On Feb. 15, 2023, the Ninth U.S. Circuit Court of Appeals affirmed a district court’s ruling that the Federal Arbitration Act (FAA) preempts California Assembly Bill 51 (AB 51), which made it a criminal offense for an employer to require an applicant or employee to agree to arbitration of claims as a condition of hire or continued employment.
The state law prohibited employers from requiring an employee or applicant to enter into an agreement to arbitrate certain claims as a condition of employment, or from retaliating against an employee or applicant who refuses to do so. It also barred employers from using an employment contract that required the employee to take an affirmative step to opt out of an arbitration agreement. Under the law, employers who violated its provisions would be guilty of a misdemeanor. However, AB 51 included a provision ensuring that if the parties did enter into an arbitration agreement governed by the FAA, it would be enforceable. Thus, an employer could be subject to criminal prosecution for violating AB 51, but could enforce that agreement once it was executed, if the agreement was governed by the FAA.
AB 51 was scheduled to take effect on Jan. 1, 2020, but on Dec. 9, 2019, the Chamber of Commerce sued the state of California arguing that the FAA preempted AB 51. The district court granted an injunction, finding the Chamber likely to succeed on the merits of its preemption claim. In September 2021, a split Ninth Circuit panel partially upheld and partially struck down the district court’s ruling, holding the FAA did not preempt AB 51 and vacating the preliminary injunction. In August 2022, with a petition for rehearing en banc pending, the Ninth Circuit took the unusual step of withdrawing its September 2021 opinion and granting a panel rehearing.
On Feb. 15, 2023, in a 2-1 decision in Chamber of Commerce v. Bonta, the Ninth Circuit affirmed the district court’s original ruling, holding that AB 51 inhibited the formation of arbitration agreements, hindering the purpose of the FAA. The Ninth Circuit noted AB 51 prohibited employers from requiring individuals to waive their right to bring certain civil actions in any forum. The Ninth Circuit also noted that the threat of criminal and civil liabilities deterred employers’ willingness to exercise their FAA right to enter into arbitration agreements with their employees. As such, the court concluded that AB 51’s penalty-based scheme violated the “ ‘equal-treatment principle’ ” of the FAA, and was the “type of device or formula evincing hostility towards arbitration that the FAA was enacted to overcome.”
As a result of the Ninth Circuit’s ruling, the preliminary injunction barring enforcement of AB 51 will remain in effect with respect to arbitration agreements, and most employers can continue to require most California applicants and employees to enter into employment arbitration agreements. However, this case may not be over, as the state of California could appeal the decision. For now, the Ninth Circuit’s ruling marks a big win for California employers looking to promulgate and enforce employment arbitration agreements.
For questions related to employment arbitration agreements, contact one of the authors or another member of the McGuireWoods labor and employment practice group.