Ninth Circuit Panel Strikes Down California Legislature’s Latest Attack on Employment Arbitration Agreements
Recently, California’s legislature and judiciary have attempted to prohibit or significantly limit arbitration clauses in employment agreements on a number of occasions. In response, Federal courts, including the U.S. Supreme Court, have rebuked these attempts dating back to 1987 on the basis that they were preempted by the Federal Arbitration Act (“FAA”).
With this backdrop in mind, in 2019, California enacted Assembly Bill 51 (“AB 51”) in another attempt to attack arbitration clauses in employment agreements. Rather than attack the enforceability of arbitration agreements per se, AB 51 instead attacked the formation of arbitration agreements.
Specifically, AB 51 prohibited employers from imposing contractual provisions requiring the mandatory arbitration of Fair Employment and Housing or California Labor Code claims as a condition of employment, continued employment, or receiving an employment benefit. Employers who violated these prohibitions would be subject to both criminal and civil penalties.
However, in an attempt to avoid FAA preemption, AB 51 provided that agreements that were formed in violation of AB 51 would still be enforceable under FAA. As a result, AB 51 created the curious result where an employer could be subject to criminal penalties for mandating arbitration even though the agreement itself was ultimately enforceable.
In response, a number of trade and commerce groups challenged AB 51’s constitutionality in Chamber of Commerce, et al. v. Bonta, et al. On Feb. 15, a divided panel of the United States Court of Appeals for the Ninth Circuit held that AB 51 was preempted by the FAA. The State of California’s key argument was that AB 51 did not violate the FAA because it only addressed the formation of arbitration agreements and did not attack the ultimate enforceability of such agreements. While the 9th Circuit acknowledged that AB 51 did not attack the ultimate enforceability of arbitration agreements per se, the majority held that AB 51’s attack on the formation of arbitration agreements nevertheless violated the FAA. Relying on prior Supreme Court precedent, the 9th Circuit held that “state rules that burden the formation of arbitration agreements stand as an obstacle to the FAA” and that no current precedent “suggests that a state rule targeting only the formation of arbitration agreement falls outside of the FAA’s preemptive scope.” In short, the 9th Circuit held that AB 51 was preempted because it discourages the formation of arbitration agreements.
The 9th Circuit decision is unlikely to be the final chapter in this saga. It is very possible that the 9th Circuit will choose to review the issue en banc (i.e., a review by eleven randomly selected 9th Circuit judges) and may reach a different conclusion. In either event, it is also possible that the Supreme Court will ultimately rule on AB 51’s validity. Also, the California legislature may try to craft a different statute in a further attempt to sidestep the FAA.
In terms of what this decision means for employers and next steps:
- California law does not currently prohibit mandatory arbitration in the employment context.
- Arbitration agreements in California remain subject to challenge-based procedural and/or substantive unconscionability.
- Employers should review their arbitration agreements on at least an annual basis to account for new legislation or court decisions.
Clark Hill PLC will continue to monitor these developments and provide updates. For more information, please contact Rafael Nendel-Flores or the Clark Hill attorney with whom you regularly work.
The views and opinions expressed in the article represent the view of the author and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.
2024 Cybersecurity and Data Privacy Laws Summit Chicago
This event will include a panel discussion with expert industry leaders, offering a deep dive into the most pressing issues and advancements in AI and data privacy laws. You’ll gain critical knowledge and explore the implications of AI in legal and privacy domains so you can update your practices to reflect the highest standards of data stewardship.
Webinar: A Cookieless Future and Promise of PETs: A Primer on Privacy Enhancing Technologies
This webinar will explore PETs – we will define what they are, what problems PETs exist to address, and emerging PET standards including the National Institute of Standards and Technology (NIST) draft guidance on how to evaluate PET effectiveness. We will provide specific PET use cases and discuss how PETs may be utilized to address the phase out of third party cookies by certain browsers for purposes of targeted advertising.
WEBINAR: Cybersecurity Resilience in Law Firms
This webinar focuses on law firms seeking useful information about robust cybersecurity strategies to protect their clients, maintain ethical and legal compliance, and fortify their digital infrastructure.