In 2019, the California Legislature passed Assembly Bill 51 (“AB51” or the “Bill”), which Governor Gavin Newsom subsequently signed into law. AB51, which was to take effect January 1, 2020, effectively rendered mandatory employment arbitration agreements unlawful (through Labor Code Sec. 432.6) and imposed criminal and civil sanctions against any employer who conditioned an individual’s employment on him/her entering into such an agreement (through Labor Code Sec. 433 and Government Code Sec. 12953). However, on December 6, 2019, just weeks before the Bill was to take effect, the U.S. Chamber of Commerce, California Chamber of Commerce, National Retail Federation, and other similar interest groups filed a complaint for declaratory and injunctive relief and other similar filings in federal court to enjoin enforcement of AB51’s promulgated Labor Code and California Government Code provisions. Ultimately, two days prior to AB51 taking effect, U.S. District Judge Kimberly Mueller granted a temporary restraining order precluding enforcement of AB51 based on a conflict with § 2 of the Federal Arbitration Act (“FAA”).
The District Court’s decision was then challenged to the Ninth Circuit Court of Appeals (“Ninth Circuit”). On September 15, 2021 the Ninth Circuit found via split decision that AB51 does not conflict with the FAA to the extent AB51 bars employers from requiring employees to enter into arbitration agreements as a condition of employment and, in turn, vacated the preliminary injunction issued by the District Court on that issue. However, the Ninth Circuit affirmed the District Court’s decision that the statutes promulgated by AB51 that impose criminal and civil sanctions on employers who violate Labor Code Sec. 432.6 by making an arbitration agreement a condition of employment are preempted by the FAA. But, it did so “to the extent that they apply to executed arbitration agreements covered by the FAA.”
Overall, Circuit Judge Carlos Lucero, in the majority opinion, opined that arbitration agreements are a matter of contract and therefore, like other contracts, must be voluntary and consensual. And, because Labor Code Sec. 432.6, which precludes employer-mandated (or “involuntary”) arbitration agreements, does not interfere with the “federally protected right” of enforcement of mutually entered-into arbitration agreements, it does not conflict with and is not preempted by the FAA. In response, Hon. Sandra Ikuta, the dissenting Circuit Judge of the three-judge panel, issued a scathing opinion in which she not only called AB51 a “legislative gimmick” that would burden employers but also referred to California’s employment arbitration agreement-related efforts as a “classic clown pop bag.” In doing so, she highlighted a quandary placed on employers as a result of the majority’s decision: given the majority invalidated the criminal and civil sanction provisions to the extent they apply to executed agreements, an employer may effectively not be held civilly or criminally liable if the employer offers an arbitration agreement to a prospective employee as a condition of employment and that individual executes the agreement. But, if that employee refuses to enter into the agreement, then the majority opinion does not cover such a situation and the employer may face civil and criminal liability pursuant to AB51, essentially rendering the attempt illegal while making the completed act outside of the purview of prosecution.
Given the split nature of the decision, the thorough and strongly-worded dissent, as well as the widespread impact the final decision on these issues will have on California employers, we anticipate the opponents of AB51 will petition for en banc review by the Ninth Circuit or pursue an appeal to the United States Supreme Court, both of which could result in a further stay of AB51’s enforcement. However, in the interim, California employers should review their arbitration agreements and consult with legal counsel on actions that may be taken to best mitigate risk in the face of the current state of the law and overall uncertainty as to what the ultimate outcome will be.