Recent Ninth Circuit Decision Revives AB 51’s Prohibition of Employers Mandating Arbitration

09.22.2021

California employers are to be forgiven if they are confused as to the state of the law regarding employer mandated agreements requiring employees to arbitrate employment-related claims. Over the last decade, the law has gone from one direction to another in the wake of California state court decisions, federal court decisions, and enactments by the California legislature.

As a result of a decision by the Ninth Circuit Court of Appeals on September 15, 2021, Chamber of Commerce of the U.S. v. Bonta, the pendulum has swung again, this time to the detriment of employers seeking to require employees to arbitrate employment-related claims. (Chamber of Commerce of the United States v. Bonta (9th Cir. 2021) D.C. No. 2:19-cv-02456KJM-DB). In Bonta, a divided panel of the Ninth Circuit sided with the State of California and invalidated an injunction entered by a district court judge that had prohibited enforcement of Assembly Bill 51.

AB 51 prohibits employers from requiring employees, as a condition of employment, to enter into agreements that obligate employees to arbitrate claims against the employer for violations of the California Fair Employment and Housing Act or California Labor Code. AB 51 subjects employers who do so to criminal and civil liability, including up to six months imprisonment.

Relevant Background

Enacted by the California Legislature in 2019, AB 51, which added section 432.6 to the California Labor Code, subjects employers to criminal charges, with a possibility of incarceration for up to six months, as well as civil sanctions, for mandating – as a condition of employment – that employees enter into agreements requiring arbitration of certain employment claims. The law addresses solely pre-arbitration behavior and, by its terms, does not bar enforcement of arbitration agreements.

Immediately before AB 51 took effect on January 1, 2020, multiple business associations including the Chamber of Commerce of the United States sought a preliminary injunction prohibiting California agencies from enforcing AB 51. The associations contended that AB 51 is preempted by the Federal Arbitration Act (“FAA”). The FAA requires courts to enforce arbitration agreements (provided the agreements have a connection to interstate commerce) in the same manner as they enforce contracts generally. The FAA also invalidates state law rules that disfavor arbitration agreements as compared with other types of contracts. In February 2020, a judge in the Eastern District of California granted a preliminary injunction prohibiting enforcement of AB 51 on the grounds that the law was preempted by the FAA. An appeal to the Ninth Circuit followed.

The Court’s Reasoning

In striking down the district court judge’s injunction, the Ninth Circuit panel distinguished between laws addressing conduct preceding execution of an arbitration agreement and those addressing already executed arbitration agreements. Under the panel’s reading of the FAA and Supreme Court precedent, the FAA concerns enforcement of already executed arbitration agreements. Under this reading, the court held that the California legislature could preclude employers from forcing employees “without their consent” to enter into agreements to arbitrate employment claims without violating the FAA. The court agreed with the district court judge, however, that imposing criminal and civil penalties on employers for already-executed arbitration agreements would create an obstacle to the purposes of the FAA. Stated differently, the court concluded that employers cannot be penalized for executing consensual arbitration agreements, while they can be penalized for requiring employees – as a condition of employment – to enter into “non-consensual” employment arbitration agreements.

Judge Sandra Ikuta issued a strong dissenting opinion in which she characterized AB 51 as a “too clever by half” attempt by the State of California to evade the FAA. She disagreed with the majority’s reading of Supreme Court precedent and indicated that the decision created a circuit split that allows a pathway for review by the U.S. Supreme Court.

The district court’s injunction is not lifted until mandate issues, which occurs 14 days from the date of the decision, on September 29, 2021.

Employer Takeaways

This new decision is far from a model of clarity. However, it appears that employers still may seek to enforce already executed arbitration agreements without being subject to civil or criminal penalties, even though they cannot demand on a going forward basis that employees who have not yet executed an arbitration agreement, consent to one as a condition of employment. This uncertainty is likely to continue unless and until the Supreme Court resolves the issue.

Employers with questions regarding the decision can contact the authors or their usual counsel at Atkinson, Andelson, Loya, Ruud & Romo.