Practical Answers to Employment Law Issues
October 05, 2021 - Legislation

Not So Fast: Ninth Circuit Resurrects Ban On Mandatory Employment Arbitration Agreements

Not So Fast: Ninth Circuit Resurrects Ban On Mandatory Employment Arbitration Agreements

A split panel of the Ninth Circuit vacated in part a preliminary injunction barring enforcement of AB 51, the California law banning mandatory employment arbitration agreements.[1]  But the Ninth Circuit found that the penalties for violation of this provision are preempted by the Federal Arbitration Act (FAA), so the enforcement path remains unclear.

How’d We Get Here?

AB 51 adds California Labor Code section 432.6, which bars employers from mandating that an employee agree to an arbitration agreement as a condition of employment.  As we explained in our previous Commentary, on February 2020, a federal district court ruled that the law is preempted by the FAA because it puts arbitration agreements on “unequal footing with other contracts,” had the impact of disfavoring arbitration contracts, and impeded the objective of the FAA.  The district court enjoined enforcement of AB 51, and the Attorney General appealed.

What Did the Ninth Circuit Rule?

On September 15, 2021, the Ninth Circuit reversed the district court’s ruling in part.  A divided panel found that AB 51 concerns “pre-agreement behavior,” which it concluded is not regulated by the FAA.  The majority further reasoned that the purpose of AB 51 is to ensure that arbitration agreements are consensual, which is consistent with the underpinnings of the FAA.

At the same time, the majority affirmed the district court’s decision to the extent that it found the civil and criminal penalties for violating AB 51 are preempted by the FAA.  The majority found that these penalties are imposed on employers for entering into arbitration agreements, which is inconsistent with and preempted by the FAA.

Judge Ikuta vehemently dissented, calling out AB 51 as only the latest anti-arbitration law passed by the California legislature that is preempted by the FAA.  Judge Ikuta rejected the majority’s attempt to set aside established Supreme Court precedent indicating that the FAA does apply to pre-arbitration conduct that interferes with arbitration agreement formation.  The Judge also explained that the majority’s focus on consensual agreements ignores well-established law that “a contract may be ‘consensual,’ as that term is used in contract law, even if one party accepts unfavorable terms due to unequal bargaining power.”[2]

What Happens Next?

We expect what happens next is what typically happens with arbitration laws—more appeals.  Judge Ikuta’s reference to the majority opinion’s creation of a circuit split and discussion of how the majority opinion is inconsistent with Supreme Court precedent will play into a request for rehearing en banc.  A petition for Supreme Court review may follow.  For now, the district court’s injunction is still in effect.

We will continue to monitor the lawsuit and report on further developments.

[1] Chamber of Commerce of the U.S. v. Becerra, No. 20-15291, __ F.4th __, 2021 WL 4187860 (9th Cir. Sept. 15, 2021).

[2] Id. at *17.