Employment Law Alert: Ninth Circuit Ruling Reinstitutes Assembly Bill 51’s Ban on Mandatory Arbitration Agreements in California

In a recent ruling by the United States Court of Appeals for the Ninth Circuit – Chamber of Commerce of the United States v. Bonta – the Court upheld Assembly Bill 51’s prohibition against arbitration agreements entered into as a condition of employment.

In 2019, California Governor Gavin Newsom signed into law AB 51 to prohibit employers from requiring workers to enter into mandatory arbitration agreements for the most common types of California employment law claims. Specifically, AB 51 provided that employers may not require employees or applicants, as a condition of employment, continued employment, or the receipt of any employment-related benefit, to “waive any right, forum, or procedure” for any claim under the California Fair Employment and Housing Act (the law underlying most employee discrimination, harassment, and retaliation claims), and the California Labor Code (the body of law underlying most wage and hour claims, and many other types of claims).

Shortly before the law was to go into effect, on December 29, 2019, a federal district court granted a temporary restraining order to block enforcement of AB 51, and on January 31, 2020, the court granted a preliminary injunction blocking enforcement of AB 51, pending final judgment on the merits. Ultimately, the case was appealed to the United States Court of Appeals for the Ninth Circuit.

On September 15, 2021, the Ninth Circuit partially reversed the district court’s decision and vacated the preliminary injunction that had been preventing the most important element of the law from taking effect. It held that California Labor Code Section 432.6, which would prohibit employers from requiring an arbitration agreement as a condition of employment, is not preempted by the FAA. Thus, at least for the time being, employers may no longer require entry into arbitration agreements that cover FEHA or Labor Code claims as a condition of employment. Rather, such agreements must be entered into consensually by both parties. Additionally, the Ninth Circuit upheld AB 51’s restriction against employers from retaliating against applicants or employees for refusing to sign an arbitration agreement. The court did hold that the civil and criminal penalties associated with AB 51 stand as an obstacle to the purposes of the FAA and are therefore preempted and invalid as they apply to “executed arbitration agreements.”

We expect this ruling to be challenged on appeal, once again putting the future of mandatory arbitration agreements in California into question. Until then, however, it is critical for employers that have been utilizing arbitration agreements since January 1, 2020 to seek advice from their employment law counsel promptly to discuss how this ruling will impact such practices. Clients of Hixson Nagatani LLP may contact an attorney of the firm to discuss receiving an updated arbitration agreement that would comply with this ruling.