In 2019, California enacted AB 51, making it an unlawful employment practice for employers to require applicants or employees, as a condition of employment, to waive any right, forum, or procedure relating to a Labor Code or FEHA claim. The short version of this word salad is that employers couldn’t mandate arbitration agreements. However, a federal district court preliminarily enjoined enforcement of AB 51 two days before the law was scheduled to go into effect.
Wednesday, a three-judge panel of the Ninth Circuit partially vacated that injunction.
At issue is whether AB 51 is preempted by the Federal Arbitration Act, which prohibits states from disfavoring arbitration agreements relative to other contracts. The district court agreed with business groups that AB 51 conflicted with the FAA. AB 51 has several components. One is the prohibition described above. A second component is a ban on discriminating or retaliating against an employee who refuses to sign an arbitration agreement. Additionally, employers who violate these prohibitions are guilty of a misdemeanor and can also be sued by the employee. The district court found that all of the foregoing as preempted by the FAA.
The Ninth Circuit panel split 2-1 in finding that the ban did not conflict with the FAA. The majority reasoned that the ban merely regulates pre-agreement conduct, and that AB 51 does not invalidate any arbitration agreement. Moreover, the FAA’s purpose is not frustrated by AB 51 because the FAA is concerned with enforcing voluntary arbitration agreements, not mandatory ones. However, the majority found that the criminal penalties and civil liability are preempted (and thus remain enjoined) to the extent they apply to executed arbitration agreements.
This “bifurcated” approach drew sharp criticism from the dissenting justice: “In case the effect of this novel holding is not clear, it means that if the employer offers an arbitration agreement to the prospective employee as a condition of employment, and the prospective employee executes the agreement, the employer may not be held civilly or criminally liable. But if the prospective employee refuses to sign, then the FAA does not preempt civil and criminal liability for the employer under AB 51’s provisions. In other words, the majority holds that if the employer successfully ‘forced’ employees ‘into arbitration against their will,’ … the employer is safe, but if the employer’s efforts fail, the employer is a criminal.”
This decision leaves us with two big questions.
First, what does this mean for the future of AB 51? After all, the district court order was only a preliminary injunction meant to maintain the status quo while the merits of the litigation could be fully resolved. However, the Ninth Circuit’s decision resolved legal questions that will definitely bind the district court and likely bind the Ninth Circuit throughout the rest of the litigation. This means that AB 51 (minus the criminal penalties and civil liability in part) will likely survive unless the entire Ninth Circuit rehears the matter or the Supreme Court agrees to take up the matter. If the Supreme Court does grant certiorari, we will get another chapter in a long-running dispute between the Court and California over arbitration.
Second, what are employers to do now? Those with voluntary arbitration programs are unaffected, as AB 51 only regulates mandatory agreements. Existing mandatory arbitration agreements are not invalidated, either. However, employers with mandatory arbitration programs should consult legal counsel for guidance on this new decision.