Signed into law by Governor Newsom on October 10, 2019, California Assembly Bill 51 (“AB 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 California 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 California 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.
Soon after AB 51’s enactment, business associations led by the Chamber of Commerce of the United States 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.
On September 15, 2021, in a 2-1 decision, a Ninth Circuit panel (consisting of 3 judges) 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 the 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.
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.
On September 22, 2021, the Chamber of Commerce of the United States filed an unopposed motion for a 21-day extension of time (i.e., until October 22, 2021) to file a petition for rehearing en banc by all of the 9th Circuit judges. If the 21-day extension is granted and a petition for rehearing en banc filed, the district court’s preliminary injunction barring enforcement of AB 51 should remain in place until the petition is decided by the 9th Circuit en banc. No matter the 9th Circuit’s decision on that petition, this matter is likely going to be appealed to the United States Supreme Court.
Unless and until any future rulings are issued, employers should review their practices regarding arbitration agreements for employees in California to avoid potential liability. Garcia & Gurney, ALC will continue to track developments related to AB 51. To learn more, contact our legal team today.
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