For the time being, California employers may decide to either wait it out or resume requiring applicants and employees to enter into arbitration agreements as a condition of hire or continued employment.

On February 15, 2023, the federal Ninth Circuit Court of Appeals ruled that California’s statute prohibiting employers from requiring mandatory arbitration agreements as a condition of hire or continued employment—Assembly Bill 51, enacted as California Labor Code Section 432.6—conflicts with the Federal Arbitration Act (FAA). The court held that the FAA preempts the California statute.

The confusion surrounding mandatory arbitration agreements has caused headaches for California employers. For many years, employers in California could require that their employees enter into arbitration agreements. State legislation changed this, effective January 1, 2020. This new ruling provides some much-needed clarification. The Ninth Circuit’s most recent opinion ruled that AB 51 is preempted by the FAA, opening the door for employers to institute (or reinstitute) mandatory arbitration agreements.

Background of Assembly Bill 51

In October 2019, Governor Gavin Newsom signed Assembly Bill 51 into law. It went into effect January 1, 2020. AB 51 sought to prohibit California employers from requiring applicants or employees to sign arbitration agreements waiving any right, forum or procedure for alleged violations of the Fair Employment and Housing Act (FEHA) and Labor Code as a condition of employment, continued employment or the receipt of any employment-related benefit. Since arbitration agreements, by definition, waive the right to bring claims in court (a forum), this legislation meant that California employers could no longer require arbitration agreements as a condition of employment. Employers pivoted and began offering employees voluntary arbitration agreements, usually in exchange for some benefit or payment.

Chamber of Commerce v. Becerra

In December 2019, the U.S. Chamber of Commerce, the California Chamber of Commerce and other business groups filed a lawsuit against the California attorney general[1] alleging that AB 51 was preempted by the FAA and seeking an injunction against its enforcement. A federal district court granted a preliminary injunction, which prevented AB 51 from being enforced while the lawsuit was ongoing. Thereafter, the district court concluded that AB 51 was preempted by the FAA and reasoned that AB 51’s deterrent effect on arbitration agreements conflicted with the FAA’s policy of favoring arbitration. The state of California appealed.

In September 2021, a divided panel of the Ninth Circuit issued a ruling that portions of AB 51, including the provision preventing employers from requiring applicants and employees sign mandatory arbitration agreements, was not preempted by the FAA. The Chamber of Commerce filed a petition for rehearing en banc pending the U.S. Supreme Court’s decision in Viking River Cruises, Inc. v. Moriana.

In August 2022, the Ninth Circuit withdrew its prior opinion and granted a rehearing.

The Ninth Circuit’s most recent decision held that AB 51 is preempted by the FAA and affirmed the district court’s grant of a preliminary injunction.

What This Means for California Employers

This may not be the end of the story: The state of California could appeal this decision. If there is no appeal, the lawsuit will be remanded back to the district court to proceed with litigation on the legality of AB 51.

For the time being, California employers may decide to either wait it out or resume requiring applicants and employees to enter into arbitration agreements as a condition of hire or continued employment. There are other potential intermediate steps that can be taken as well, such as only requiring arbitration agreements for certain levels of employees. Employers should be aware that, for the moment, the issue is not fully and finally resolved.

Employers should know, however, that California imposes several conditions upon employment arbitration agreements that must be met in order for such agreements to be upheld and enforced. Additionally, employers should be aware that some claims may not be covered by arbitration agreements, especially with President Biden’s enactment of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021.

For More Information

If you have any questions about this Alert, please contact Jennifer A. Kearns, Brittany Wunderlich, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.