As of February 15, 2023, employers in California may once again require mandatory arbitration as the US Court of Appeals for the Ninth Circuit held that the Federal Arbitration Act (FAA) preempts Assembly Bill 51 (AB 51), a law that prohibited “forced arbitration” as a condition of employment.
After years of litigation, the Ninth Circuit’s ruling upholds a federal district court’s preliminary injunction that temporarily blocked California from enforcing AB 51 and all but guarantees that AB 51 will never be enforceable. While California could seek review from the Ninth Circuit (en banc) or the Supreme Court of the United States, given the Supreme Court’s line of cases upholding FAA preemption, we think this decision will stand.
That said, US President Joe Biden’s Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (HR 4445) must not be ignored. Employers may include sexual harassment and sexual assault claims in a voluntary arbitration agreement, but an employee may choose to file these particular claims in court.
A MORE IN-DEPTH CASE DISCUSSION
At issue in this case was whether the FAA preempts California’s AB 51. In its latest ruling, the Ninth Circuit held that the answer is “yes,” reasoning that AB 51’s imposition of criminal penalties on employers entering into arbitration agreements as a condition of employment or continued employment is an “obstacle” to the FAA’s purpose. Further, the Court explained that AB 51 discriminates against arbitration by (1) discouraging or prohibiting the formation of an arbitration agreement, even if the agreement is ultimately enforceable, and (2) burdens the defining features of arbitration agreements.
What Is AB 51?
Even though the FAA embodies the national policy favoring arbitration, over the years, California legislature has engaged in a prolonged effort to craft legislation to prevent employers from requiring employees to enter into arbitration agreements as a condition of employment. To that end, California legislature passed AB 51 in 2019, which added Section 432.6 to Article 3 of the California Labor Code and effectively barred an employer from requiring an employee or applicant for employment to enter into an agreement to arbitrate certain claims as a condition for being hired or for keeping a job.
To circumvent Supreme Court precedent, which holds that a state rule that discriminates against arbitration is preempted by the FAA, the legislature included a provision in AB 51 that ensures that if the employer and employee did enter into an arbitration agreement, the agreement was nonetheless enforceable. This resulted in the oddity that under AB 51, employers would be subject to criminal prosecution for requiring an employee to enter into an arbitration agreement, but employers could still enforce the executed arbitration agreement.
Enforcement of AB 51 Halted
On December 30, 2019, before AB 51 could take effect, a federal district court issued a temporary restraining order halting enforcement of the law. In January 2020, that court issued a preliminary injunction enjoining its enforcement.
In 2021, the Ninth Circuit partially reversed the district court’s decision and upheld AB 51 in part. Specifically, the Ninth Circuit affirmed the lower court’s decision that the FAA preempts the civil and criminal penalties under AB 51 but lifted in part the injunction, explaining that the FAA does not preempt AB 51’s regulation of an employer’s conduct before executing the arbitration agreement. Notably, however, the Court later withdrew the decision in August 2022 and reheard the case.
The Ninth Circuit’s Latest Ruling
On February 15, 2023, the Ninth Circuit revisited the case and held that the FAA preempts AB 51 and enjoined enforcement of the law in its entirety. The Court explained that the FAA preempts state laws that affect the enforceability of arbitration agreements and laws that discriminate against the formation of arbitration agreements, joining the First and Fourth Circuits. The Court reasoned that although AB 51 does not expressly bar arbitration agreements, it disfavors the formation of arbitration agreements and stands as an obstacle to the FAA’s purpose by deterring employers from entering into arbitration agreements by imposing civil and criminal sanctions on those who do so. AB 51’s penalty-based scheme to inhibit arbitration agreements before they are formed violates the equal treatment principle inherent in the FAA. Moreover, the Court reasoned that all of AB 51’s provisions work together and, therefore, the Court declined to uphold parts of the law and sever others as it had previously done.
Thus, employers may take comfort in the fact that the door is open for mandatory arbitration once again.
KEY TAKEAWAYS FROM THE CASE
- While California employers may impose mandatory arbitration as a condition of employment, the decision of whether to require mandatory arbitration and how to craft the agreement requires careful consideration with counsel as the legal landscape quickly changes.
- For example, employers should still consider whether their arbitration agreement will include a class and collective action waiver (we recommend doing so), how to carve out sexual harassment and sexual assault claims, and how to incorporate Viking River Cruises, Inc. v. Moriana, 596 U.S. (2022), which permits employers to require employees to arbitrate individual Private Attorneys General Act claims.
- In sum, employers must be vigilant and keep their arbitration agreements up to date—and it doesn’t hurt to include a severability provision.
Please reach out to your regular McDermott lawyer or one of the authors of this article if you have questions.