissent that, considering the lack of federal precedent supporting California’s structural attempts, the law impermissibly discriminated against arbitration agreements in violation of the FAA and was a “transparent effort to sidestep” the Act’s requirements. Although arbitration agreements entered into in violation of A.B. 51 would still be enforceable, the Ninth Circuit panel’s most recent decision reiterates Judge Ikuta’s argument by stating that “the FAA’s preemptive scope is not limited to state rules affecting the enforceability of arbitration agreements, but also extends to state rules that discriminate against the formation of arbitration agreements.” The panel’s majority opinion holds that prohibiting employers from entering into arbitration agreements as a condition to employment, enforced by penalizing employers who do so, is the “type of ‘device’ or ‘formula’ evincing ‘hostility towards arbitration’ that the FAA was enacted to overcome.”

The Ninth Circuit panel, however, remains divided – U.S. Circuit Judge Carlos F. Lucero was one panel member supporting the validity of A.B. 51 in the court’s September 2021 decision and dissented in the majority’s most recent reversal. While conceding in a footnote that both civil and criminal sanctions imposed against employers who enter into arbitration agreements likely violates the FAA and thus should be struck from A.B. 51, Judge Lucero argues that no precedent from either the Supreme Court or the FAA holds that employers can require arbitration as a condition for employment. Because “arbitration is a matter of contract and agreements to arbitrate must be voluntary and consensual,” Judge Lucero does not believe there is federal support for the preemption of mandatory or forced arbitration agreements. The judge also raised concerns over the ability of state legislatures “to ensure that arbitration clauses in these employment agreements are freely and openly negotiated” and the “diminished role” courts are left to play in employer-employee disputes.

While the California Attorney General’s Office reviews the Ninth Circuit panel’s decision and assesses how best to defend A.B. 51, the U.S. Chamber of Commerce has expressly supported the panel’s invalidation of the law by recognizing the benefits of arbitration for employer-employee disputes.

Contact your Kunzler Bean & Adamson attorneys for a privileged review of your employment contracts or if you have questions about this recent change to California employment law.

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