On September 15, 2021, a divided panel of the Ninth Circuit Court of Appeals issued its decision in Chamber of Commerce v. Bonta, No. 20-15291 (9th Cir. Sept. 15, 2021), finding that AB 51, a state law aimed at prohibiting mandatory arbitration agreements, is largely not preempted by the Federal Arbitration Act (“FAA”).

1. AB 51

As background, AB 51, which was signed into law in California in 2019, prohibits employers from requiring employees to arbitrate claims under the California Fair Employment and Housing Act (“FEHA”) and the Labor Code as a condition of employment, continued employment, or receipt of employment-related benefits. The law also places a prohibition on employers who “threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee because of the refusal to consent to the waiver of any right, forum, or procedure for a violation of the [FEHA or Labor Code], including the right to file and pursue a civil action or a complaint with … any state agency … or any court.” Rather than invalidate arbitration agreements themselves, AB 51 instead subjects an employer who violates the law to civil and criminal penalties.

2. The District Court Ruling

Before AB 51 was set to go into effect, the law was challenged by the U.S. Chamber of Commerce as being preempted by the FAA. In January 2020, a federal District Court agreed with the U.S. Chamber of Commerce and enjoined enforcement of AB 51. The district court found that the law was preempted by the FAA, given the law’s specific impact on an employer’s ability to require arbitration agreements as a condition of employment.

3. The Ninth Circuit Decision

After the U.S. Chamber of Commerce appealed, the Ninth Circuit partially reversed, finding that AB 51 is not entirely preempted by the FAA. The Ninth Circuit held that the majority of AB 51 is not entirely preempted because the law only addresses “pre-agreement employer behavior” – the manner in which arbitration agreements are entered into – and not arbitration agreements themselves. Significantly, the Ninth Circuit determined that AB 51 does not invalidate or render unenforceable arbitration agreements covered by the FAA.

The court further explained that the Labor Code provision created by AB 51 (Labor Code Section 432.6) merely codifies that arbitration is a matter of contract and arbitration agreements must always be voluntary and consensual. The court stated, “[a]s 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.”

The court did, however, find that portions of AB 51 imposing civil and criminal penalties for mandating arbitration in violation of AB 51 do conflict with the FAA and are therefore preempted. This particular holding thus leaves open questions regarding what remedies or damages may be available to an employee who brings an action for a violation of Labor Code Section 432.6. The holding as a whole also leaves questions regarding what particular “pre-agreement employer behavior” would constitute a violation of the law.

The majority’s decision was heavily criticized by the dissent and it seems likely that the Chamber of Commerce will file a petition for rehearing en banc with the Ninth Circuit and may also appeal the decision to the United States Supreme Court, given that it conflicts with holdings of the First and Fourth Circuits. Of note, the court’s decision does not apply retroactively and it does not immediately lift the district court’s preliminary injunction on AB 51. Thus, it is imperative that employers who continue to require arbitration agreements as a condition of employment closely monitor the developments in this area.

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