California’s law prohibiting employers from implementing mandatory arbitration agreements as a condition of employment, commonly known as Assembly Bill 51 (“AB 51”), has been permanently enjoined by a district court. Chamber of Commerce of the USA et al. v. Becerra et al., No. 2:19-cv-02456 (E.D. Cal. Jan. 1, 2024).
Background:
AB 51 prohibits employers from requiring employees to sign arbitration agreements for claims arising under the California Fair Employment and Housing Act and the California Labor Code, where execution of the arbitration agreement is a condition of employment or employment-related benefits. It applies to any arbitration agreement entered into, modified, or extended on or after January 1, 2020.
Upon its implementation in 2020, a California federal district court granted the U.S. Chamber of Commerce’s motion to preliminarily enjoin AB 51 as to arbitration agreements governed by the Federal Arbitration Act.[1] The order granting the preliminary injunction was appealed to the U.S. Court of Appeals for the Ninth Circuit, which resulted in a split opinion holding that the Federal Arbitration Act did not completely preempt AB 51. Thereafter, the Ninth Circuit, in an unprecedented move, withdrew its prior opinion on its own motion.
Following the withdrawal of this opinion, the Ninth Circuit again addressed whether AB 51 is preempted by the Federal Arbitration Act and held that the Federal Arbitration Act does in fact completely preempt AB 51. In doing so, it affirmed the district court’s grant of a preliminary injunction precluding enforcement of AB 51. Chamber of Commerce of the USA et al. v. Bonta, 62 F.4th 473 (9th Cir. 2023).
In reaching its decision, the Ninth Circuit reiterated U.S. Supreme Court and federal jurisprudence holding that state rules that impose an obstacle to the formation of arbitration agreements governed by the Federal Arbitration Act (like AB 51) are preempted by the Federal Arbitration Agreement.
The Ninth Circuit also found the State of California’s arguments that AB 51’s provisions that were subject to preemption under the Federal Arbitration Agreement could, nonetheless, be severed unpersuasive and held that AB 51 could not in fact be salvaged through severance.
Following remand of the Ninth Circuit’s decision, the State of California stipulated to a permanent injunction of AB 51 and dismissed its case. Chamber of Commerce of the USA et al. v. Becerra et al., No. 2:19-cv-02456 (E.D. Cal. Jan. 1, 2024).
Moving Forward:
These decisions resolve a long-unsettled question as to whether employers can require employees to sign arbitration agreements as a condition of employment where the arbitration agreement at issue is governed by the Federal Arbitration Act.
Although these decisions can be considered a “win” for California employers, questions remain about the future enforcement of mandatory arbitration agreements in California, including how and when employers should implement new arbitration agreements if they have existing arbitration agreements in place. In particular, employers need to assess the effective date(s) of any new arbitration agreements they intend to implement and whether existing arbitration agreement(s) are superseded. Employers should also assess whether there is a need to offer additional consideration to employees to enforce their agreement to arbitrate where they have already agreed to arbitrate their claims in an existing arbitration agreement.
We also anticipate potential changes to rules governing the use of mandatory arbitration agreements at the federal legislative level, particularly following the outcome of the November 2024 elections.
Given the complexities of the law regarding mandatory arbitration agreements, employers are advised to consult their trusted legal counsel to help them navigate these complex issues. The Employment Law team at Gordon Rees Scully Mansukhani is here to help.
[1] The Federal Arbitration Act generally applies to businesses involved in interstate commerce. 9 U.S.C. § 1.