IMPORTANT: California: Ban on Mandatory Arbitration Agreements Reinstated?

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September 15, 2021

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In 2020, AB 51 was set to prohibit employers from requiring mandatory arbitration agreements with employees as a condition of employment. Soon after enactment, a federal district court issued a preliminary injunction preventing AB 51 from going into effect, specifically for arbitration agreements subject to the Federal Arbitration Act (FAA). In Chamber of Commerce v. Bonta, the Ninth Circuit Court of Appeal recently vacated the preliminary injunction against AB 51.

As a longstanding rule, the FAA requires arbitration agreements to be treated the same as any other contract, and that valid consensual arbitration agreements should be enforced. The Ninth Circuit framed AB 51 as a pre-agreement condition that “takes place prior to the existence” of the agreement to ensure that the arbitration agreement is consensual. Because AB 51 specifically provides that it does not invalidate an arbitration agreement that is “otherwise enforceable” under the FAA, the court stated that AB 51 does not make executed mandatory arbitration agreements unenforceable.

Additionally, the court stated that Congress “did not intend to preempt state laws requiring that agreements to arbitrate be voluntary.” The Ninth Circuit acknowledged that a court could void an arbitration agreement upon finding that it was not entered into voluntarily, as a matter of general contract principles not specific to arbitration agreements themselves. However, it did not endeavor to make that determination in this particular case.

Even though the preliminary injunction was removed with respect to AB 51’s pre-agreement requirements, the court upheld the preliminary injunction against the civil penalties applicable for violating AB 51 (i.e., Labor Code § 433 and Gov’t Code § 12953). The court stated that the civil and criminal penalties violate the purpose of the FAA, including punishing employers for entering into an agreement to arbitrate. “An arbitration agreement cannot simultaneously be ‘valid’ under federal law and grounds for a criminal conviction under state law.” The preliminary injunction against penalties is only upheld for executed arbitration agreements covered by the FAA. Ultimately, the case was remanded to the federal district court.

What do employers do now? The court’s logic and explanation are confusing to say the least. Presumably, employers are prohibited from engaging in pre-agreement conduct that would require mandatory arbitration agreements as a condition of employment, but the stated civil and criminal penalties cannot be enforced and the executed arbitration agreements themselves are still enforceable. While this may sound somewhat reassuring, employers may still be subject to other statutory claims, including attorneys’ fees, if they choose to keep their mandatory arbitration agreements going forward.

Even though the ruling is certain to be appealed to the Ninth Circuit en banc and/or the U.S. Supreme Court, employers need to immediately evaluate their strategy moving forward. Best practice would be to switch to a voluntary arbitration agreement while waiting for further judicial movement. Employers who wish to retain their mandatory arbitration agreements should consult with legal counsel on the potential ramifications.

Action Items

Immediately review arbitration agreement strategy with legal counsel.
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Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser.