A divided Ninth Circuit panel has held that employer attempts to impose mandatory arbitration agreements on applicants or employees can be criminally and civilly penalized in California, and thus struck down an injunction stopping California officials from enforcing AB 51. According to the panel’s decision, businesses are once more barred from requiring workers to enter into agreements to arbitrate FEHA and Labor Code claims. Chamber of Commerce of the U.S. v. Bonta.

The Facts—AB 51

Signed into law by Governor Newsom on October 10, 2019, California Assembly Bill 51 subjects employers to criminal misdemeanor charges, as well as civil sanctions, for mandating arbitration agreements of certain claims in employment contracts. Under AB 51, which added Section 432.6 to the Labor Code, employees and job applicants cannot be contractually barred from suing employers in court for violations of the Fair Employment Housing Act or provisions of the Labor Code. Employers who require arbitration agreements as a condition of employment could face up to six months imprisonment as well as face numerous state investigations and private litigation. The law exclusively focuses on pre-arbitration agreement behavior and, by its terms, does not bar enforcement of arbitration agreements.

The District Court’s Preliminary Injunction

Soon after AB 51’s enactment, business associations led by the United States and California Chambers of Commerce sought a preliminary injunction to stop various California agencies from enforcing AB 51, on the ground that AB 51 is preempted in its entirety by the Federal Arbitration Act (“FAA”). The FAA mandates that written arbitration agreements, if meeting the legal elements of a contract, are enforceable by their terms, as much as any other contracts would be, notwithstanding some state law to the contrary.

In February 2020 a federal judge in the Eastern District of California issued a detailed decision granting the requested preliminary injunction, reasoning that AB 51 discriminates against arbitration agreements and thereby interferes with the FAA’s objectives. The judge found that the civil and criminal penalties associated with AB 51 were preempted as well. The judge enjoined the California Attorney General and relevant state officials from enforcing AB 51 and thus prevented these officials from penalizing employers for mandating arbitration agreements in employment contracts.

The Ninth Circuit’s Decision

On September 15, 2021, in a 2-1 decision, a Ninth Circuit panel struck down most of the district court’s order, holding that AB 51 is largely not preempted by the FAA.

The panel’s majority opinion first addressed whether AB 51 is preempted, in whole or in part, by the FAA. The majority opinion agreed with the district court that imposing criminal and civil penalties on employers because they had arbitration agreements would create an obstacle to the purposes of the FAA, but that these penalties are not preempted insofar as they apply only to pre-agreement behavior. In other words, the majority opinion reasoned that employers cannot be penalized, criminally or otherwise, for executing a consensual arbitration agreement, but they can be penalized for making an arbitration agreement a condition of employment. The majority read AB 51’s key focus to be whether arbitration agreements are consensual, which is an issue that the FAA leaves to state law.

Judge Ikuta, predicting a Supreme Court reversal of the majority’s decision, issued a blistering dissenting opinion. The dissent calls AB 51 a “blatant attack on arbitration agreements” and argues that the majority opinion conflicts with the Supreme Court’s guidance in Kindred Nursing Centers and creates a circuit split with the First and Fourth Circuits. The dissent highlights precedent favoring arbitration agreements and places the enactment of AB 51 in California’s long history of unconstitutional attempts to stifle arbitration agreements. AB 51, the dissent says, can criminalize even the offer of a valid and enforceable arbitration agreement, something that is squarely FAA-preempted both for disfavoring valid arbitration contracts and for obstructing the purpose and objectives of the FAA.

The panel decision would remand the matter to the district court.

What Chamber of Commerce Means for Employers

Under the panel decision, while executed arbitration agreements can be valid and enforceable, California officials can penalize employers for making such agreements a condition of employment. When entering into employment agreements, employers not inclined to challenge the constitutionality of AB 51 must steer clear of mandating arbitration agreements and ensure that any such agreements are consensual between the employer and the employee.

Employers should carefully monitor this case as it is likely that the Chambers of Commerce will seek to have the three-judge panel decision reviewed by a larger panel of Ninth Circuit judges, or by the Supreme Court. The review process could stay the effect of the panel’s decision.