9th Circuit Upholds California Bill Banning Mandatory Arbitration in Employment – Likely Headed for Supreme Court
In 2019, the California legislature passed AB 51, a law prohibiting employers from requiring employees to agree to arbitration as a condition of employment. Before the law went into effect, the U.S. Chamber of Commerce—a coalition of employers—challenged the law in federal court, arguing that it violated the Federal Arbitration Act (the “FAA”). The FAA effectively requires arbitration agreements to be treated the same as any other contract. That is, under the FAA arbitration agreements are not allowed to be singled out or targeted for any special rules or heightened scrutiny.
Reviewing the challenge, the federal court for the Eastern District of California ruled that the challenge was likely to be successful and granted a temporary injunction barring the law from being enforced. The State of California appealed the ruling to the 9th Circuit, who disagreed with the Eastern District and upheld the law.
Affirming the law’s validity in a 2-1 split decision, the 9th Circuit reasoned that AB 51 did not in fact separate arbitration agreements out for unique treatment in violation of the FAA, but rather simply prohibited mandatory arbitration. In the majority’s view, the law did not address the “enforcement” of arbitration agreements, and thus did not violate the FAA.
Calling the majority decision “clearly wrong” and AB 51 “too clever by half,” the dissent described AB 51 as yet another “blatant attack” on the FAA. Both the Eastern District’s opinion and the dissent will likely provide strong encouragement for the Chamber of Commerce to appeal the matter to either an en banc review before the 9th Circuit, or to the U.S. Supreme Court, where it is likely certainly headed.
In the meantime, the law is now back before the Eastern District pending another appeal, where it was remanded for further proceedings. Given the uncertain nature of the law, employers should consider whether to utilize arbitration provisions compliant with the new law should it ultimately survive judicial review. Such policies would need to allow employees the option of electing arbitration, and would potentially consider separate incentives to enter into an arbitration agreement. If allowed to stand, AB 51 would operate as a defense to enforcement of mandatory arbitration agreements, allowing a prevailing plaintiff to recover their attorneys’ fees.