On February 15, 2023, the Ninth Circuit in the Chamber of Commerce of the U.S., et al. v. Bonta, et al., No. 20-15291 (9th Cir. February 15, 2023) issued its highly anticipated opinion regarding California’s Assembly Bill 51 ("AB 51"), which had sought to preclude employers from conditioning employment on an employee’s acceptance of an arbitration agreement.
The Ninth Circuit has now affirmed the District Court’s preliminary injunction of AB 51 in its entirety, meaning that employers can continue to require new employees to execute arbitration agreements as a condition of hire.
Ninth Circuit’s Holding
The Ninth Circuit has upheld a preliminary injunction barring enforcement of AB 51. It held that AB 51 conflicted with the Federal Arbitration Act (“FAA”) and was antithetical to the FAA’s liberal federal policy favoring arbitration agreements. Although the State of California may still apply to reconsider the decision en banc at the Ninth Circuit or appeal to the U.S. Supreme Court, it has a low probability of ultimately prevailing in any subsequent appeal given the Supreme Court’s historic hostility to California’s attempts to circumvent the enforceability of arbitration agreements.
Procedural History
As AB 51 was to take effect January 1, 2020, on December 9, 2019, a group of employers led by the Chamber of Commerce sought an injunction in Federal Court. On February 7, 2020, a Federal district court issued a preliminary injunction against AB 51. That preliminary injunction has remained in full force and effect since its issuance. On February 20, 2020, the State of California appealed the preliminary injunction to the Ninth Circuit Court of Appeals.
On September 15, 2021, a divided Ninth Circuit panel held that the FAA did not completely preempt AB 51, but that the civil and criminal penalties prescribed by AB 51 against employers who mandated arbitration agreements were unenforceable. As a result, the Ninth Circuit initially rendered AB 51 toothless without enjoining the law in its entirety. Nevertheless, the Ninth Circuit’s prior opinion never took effect, leaving the District Court’s preliminary injunction in force.
Following the U.S. Supreme Court’s decision in Viking River Cruises v. Moriana, 596 U.S. ___ (2022), in which the U.S. Supreme Court held that California could not prohibit the arbitration of individual claims asserted under the Private Attorneys General Act ("PAGA"), the Ninth Circuit granted a petition for panel rehearing and vacated its prior opinion. On February 15, 2023, the same divided panel voted to affirm the preliminary injunction and enjoin AB 51 in its entirety rather than only the civil and criminal penalties associated with the bill.
About AB 51 and the Ninth Circuit’s Opinion
Originally, AB 51 applied to arbitration agreements entered into or modified/amended on or after January 1, 2020, to protect employees from forced arbitration. AB 51 was motivated by California’s belief that employers and employees have unequal bargaining power, and that employees should not be forced to accept arbitration as a condition of employment. The bill imposed civil and criminal penalties on employers who required arbitration agreements for new employees. AB 51 injected considerable uncertainty into California’s employment framework, as savvy employers have increasingly conditioned employment on arbitration agreements and class-action waivers.
The Ninth Circuit panel ultimately agreed with the District Court that AB 51 conflicted with the purposes and objectives of the FAA. In previous cases such as Imburgia, Concepcion, and Perry, the Supreme Court has repeatedly struck down state laws and overruled cases that have singled out arbitration agreements for disfavored treatment. Instead, the Supreme Court has held that arbitration agreements must be placed on an equal footing with all other contracts and that arbitration agreements may only be invalidated based on generally applicable contract defenses like fraud, unconscionability, or duress. See Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1426 (2017). The proscription against interference with arbitration agreements extends to laws that seek to prevent the formation of arbitration agreements, like AB 51.
California sought to navigate around previous Supreme Court precedent by criminalizing the act of entering into new, mandatory arbitration agreements while allowing the parties to enforce arbitration agreements once executed. The Ninth Circuit recognized that, if permitted, California’s law could “entirely defeat the FAA’s purpose.” AB 51, therefore, stood as an “unacceptable obstacle to the accomplishment and execution of the full purposes and objectives of Congress” in enacting the FAA.
Conclusion
The Court held that AB 51 was preempted by the FAA and therefore upheld the preliminary injunction against AB 51 in its entirety. The injunction entered is preliminary, but because the Ninth Circuit has already concluded that AB 51 is preempted by the FAA as a matter of law, it is highly likely that a permanent injunction will soon follow. There is little chance that AB 51, as currently drafted, will be revived by the Supreme Court or a further rehearing at the Ninth Circuit.
Best Practices for Employers
This ruling is welcome news for many employers in California, for now. Nevertheless, because there are still myriad defenses that apply to arbitration agreements, employers should still consult with experienced employment counsel to ensure that any agreements are carefully drafted and fully enforceable. In addition, Congress has shown an increasing willingness to carve out exceptions to the FAA in employment contexts, such as with the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021,” which prohibits employers from requiring employees to resolve sexual harassment and sexual assault claims through private arbitration unless the employee voluntarily elects to arbitrate his or her claim. Trusted counsel can ensure that agreements reflect the latest guidance from state and Federal courts. Finally, arbitration agreements can be a double-edged sword, as the costs of arbitration can sometimes be significantly more costly than the cost of litigation in a judicial forum. Therefore, employers should always consult with counsel before mandating or invoking an arbitration agreement.
Gordon & Rees’ Employment Law attorneys, like Brandon Saxon, Jason Goldwater, and Heather Daiza, have significant experience advising and counseling employers of all sizes across various industries on best practices regarding arbitration agreements and the constantly evolving California legal landscape.