Publication Details

Special Alert: California Law Barring Mandatory Arbitration of Employment Disputes Preempted by the FAA (Again)

Feb 15, 2023 | Related Attorneys Katherine M. McCray, Michael S. Kalt, Emily J. Fox, Lois M. Kosch | Topic: Employment

In the latest chapter of a dizzying judicial story, a divided panel of the Ninth Circuit Court of Appeals issued a decision today finding that AB 51 (the California law prohibiting employers from requiring employees to arbitrate employment disputes) is preempted by the Federal Arbitration Act (FAA) and thus unenforceable as to arbitration agreements covered by the FAA. The bottom line for California employers is that there is no currently-enforceable ban on mandatory arbitration agreements covered by the FAA. However, this is likely not the end of the story, and employers should stay tuned for further developments.

Background and History Leading up to the Decision

This case (Chamber of Commerce of the United States of America v. Bonta) arises from the latest in a long line of California legislative attempts to limit an employer’s ability to require its employees to arbitrate employment-related disputes. Many prior attempts have been thwarted by the FAA, a federal law whose purpose is to ensure that private arbitration agreements are enforced according to their terms. In recent years, the FAA has been applied to preempt (and thus invalidate) state laws that make arbitration agreements unenforceable. In 2019, California enacted AB 51, a bill which was expressly designed as an end-run around the FAA. The law created Labor Code Section 432.6, which purports to do several things:

  • First, it prohibits employers from requiring employees or applicants to enter mandatory arbitration agreements related to resolution of disputes under the Fair Employment and Housing Act (FEHA) or the Labor Code.
  • Second, it prohibits employers from retaliating or discriminating against anyone who refuses to enter an arbitration agreement.
  • However, the statute states it is not intended to invalidate any arbitration agreements that are otherwise enforceable under the FAA.

Labor Code section 433 makes violation of this new law a misdemeanor, punishable by up to six months’ imprisonment and/or a fine up to $1,000. Government Code section 12953 (also enacted by AB 51) makes violation of Section 432.6 an unlawful employment practice. Other provisions of the Government Code create civil sanctions for unlawful employment practices, including investigation by the Department of Fair Housing and Employment (DFEH) and potential civil litigation brought by the DFEH or by the aggrieved individual. And Section 432.6 itself provides that a prevailing plaintiff is entitled to attorneys’ fees and costs, as well as injunctive relief and any other remedies available.

However, before AB 51 went into effect, a federal district court granted a preliminary injunction prohibiting the state of California from enforcing the law as it applies to arbitration agreements covered by the FAA, finding that the law’s challengers were likely to succeed on their claim that the FAA preempted the law.

On September 15, 2021, a panel of the Ninth Circuit Court of Appeals disagreed and vacated a significant part of the preliminary injunction. But then, after the Chamber of Commerce asked the full Ninth Circuit to review the decision en banc, the original panel withdrew its original opinion.

Today’s Decision

Today, the original panel of the Ninth Circuit issued a new decision coming to the opposite conclusion and affirming the district court’s order entering a preliminary injunction. In so doing, the Ninth Circuit concluded that the FAA preempts AB 51, because the California law stands as an “unacceptable obstacle to the accomplishment and execution of the full purposes and objectives of Congress” in enacting FAA. Essentially, the court stated that the FAA’s purpose is to promote arbitration, and AB 51 runs afoul of that purpose because it discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement.

What is Next for This Case?

It is possible the State of California may seek further review of this decision – either by seeking “en banc” review by the full Ninth Circuit Court of Appeals or by asking the U.S. Supreme Court to weigh in. It is also possible the California legislature may go back to the drawing board and attempt to fashion a different restriction on employment arbitration agreements. We will continue to monitor the case and any legislative changes and provide updates regarding significant developments.

What Does This Mean for California Employers?

The preliminary injunction remains in effect, barring the State of California from enforcing AB 51 as to arbitration agreements covered by the FAA. In general, the FAA applies to any transaction involving interstate or foreign commerce, but does not cover employment contracts for seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. Thus, California employers can probably require employees and applicants to enter into arbitration agreements but should consult counsel to discuss the applicability of the FAA, the terms of any arbitration agreements, and any remaining risks. Employers should also stay tuned for any further changes in the law regarding arbitration.

If you have questions about how these new guidelines may affect your business, please contact us.

Wilson Turner Kosmo’s Special Alerts are intended to update our valued clients on significant employment law developments as they occur. This should not be considered legal advice.