Updated February 16, 2023
In a win for employers who rely on arbitration agreements to resolve workplace disputes, a panel for the U.S. Court of Appeals for the Ninth Circuit has just ruled that such agreements, when fairly drafted to comply with contractual principles, can be imposed as a condition of employment. The issue arose in 2019 after California adopted AB 51, a statute which for the first time invalidated mandatory arbitration at work.
Before AB 51 took effect, it was challenged by the California Chamber of Commerce, which argued in the trial court that AB 51 conflicted with federal law upholding the validity of arbitration agreements. The case was filed in the Eastern District of California, where in 2020, United States District Court Judge Kimberly Mueller ruled in favor of the Chamber, preliminarily enjoining the statute from taking effect. She found that AB 51 ran afoul of the Federal Arbitration Act, which encourages the use of private arbitration and prohibits states from adopting laws that impose obstacles on their use. She specifically found that AB 51 would deter employers from adopting arbitration agreements.
California filed an immediate appeal of the decision. The Ninth Circuit panel, which initially reviewed the decision, found Judge Mueller’s opinion overbroad, thereby placing in doubt the injunction she imposed against its enforcement. Thereafter, however, the Ninth Circuit agreed on a rehearing. And on February 15, 2023, the Ninth Circuit panel finally affirmed the lower court ruling, ultimately holding:
“AB 51’s deterrence of an employer’s willingness to enter into an arbitration agreement is antithetical to the FAA’s ‘liberal federal policy favoring arbitration agreements.’… Because the FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 is therefore preempted.”
The court expressly rejected the State’s argument that such a ban would protect employees from inequality in bargaining power, stating, “Accordingly, there is no support for California’s description of AB 51 as simply an assurance that employees will not be the victims of forced arbitration or be compelled to arbitrate claims against their wills.”
The court ultimately agreed with other circuits that the FAA preempts a state rule that discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement.
This is likely not the end of the AB 51 saga, as the ruling is simply affirming the district court’s grant of a preliminary injunction, but it is another significant ruling focused on the importance of arbitration in the workplace. California employers should still seek counsel when implementing arbitration agreements in the workplace due to the complexity and changing landscape related to enforcement of these agreements.
The case is CHAMBER OF COMMERCE V. BONTA (February 15, 2023) No. 20-15291.