AB 51 Ban On Mandatory Arbitration

Tue, 11/09/21

Ab 51 Ban On Mandatory Arbitration In Employment Is Back (Kind Of, And Probably Not For Long)

9th Circuit Court Lifts Restraining Order on California Implementing a Ban on Mandatory Arbitration as not being preempted by the Federal Arbitration Act

In a somewhat surprising (and definitely creative) decision, a split 9th Circuit Court panel ruled that certain portions of California Assembly Bill 51 (“AB 51”) from 2019 were not preempted by the Federal Arbitration Act (“FAA”). The ruling, made on September 15, 2021, has the potential  to re-shape the law concerning mandatory employment arbitration agreements in California. However, further challenges and review of the law remain.

AB 51 was signed into law by Governor Gavin Newsom almost two years ago, but had been preliminarily enjoined (i.e., stopped, prohibited, etc.) from enforcement by the U.S. District Court, Eastern District of California (Chamber of Commerce v. Becerra, et al., (E. Dist. Cal. 2020) 438 F.Supp.3d 1078, 1108) on February 7, 2020. This is because the federal courts believe that it ran afoul of existing federal law and was, thus, preempted.

AB 51 added California Labor Code, section 432.6, which prohibits employers from requiring any employee or applicant to “waive any right, forum or procedure for a violation of any provision” of FEHA or the entire Labor Code, including “the right to file and pursue a civil action” in “any court,” “as a condition of employment, or the receipt of any employment-related benefit.” AB 51 further adds Section 12953 to the California Government Code, which makes it unlawful for an employer to violate Labor Code, section 432.6. AB 51 explicitly grandfathered existing arbitration agreements otherwise enforceable under the FAA, even if they would have or do violate AB 51.

In enjoining its enforcement, the district court had found:  “AB 51 [i.e., Labor Code section 432.6] is preempted by the FAA because it singles out arbitration by placing uncommon barriers on employers who require contractual waivers of dispute resolution options that bear the defining features of arbitration.”  (Id. at p. 1099.) That decision was appealed on February 20, 2020.

Now, in last week’s 2-1 decision, the 9th Circuit Court panel reversed the district court’s injunction, in part, and permitted enforcement of Labor Code, section 432.6, while the case proceeded. Specifically, the panel upheld the portion of AB 51 that prohibits employers from requiring employees to execute an arbitration agreement as a condition of employment and lifted a district court’s injunction that barred the law from taking effect. The majority of the panel opined that AB 51 and the FAA do not conflict given that the California law does not allow for the invalidation or nonenforcement of an arbitration agreement and does not prohibit outright the arbitration of a particular claim. The court stated that because AB 51 regulates pre-agreement behavior, it does not run afoul of the FAA’s purpose because it does not undermine the validity or enforcement of an arbitration agreement as set forth under the FAA. According to the court, pre-agreement conduct is not subject to the FAA.

The panel did uphold FAA preemption of the imposition of criminal and civil penalties for the violation of AB 51 to the extent that they apply to executed arbitration agreements.

There was a spirited dissent by the Honorable Sandra Ikuta. Judge Ikuta began it by stating, “Like a classic clown bop bag, no matter how many times California is smacked down for violating the [FAA], the state bounces back with even more creative methods to sidestep the FAA.” She found this new circumvention to be in line with California’s prior hostility to arbitration that led to the FAA’s enactment in the first place.

Judge Ikuta also identified an apparent contradiction within the ruling that renders it absurd: while the law prohibits an employer requiring an employee to sign an arbitration agreement, if the employee signs the agreement anyway, AB 51 no longer applies. That is because upon signing, the question turns to the enforceability of the agreement, which is governed under the purview of the FAA. In other words, if the employer successfully forces employees into arbitration against their will, the employer is safe, but only if those efforts fail, will the employer be in violation of the law.

Judge Ikuta also noted that the majority’s ruling created a split with the First and Fourth Circuits. Those courts have held that “too clever-by-half” workarounds to block the formation of arbitration agreements are preempted by the FAA, just as much as laws that explicitly block their enforcement. That split suggests that the parties opposing AB 51 may not only seek an en banc review of the case (i.e., a review by all of the judges on the circuit, instead of just three), but that they will also seek review by the Supreme Court of the United States.

The U.S. Chamber of Commerce, the losing party in the appellate action, will likely seek one-if-not-both reviews, including a request to immediately stay the effect of the 9th Circuit holding. The decision at issue was published on September 15, 2021, but is not effective until the court issues its formal mandate. A stay would effectively extend the uncertainty that employers face regarding mandatory arbitration agreements until the en banc or Supreme Court decision.

Unless an extension for time has been granted, the U.S. Chamber has 14 days to file a petition for rehearing or rehearing en banc. For the Supreme Court to review the 9th Circuit decision, a petition for certiorari is due 90 days from the date of the decision or from the order denying a petition for rehearing, whichever is later. If the case is appealed and accepted by the U.S. Supreme Court, the decision is likely to be reversed (in the words of Justice Ikuta, another “smack down” for violating the FAA.) The question becomes: what can employers do in the meantime?

Next Steps for Employers

Arbitration agreements entered into before January 1, 2020, are not covered by Section 432.6.  For arbitration agreements entered into on or after January 1, 2020, up to September 15, 2021 (the date of the Ninth Circuit’s opinion), employers can (1) continue enforcing the agreements or (2) not enforce the agreements unless and until the law is enjoined pending appeal. Given that a review and stay are likely, a wait and see approach may be best.

We will continue to monitor those legal machinations as they take place in the coming days. 

With respect to new employees, there is no one-size-fits-all approach. How employers with choose to respond to the Ninth Circuit’s ruling will depend on their organization’s risk tolerance. Options to consider include:

  • Staying the course based on the assumption that AB 51 will, ultimately, be held as preempted by the FAA (e.g., by either an en banc decision of the 9th Circuit or by way of the Supreme Court of the United States, etc.). This option risks potential criminal and civil liability.
  • Suspending arbitration programs until more clarity on AB 51 is provided.
  • Continue offering arbitration agreements to applicants but make them voluntary until the law is enjoined or struck down. This option would provide the lowest risk of liability.

If you have any legal questions or concerns, please call Dawn Ross, Arif Virji, Samantha Pungprakearti, or Justin Hein at Carle, Mackie, Power & Ross LLP at (707) 526-4200.

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