The Return of AB51: Ninth Circuit Lifts Injunction on California’s Anti-Arbitration Law Finding that the Law’s Prohibition on Mandating Employment Arbitration is Not Entirely Preempted by the Federal Arbitration Act

This past week, the Ninth Circuit Court Appeal, in Chamber of Commerce of the United States v. Bonta, ___ F. 4th ____ (9th Cir. 2021) lifted a district court injunction to AB51 – the controversial California law prohibiting employers from mandating arbitration as a term and condition of employment after January 1, 2020. At the same time, the Ninth Circuit held that the criminal and civil sanctions for violating AB51 are preempted by the Federal Arbitration Act (“FAA”) for arbitration agreements covered under the FAA. The decision leaves a number of unanswered questions as to the status of employer-mandated arbitration agreements in California.

What Exactly Does AB51 (Labor Code 432.6), as Written, Prohibit?

AB 51 was passed in 2019 and codified as Labor Code § 432.6 (“Section 432.6”) and Government Code § 12953 (“Section 12953”). Section 432.6 prohibits employers from imposing as a condition of employment the waiver of any “right, forum or procedure” for alleged violations of the California Fair Employment and Housing Act (“FEHA”) or of the Labor Code. Section 432.6 further prohibits employers from threatening, retaliating, or discriminating against any applicant or employee for refusing to consent to such waiver. A violation of Section 432.6 is a misdemeanor punishable by up to six months in jail and/or a fine of up to $1,000.00. A violation of 432.6 is also a violation of the FEHA, subjecting employers to potential investigation by the Department of Fair Employment and Housing (“DEFH”) and lawsuits under the FEHA by either the DFEH or the aggrieved individual.

While arbitration agreements are not expressly mentioned, Section 432.6 unquestionably prohibits employers from requiring employees to agree to an arbitration agreement as a condition of employment. As the Ninth Circuit points out in Chambers of Commerce decision, Section 432.6 reaches other types of waivers as well including non-disparagement clauses and non-disclosure agreements.  Section 432.6 does not, however, invalidate an arbitration agreement that is otherwise enforceable under the FAA.

What is the Status of Employers Mandating the Use of Arbitration Agreements After the U.S. Chamber of Commerce Decision?

Following the U.S. Chamber of Commerce decision, employers cannot mandate the use of arbitration agreements as a condition of employment in California. However, employers and employees may still voluntarily enter into an arbitration agreement so long as it was truly voluntary.

What is now uncertain following the Ninth Circuit decision is the potential consequences for violating Section 432.6. The mechanisms for enforcing AB51 – criminal and civil sanctions – were held preempted by the FAA (and thus unenforceable) as applied to executed arbitration agreements covered under the FAA. As Judge Ikuta noted in her dissent, describing the decision as a “too-clever-by-half-workaround,” the holding is that AB51 can make offering the employee an arbitration agreement as a condition of employment unlawful, even though the agreement is lawful and enforceable once ..executed.

Is the U.S. Chamber of Commerce Decision the Final Word on the Enforceability of AB51?

The U.S. Chamber of Commerce decision may not be the final word on the enforceability of AB51. There is a possibility that the Ninth Circuit could overturn itself through en banc review where the matter is heard before a panel of 11 judges of the Ninth Circuit who could overturn the decision of the initial three-judge panel. Given the strong dissent issued by Judge Ikuta, who found the majority opinion to abet California’s efforts to evade the FAA, en banc review seems likely. There is also the possibility of the U.S. Supreme Court accepting review of the case and overturning the Ninth Circuit decision.

With continued uncertainty, until the landscape on the enforceability of AB51 crystalizes, employers seeking to use employment arbitration agreements in California should consult with experienced employment counsel.

If you have questions or concerns about AB51, please contact the Rogers Joseph O’Donnell attorney with whom you regularly work or a member of our employment law team at employmentlaw@rjo.com.

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