December 7, 2021

Volume XI, Number 341

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December 06, 2021

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Ninth Circuit Decision Creates Uncertainty for California Employers Using Mandatory Arbitration Agreements

On September 15, 2021, the Ninth Circuit, in a 2-1 split decision, partially upheld a California law passed in 2019 governing the use of mandatory arbitration agreements by employers in California.  The state law, AB 51 (codified as California Labor Code section 432.6), prohibits employers in California from requiring employees to agree to arbitration as a condition of employment.  Before AB 51 went into effect on January 1, 2020, a group of employers and the U.S. Chamber of Commerce challenged the law in federal district court as preempted by the Federal Arbitration Act (“FAA”), and the federal court issued a preliminary injunction on January 31, 2020 temporarily preventing enforcement of the law.

A Ninth Circuit panel reviewing the district court’s decision on appeal disagreed, vacating the preliminary injunction and holding that the provisions of AB 51 prohibiting employers in California from requiring employees to agree to arbitration as a condition of employment and from retaliating against applicants who refuse to sign an arbitration agreement are not preempted by the FAA. Curiously and somewhat confusingly, the Ninth Circuit distinguished in its analysis between an employer’s conduct before and after an employee signs an arbitration agreement.  The Court held that, while the FAA does not preempt AB 51 insofar as AB 51 regulates an employer’s pre-signing conduct (including an employer’s requiring that an employee sign an arbitration agreement as a condition of employment), the FAA does preempt AB 51’s attempt to prevent enforcement of executed arbitration agreements (even those that are mandatory and, therefore, consummated in violation of AB 51) by imposing civil and criminal penalties on employers as punishment for entering into arbitration agreements otherwise enforceable under the FAA. 

The upshot for California employers is that the ruling does not impact the enforceability of executed arbitration agreements, including existing mandatory arbitration agreements. However, for new employees or those who have not already signed an arbitration agreement, the Court’s decision preserves AB 51’s ban on employers requiring that such employees sign arbitration agreements as a condition of employment, and continues to prohibit employers from retaliating against an employee for refusing to do so.  Although the ruling eliminates the imposition of civil and criminal penalties in connection with an executed arbitration agreement, civil and criminal penalties could still be imposed if the employer were to terminate, refuse to hire or otherwise retaliate against an employee or applicant because they refused to sign an arbitration agreement. 

Following the Ninth Circuit’s decision, AB 51 will go back to the district court pending another appeal, where the case has been remanded for further proceedings.  However, the Ninth Circuit’s decision does not immediately allow for enforcement of AB 51.  The Court’s decision takes effect only once the Court issues its “mandate” relinquishing jurisdiction over the case.  Additionally, the U.S. Chamber of Commerce has been granted an extension of time to file a Petition for Rehearing en banc of the Ninth Circuit’s decision, and issuance of the Ninth Circuit’s mandate is likely to automatically stay if and when such a Petition is filed.  Moreover, the U.S. Chamber of Commerce may ultimately file a Petition for Certiorari to the U.S. Supreme Court, in which case the Chamber may move to stay issuance of the Ninth Circuit’s mandate pending review by the U.S. Supreme Court.

Practically speaking, employers in California are left in limbo while they await final resolution of this case and a final determination as to AB 51’s constitutionality.  Employers with existing mandatory arbitration agreements in place and those who wish to continue to require their employees to enter into arbitration agreements as a condition of employment should reach out to employment counsel to discuss their various options and the associated risks.  

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume XI, Number 273
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About this Author

Lindsay L. Ryan Principal Polsinelli Labor and Employment Employment Litigation
Partner

Lindsay is committed to providing reliable counsel to strategically solve client matters and address their litigation needs. Clients rely on Lindsay to develop solutions and effective arguments with respect to their complex legal challenges. Her practice focuses on advising employers on compliance with both state and federal requirements for disability accommodation, leaves of absence, wage and hour, harassment and discrimination complaints, workplace investigation, reductions in force, disciplinary actions and terminations. She represents clients in all forums, including state and federal...

310-203-5333
Associate

Grant Horton brings a thorough and pragmatic approach to assisting clients with their litigation matters. He works with seasoned Polsinelli attorneys to provide concise and articulate legal counsel that aligns with clients’ business objectives, which vary from company to company, but typically include compliance with the law, avoidance of litigation and appropriately positioning themselves to defend litigation when necessary.

Prior to joining the firm, Grant was a Polsinelli summer associate. His previous experience also includes working as a litigation paralegal at a full-service...

310-229-1310
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