Ninth Circuit Vacates Preliminary Injunction Against California Law That Restricts Employers’ Use of Mandatory Arbitration Agreements

A recent Ninth Circuit decision regarding a California law may cause California employers to re-think whether to include arbitration clauses in employment contracts. California Assembly Bill (AB) 51, which was signed into California law in October 2019, created Section 432.6 of the Labor Code and Section 12953 of the California Government Code—effectively prohibiting employers from requiring applicants and employees to enter into mandatory arbitration agreements as a condition of employment, continued employment, or the receipt of any employment-related benefit. The law also imposes potential civil and criminal liability against employers who violate the law.

In February 2020, a federal court in the Eastern District of California entered a preliminary injunction barring enforcement of AB 51, finding that the law was preempted by the FAA. However, on September 15, 2021, in Chamber of Commerce of the United States v. Bonta, the Ninth Circuit vacated the preliminary injunction. In reaching its decision, the Ninth Circuit found that Section 432.6 of the Labor Code is not preempted by the FAA. According to the majority, the law does not “undermine the validity or enforceability of an arbitration agreement,” but, rather, the law’s effects “are aimed entirely at conduct that takes place prior to the existence of any such agreement.”

On the other hand, the Ninth Circuit affirmed that the imposition of civil and criminal sanctions “for the act of executing an arbitration agreement,” is preempted by the FAA. However, the Court’s less-than-clear decision—particularly its ambiguous distinction between pre-agreement conduct versus the execution of an arbitration agreement— leaves many questions unanswered and highlights lingering criminal and civil risks to California employers who ask their applicants and employees to sign arbitration agreements.

In light of the Court’s decision, employers who may be subject to California laws should exercise caution before using arbitration clauses in employment agreements. Contact your Kunzler Bean & Adamson attorneys for further guidance on how this new case may impact your business.