Here we go Again… Ninth Circuit Upholds (In Part) California’s Prohibition on Mandatory Arbitration Agreements

By Saba Zafar, Esq.

and

Jaimee K. Wellerstein, Esq.

Employers and employees have long disputed the validity and lawfulness of employment-related arbitration agreements in California. On September 15, 2021 in Chamber of Commerce v. Bonta (No. 20-15291, 2021 WL 4187860 (9th Cir. Sept. 15, 2021)), the Ninth Circuit Court of Appeals dealt a blow to employers in reversing a lower court ruling and holding that the Federal Arbitration Act (“FAA”) does not completely preempt AB 51. As a result, employers are now banned from requiring employees and applicants to enter into mandatory arbitration agreements as a condition of employment.

By way of background, in October 2019, Governor Newsom signed into law California Assembly Bill 51 (“AB 51”), with an effective date of January 1, 2020. AB 51 prohibits employers, as a condition of employment, from requiring applicants or employees to sign arbitration agreements. The prohibition applies even if the employer provides the employee with the opportunity to opt-out of the agreement, and requires employment arbitration agreements to be completely voluntary. AB 51 also bans employers from retaliating against employees or applicants who refuse to enter into such arbitration agreements, and provides both civil and criminal penalties for companies that violate the statute.

In December 2019, the Chamber of Commerce of the United States and other business groups were granted a preliminary injunction to stop AB 51 from going into effect. This was certainly a welcome reprieve for employers.

However, on September 15, 2021, in a 2-1 decision, the Ninth Circuit reversed the preliminary injunction in part, and lifted the stay on enforcement of AB 51. The Ninth Circuit concluded that AB 51 did not conflict with the FAA (and thus the State was free to regulate this conduct) because it only governed an employer’s conduct before entering into an arbitration agreement with an employee. Accordingly, employers cannot seek to require California applicants and employees to enter into mandatory arbitration agreements as a condition of employment.

Strangely, the Ninth Circuit also concluded that if an employee does sign the arbitration agreement, then not only could the agreement be valid and enforceable under both the FAA and AB 51, but the potential criminal and civil penalties that would otherwise be available are preempted by the FAA. It seems to then follow from this strange ruling that if the employee signs the mandatory arbitration agreement, the employer may not be held civilly or criminally. However, if an employee refuses to sign the arbitration agreement, then the FAA does not preempt AB 51, and thus the employer could potentially face civil and criminal liability for having attempted to engage the employee in such a mandatory agreement in the first place.

Unless appealed and overturned by the U.S. Supreme Court, this decision will have far reaching consequences for California employers. Arbitration agreements may be challenged and employers may have to face class claims which otherwise would have been subject to an arbitration agreement’s class action waiver.

Employer Takeaway:

Employers are strongly advised to review their arbitration agreement and practices. While employers may still present arbitration agreements to their employees and applicants, they cannot be a condition of employment or continued employment. Arbitration agreements should be voluntary, and not coercive in any manner. Any arbitration agreements with “opt out” provisions should be revised to comply with the current state of the law. If you have any questions about how this decision may impact your business, or need assistance preparing a new arbitration agreement, please contact your attorneys at Bradley, Gmelich & Wellerstein LLP. We are here to help.