Change of Mind: Ninth Circuit Will Review California Law Prohibiting Mandatory Employment Arbitration Agreements

History of AB 51 and the Subsequent Court Decisions Interpreting It

AB 51 took effect in January 2020 as Labor Code section 432.6. It prohibited employers in California from requiring employees to sign arbitration agreements as a condition of employment and imposed criminal and civil penalties on employers who violated the law of up to six months imprisonment and a fine of up to $1,000.

In December 2019, the US Chamber of Commerce, along with other business groups, sued the State of California in the US District Court for the Eastern District of California, seeking a declaration that AB 51 was preempted by the Federal Arbitration Act (FAA) and an injunction halting the enforcement of AB 51. The District Court issued a preliminary injunction a year later, in January 2020, concluding that AB 51 was preempted by the FAA. (Chamber of Commerce v. Becerra, Case No. 2:19-at-01142.).

The State appealed, and in September 2021, the Ninth Circuit, in a 2-1 decision, reversed the District Court’s determination that AB 51 was preempted by the FAA and vacated the preliminary injunction. Circuit Judges Fletcher and Lucero reasoned that AB 51’s anti-retaliation provision fell outside the ambit of the FAA, because it was pre-formation conduct. 

However, the majority affirmed the District Court’s decision to enjoin AB 51’s imposition of civil and criminal penalties on employers based on FAA preemption.

Circuit Judge Ikuta authored a powerful dissenting opinion, calling AB 51 a “blatant attack” on arbitration agreements and likening California to a “clown bob bag” and a “poster child for covertly discriminating against arbitration agreements and enacting a scheme that disproportionately burdens arbitration.”

The Post-Viking River Cruises Ninth Circuit Order 

In June 2022, the US Supreme Court held in Viking River Cruises vs. Moriana that the FAA preempted California’s Labor Code Private Attorneys General Act (PAGA) and that an employee who had agreed to arbitrate employment-related claims could be compelled to arbitrate her individual PAGA claims. The High Court further held that the same employee lacked standing to pursue PAGA claims as a representative plaintiff, since her individual PAGA claims had to be arbitrated. See AFS Article on Viking River Cruises Decision for more information.

In late August 22, 2022, Judge Fletcher joined Judge Ikuta in ordering that the Ninth Circuit’s September 2021 opinion be withdrawn and that the matter be set for rehearing.

The Impact on California Employers 

Because the Ninth Circuit’s September 2021 decision has been withdrawn, it can be argued that the District Court’s January 2020 preliminary injunction enjoining AB 51 remains in effect while the Ninth Circuit reconsiders its decision. California employers may nevertheless want to exercise caution in mandating employment arbitration agreements until the Ninth Circuit’s final decision on this matter. Employers can continue to enter into voluntary arbitration agreements with their employees.