Ninth Circuit Upholds Parts of California's AB 51 Prohibiting Mandatory Arbitration of Employment Disputes

Background Regarding AB 51

Codified in California Labor Code Section 432.6 (“Section 432.6”), AB 51, which was signed into law by Governor Newson in October 2019, prohibits employers from requiring applicants to sign arbitration agreements applicable to various employment claims, such as those brought under California’s Labor Code and Fair Employment and Housing Act “FEHA”), “as a condition of employment, continued employment, or the receipt of any employment-related benefit.”  AB 51 also allows for criminal penalties for violations of Section 432.6 and imposes civil liability (including for unlawful conduct under FEHA) against any employer that retaliates, discriminates, terminates, or threatens any such action, against employees who refuse to accept mandatory arbitration.  While AB 51 was enforceable beginning January 1, 2020, the United States District Court for the Eastern District of California issued a preliminary injunction prohibiting its enforcement, holding that AB 51 violates the FAA. The State of California appealed. 

Earlier this month, in Chamber of Commerce of the United States of America v. Bontathe Ninth Circuit panel upheld, in a 2-1 decision, parts of California Assembly Bill (“AB”) 51—which prohibits employers from entering into mandatory arbitration agreements and includes criminal and civil penalties for violations—holding that portions of AB 51 are not preempted by the Federal Arbitration Act (“FAA”).

The Ninth Circuit’s Decision

The Ninth Circuit held that the FAA does not preempt the portion of AB 51 that precludes employers from mandating arbitration agreements as a condition of employment or from retaliating against employees or job applicants who refuse to sign such an agreement.  Notably, the Court held that Section 432.6 does not conflict with the FAA because the FAA preempts states from imposing conditions on the enforcement of executed or consummated arbitration agreements, whereas Section 432.6 is focused on pre-agreement behavior (i.e., a requirement that all parties consent to arbitration).

The Ninth Circuit panel was deliberate in its efforts to distinguish existing U.S. Supreme Court precedent, holding that none of the existing precedent “preempted a rule that regulated pre-agreement behavior.”  The Ninth Circuit also observed that: (i) Section 432.6 “does not make invalid or unenforceable any agreement to arbitrate, even if such agreement is consummated in violation of the statute;” and (ii) nothing in Section 432.6 “is intended to invalidate a written arbitration agreement that is otherwise enforceable under the [FAA].”  Under the Ninth Circuit’s opinion, Section 432.6 applies “only in the absence of an agreement to arbitrate.”  The Ninth Circuit’s decision implies that AB 51 may not be used by an employee as a way to escape a signed arbitration agreement that is otherwise enforceable under the FAA, including an agreement that could violate Section 432.6

While the Ninth Circuit vacated the District Court’s preliminary injunction, it enjoined the enforcement of California Labor Code Section 433 and California Government Code Section 12953 (imposing criminal and civil sanctions against employers that violate Section 432.6) “to the extent that they apply to executed arbitration agreements covered by the FAA,”  implying that employers may be subject to civil and criminal penalties where employees refuse to sign mandatory arbitration agreements (as this would fall under Section 432.6). 

Potential For Appeal

Although the District Court’s preliminary injunction was lifted, it is likely that the Ninth Circuit panel’s decision will be reviewed en banc and/or by the U.S. Supreme Court.  Until such review occurs, the Ninth Circuit’s decision will remain operative.

What should employers do?

In light of the Ninth Circuit’s recent decision, employers who are currently using mandatory arbitration agreements that were signed on or after January 1, 2020 (and/or are considering implementing such agreements) should consider several options based on their unique factual circumstances.  Below are a few alternatives that California employers may consider.

  • Switch to the use of voluntary employment arbitration agreements.  Since the Ninth Circuit decision implies that employers cannot demand that employees (who have not executed employment arbitration agreements) agree to them as a condition of employment, employers may consider the use of voluntary agreements.  For employers who have already obtained executed employment arbitration agreements from some or all of their employees, the decision to have such employees re-sign new agreements sufficient to meet the “voluntary” threshold will involve consideration of various issues, including the impact of any existing wage and hour class action litigation as well as the potential for wrongful termination lawsuits.  Employers seeking to roll-out employment arbitration agreements for the first time and/or to present such agreements to new-hires on a go-forward basis should consider including arbitration language in stand-alone documents that require employees to affirmatively review and consent to (or refuse to sign) the arbitration provision(s).

  • Maintain the status quo. Given that the Ninth Circuit noted that AB 51 does not render executed arbitration agreements unenforceable—even if consummated in violation of Section 432.6— employers may decide to keep in place existing mandatory arbitration agreements.  This option is also attractive because the Ninth Circuit’s decision implies a reduced risk of civil and criminal penalties in cases involving already executed agreements (as noted above).  Employers seeking to have new hires sign existing mandatory arbitration agreements are strongly encouraged to contact counsel to assess liability pitfalls, including class-action and PAGA related considerations.

  • Stop using arbitration agreements. Given the potential for appeal and further review of the Ninth Circuit’s decision, some employers may consider stopping the use of arbitration agreements (and/or eliminate any mandatory arbitration language included in handbooks or other policy documents).  While this is an alternative, the prospect of being forced to litigate class action claims in court should be considered carefully.  Employers should contact experienced counsel to discuss the potential drawbacks associated with a roll-back of existing mandatory employment arbitration agreements.

  • Consider other hybrid approaches.  

  • Since AB 51’s prohibition on mandatory arbitration agreements essentially applies to claims arising under the California Labor Code and FEHA, employers could choose to dispense with mandatory arbitration as to these claims but proceed with mandatory arbitration of other claims.  To avoid future liability risks, employers considering this alternative must carefully review existing agreements and policies to ensure they do not contain contradictory or inconsistent language.

  • Employers who wish to continue with mandatory arbitration of all types of employment claims, including those arising under the Labor Code and/or FEHA, must consider the forms of additional consideration, if any, that are appropriate to include.  Based on the language in Section 432.6, employment, continued employment as well as employment benefits (such as sick pay, salary increased, etc.) will not constitute sufficient consideration.  One-time sums that are unrelated to employment may, under certain circumstances, be deemed sufficient.  Employers exploring such alternatives should contact counsel to discuss their options.

The enforcement of arbitration agreements presents many complicated legal issues, including the potential impact of AB 51.  As noted, the above considerations present a starting point.  Employers should seek assistance from counsel as they review and refine their employment arbitration provisions, offer letters, and other policy documents.

Shareholders Associates
Eric C. Bellafronto Ernest M. Malaspina Sean Bothamley
Karin M. Cogbill Richard M. Noack Jonathan Heller
Jennifer Coleman Daniel F. Pyne III Shirley Jackson
Michael Manoukian

Elaisha Nandrajog

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