The Ninth Circuit Holds FAA Preempts State Ban on Mandatory Employment Arbitration Agreements

On February 15, 2023, a three-judge panel for the 9th Circuit Court of Appeals held that the Federal Arbitration Act (“FAA”) preempts Assembly Bill 51 (“AB 51”), a 2019 bill that would have prohibited employers from mandating arbitration agreements as a term and condition of employment after January 1, 2020.  

History of AB 51 

Over the years, the California legislature has attempted to craft legislation that would restrict employers from requiring arbitration agreements as a condition of employment.  However, Courts have repeatedly held that the FAA preempts such state law regulations.  The California legislature attempted to avoid FAA preemption by drafting AB 51, which criminalized the formation of an arbitration agreement but nonetheless allowed the agreement to be enforceable.  AB 51 prohibited employers from requiring employees and job applicants to consent to arbitrate any claims they may have under the Labor Code or California Fair Employment and Housing Act (“FEHA”) as a condition of employment.  A violation of AB 51 would have imposed penalties on the employer, including a misdemeanor punishable by up to six months in jail and/or a fine of up to $1,000.00.  A violation of AB 51 would also subject employers to a potential investigation by the Department of Fair Employment and Housing (“DEFH”) and potential civil lawsuits under FEHA.  However, any arbitration agreements entered would nonetheless be enforceable under AB 51.

Challenge to AB 51 under US Chamber of Commerce v. Bonta

After Governor Newsom signed AB 51 into law, a coalition of business groups headed by the US Chamber of Commerce filed a lawsuit to challenge the law and enjoin the enforcement of AB 51.  The district court issued a preliminary injunction temporarily preventing the enforcement of the law based on a finding that AB 51 was likely preempted by the FAA.  The State appealed this court order.  In the first round of the appeal, the Ninth Circuit held that while the criminal and civil sanctions imposed for violations of AB 51 was preempted by the FAA, the rest of the statute was not preempted, thus partially vacating the district court’s preliminary injunction order.  However, following the US Supreme Court’s decision in Viking River Cruises, Inc. v. Moriana, the Ninth Circuit decided to withdraw its prior opinion and grant a rehearing.  

On February 15, 2023, the Ninth Circuit issued its opinion following the rehearing and ruled that the FAA indeed preempts AB 51.  The court reasoned that the threat of civil and criminal liabilities intends to have a deterrent effect. Thus, the provisions of AB 51 discriminate against arbitration, which is adverse to the FAA’s policy favoring arbitration agreements.  The Ninth Circuit further stated that it mattered not that AB 51 did not affect the validity and enforceability of employment arbitration agreements.  The Ninth Circuit reasoned that because AB 51 impeded individuals’ ability to form arbitration agreements, it hindered the FAA’s policy favoring arbitration just as much as a law that undermined the enforceability of an already existing arbitration agreement.  

Employers wanting to know more about the practical implications of the most recent Ninth Circuit decision on the use of mandatory arbitration agreements should contact their legal counsel.