Mandatory Employment Arbitration Agreements Are Legal in California: Ninth Circuit Affirms That California Assembly Bill 51 Is Unenforceable
In some rare and welcome news for California employers, on February 15, 2023, the Ninth Circuit Court of Appeals, after first withdrawing its 2021 opinion in Chamber of Commerce of the United States of America v. Bonta that primarily upheld portions of California Assembly Bill 51, published a new 2 to 1 decision that affirmed the District Court’s preliminary injunction of this law. Under section 422 of the California Labor Code, AB 51 purported to criminalize and prohibit the formation of “involuntary” employment arbitration agreements, which the court reasoned was inconsistent with the Federal Arbitration Act (FAA): “Because the FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 is therefore preempted.”
As we previously wrote, on October 10, 2019, Governor Newsom signed into law AB 51, prohibiting California employers from requiring, as a condition of employment, continued employment, or the receipt of any employment-related benefit, that any applicant for employment or employee waive “any right, forum, or procedure” for a violation of California’s Fair Employment and Housing Act or the Labor Code. Civil sanctions and criminal penalties could be imposed for violations of the law, including as a misdemeanor punishable by imprisonment and/or a fine. In effect, the new law was designed to prevent employers from requiring employees to arbitrate most employment-related claims instead of being able to bring such claims in court.
The U.S. Chamber of Commerce and other groups soon thereafter sought and obtained an injunction of the new law in the United States District Court, with U.S. District Judge Kimberly Mueller agreeing that “serious questions” had been raised about AB 51, on the grounds that it was likely preempted by the FAA.
On September 15, 2021, a divided three-judge panel of the Ninth Circuit Court of Appeals largely lifted the injunction, finding that most provisions of the California law were not preempted by the FAA or inconsistent with U.S. Supreme Court precedent. Notably, Judge Sandra Ikuta, in dissent, flatly disagreed and asserted that AB 51 was indeed contrary to the FAA and blasted what she saw as the illogic of making the formation of “involuntary” arbitration agreements unlawful, but also condoning enforcement of such agreements once executed.
In the aftermath of the United States Supreme Court’s decision in Viking River Cruises v. Moriana in 2022, which affirmed that individual PAGA claims were arbitrable, on August 22, 2022, the same three-judge Ninth Circuit panel withdrew its 2021 opinion and reconsidered the matter.
This new decision, with Judge Ikuta in the majority, reasoned, based upon U.S. Supreme Court precedent, that “state rules that burden the formation of arbitration agreements stand as an obstacle to the FAA.” Based thereon, the Court held that AB 51 posed an unlawful barrier to arbitration agreements, was contrary to the FAA, and was unenforceable.
It is also worth noting that the Ninth Circuit tackled the issue of whether mandatory arbitration agreements were “voluntary” if they were required as a condition of new or continued employment. The majority reasoned that some level of unfavorable terms in an arbitration agreement did not alone mean the agreement was involuntary:“[c]ontrary to the arguments made by California and the dissent, a contract may be ‘consensual,’ as that term is used in contract law, even if one party accepts unfavorable terms due to some degree of unequal bargaining power.” Indeed, inequality in bargaining power, and agreeing to terms that one or more contracting parties does not like is par for the course across a wide range of contracts. But the majority concluded that the test of whether an arbitration agreement is “unconscionable” and therefore unenforceable is the same as for any other type of contract, noting that “AB 51 does nothing to change these basic principles,” implicitly recognizing that California law is quite settled on that point.
The future of mandatory employment arbitration provisions in California is not necessarily settled. The California Attorney General’s Office could ask the Ninth Circuit for an en banc review of the case by a larger panel of judges, or could appeal the decision to the U.S. Supreme Court. However, as we previously wrote on February 14, 2022, regardless of what the state of California does in this case, mandatory arbitration of sexual assault and sexual harassment claims will remain prohibited nationwide, as the U.S. Congress already amended the FAA to, among other things, invalidates employment pre-dispute agreements and class action waivers that require claims related to sexual assault or sexual harassment to be arbitrated on an individual basis
California’s Legislature and its courts, as a whole, will remain hostile to mandatory employment arbitration agreements. But as the federal courts have repeatedly decided, such agreements are enforceable in light of the FAA, and California cannot single such agreements out for treatment different from any other legal contract. Further challenges loom, including whether PAGA claims will remain arbitrable, and how (the California Supreme Court’s pending decision in Adolph v. Uber Technologies, Inc. should clarify this latter issue sometime in 2023), but for now, employers can and should consider requiring mandatory arbitration agreements as a term and condition of new and continued employment.
If you have any questions or concerns about how this new development may affect your business, please reach out to Monte Grix, firstname.lastname@example.org, (415) 835-9016, or Derek Ishikawa, email@example.com or (310) 255-1803