In 2019 California enacted Assembly Bill 51 (AB51) that would impose criminal sanctions on employers who required employees to sign arbitration agreements as a condition of employment. From there, this highly controversial law has followed a circuitous route.
Before AB51 was set to go into effect in January 2020, a Federal District Court granted a temporary restraining order to enjoin the law’s enforcement based on a suit brought by the U.S. Chamber of Commerce and other business organizations challenging AB 51 as being preempted by federal law, specifically the Federal Arbitration Act (FAA).
Following the issuance of a preliminary injunction, the case was appealed to the Ninth Circuit, which in September 2021, vacated the January 2020 preliminary injunction against AB 51.
Then, on August 22, 2022, the Ninth Circuit unexpectedly withdrew its September 2021 opinion, granted a panel rehearing, and re-instituted the preliminary injunction, blocking the enforcement of AB 51.
The Ninth Circuit’s 2023 Decision
It took another 18 months, but on February 15, 2023, a divided three-judge panel for the Ninth Circuit Court of Appeals reversed its own prior decision and found that Assembly Bill 51 is preempted by the FAA.
The court stated that even though “AB 51 does not expressly bar arbitration agreements,” it “disfavors the formation of agreements that have the essential terms of an arbitration agreement.” Moreover, the Ninth Circuit found AB 51 imposed a “severe” burden on formation of arbitration agreements by imposing civil and criminal sanctions on any employer who violates its terms.
In affirming the district court’s grant of a preliminary injunction, a majority of the Ninth Circuit panel stressed long-standing U.S. Supreme Court precedent that states rules that burden the formation of arbitration agreements are an obstacle to the legislative intent of, and thus preempted by, the FAA.
The Ninth Circuit holding removes the uncertainty surrounding the use of arbitration agreements in the employment context. This is great news for California employers.
The State could attempt to revive AB 51 by asking the full Ninth Circuit or the U.S. Supreme
Court to review the February 15, 2023, decision. Meanwhile, employers are free to require their employees to sign arbitration agreements as a condition of employment. As always, employers must continue to comply with numerous other requirements applicable to the enforcement of California employee arbitration and class action waiver agreements.
In a related action pertaining to employment arbitration, Congress created an exception for sexual harassment and assault, in connection with the #MeToo movement. In 2022, President Joe Biden signed a bill into law voiding contracts that require arbitration of workplace sexual harassment or assault claims.
Dykema attorneys will continue to monitor developments related to AB 51 and arbitration agreements. If you have any questions about how this ruling affects your business, please contact the authors of this article or any member of Dykema’s Labor and Employment team.