Ninth Circuit Vacates Preliminary Injunction Against Enforcement of Mandatory Employment Arbitration Agreement Ban

Update Feb. 21, 2023

On Feb. 15, 2023, the Ninth Circuit issued an opinion affirming the District Court’s preliminary injunction on the grounds that AB 51 is preempted by the FAA.  For more on that decision, please see our legal alert on AB 51 here.

__________________________________________________________________________

This morning, in its decision in Chamber of Commerce v. Bonta, No. 20-15291, the Ninth Circuit Court of Appeals vacated a January 2020 preliminary injunction against enforcement of AB 51, a 2019 California law effectively banning mandatory employee arbitration agreements. With the preliminary injunction vacated, the State of California is no longer barred from enforcing this law.

The History of AB 51 and the Preliminary Injunction

As we previously reported, AB 51 adds section 432.6 to the Labor Code and section 12953 to the Government Code, which together prohibit employers from requiring an employee, as a condition of employment, continued employment, or receipt of employment-related benefits, to waive any right, forum, or procedure to pursue a claim under the California Fair Employment and Housing Act or the Labor Code. In other words, AB 51 bans mandatory employment arbitration agreements for employment-related claims.

In January 2020, a federal judge issued a preliminary injunction against enforcement of AB 51, on the grounds that section 432.6 is preempted by the Federal Arbitration Act (“FAA”). The order specifically enjoined the California Attorney General, the California Labor Commissioner, the Secretary of the California Labor and Workforce Development Agency (“LWDA”), and the Director of the California Department of Fair Employment and Housing (“DFEH”) from enforcing (1) Labor Code sections 432.6(a), (b), and (c) “where the alleged ‘waiver of any right, forum, or procedure’ is the entry into an arbitration agreement covered by the Federal Arbitration Act,” and (2) Government Code section 12953 “where the alleged violation of ‘Section 432.6 of the Labor Code’ is entering into an arbitration agreement covered by the FAA.”

The Ninth Circuit’s Decision

In a 2-1 decision, the Ninth Circuit reversed in part the trial court’s decision, vacated the preliminary injunction, and remanded the case for further proceedings. The court held that section 432.6 is not preempted by the FAA’s guarantee “to have consensual agreements to arbitrate enforced according to their terms” because section 432.6 is “solely concerned with pre-agreement employer behavior.” In the majority’s view, the FAA was not intended to preempt state laws requiring that agreements to arbitrate be voluntary. Section 432.6 does nothing more than “codify what the enactors of the FAA took as a given: that arbitration is a matter of contract and agreements to arbitrate must be voluntary and consensual. As we read California Labor Code § 432.6, the state of California has chosen to assure that entry into an arbitration agreement by an employer and employee is mutually consensual and to declare that compelling an unwilling party to arbitrate is an unfair labor practice.”

That said, the Ninth Circuit did find that the civil and criminal sanctions attached to a violation of section 432.6 do run afoul of the FAA, and therefore are preempted, because the “accompanying enforcement mechanisms that sanction employers for violating § 432.6 necessarily include punishing employers for entering into an agreement to arbitrate.” Thus, Government Code section 12953 and Labor Code section 433 are preempted to the extent they apply to executed arbitration agreements covered by the FAA.

Practical Implications

This case may very well end up before the United States Supreme Court. As dissenting Judge Ikuta wrote, “Like a classic clown bop bag, no matter how many times California is smacked down for violating the Federal Arbitration Act (FAA), the state bounces back with even more creative methods to sidestep the FAA.”

In the meantime, employers should immediately review their employment arbitration agreements and practices. As we recommended when AB 51 was signed, although employers may continue seeking to enter into voluntary arbitration agreements with employees, they must ensure that such efforts are not a prerequisite for employment, continued employment, or receipt of employment-related benefits. It will be essential that efforts to obtain an employee’s agreement to arbitrate claims be made in writing, and that the writing plainly indicates that the employee may choose not to enter into the agreement and that the employee will not be retaliated against in the event he or she chooses not to agree.

Disclaimer: Please contact your Payne & Fears attorney for current guidance on the subject matter of this article.