In a shocking win for California employers, the U.S. Court of Appeals for the Ninth Circuit held on February 15, 2023 that the Federal Arbitration Act (FAA) preempts California's controversial Assembly Bill 51 (AB 51), which attempted to criminalize employers' use of mandatory arbitration agreements in the Golden State.
AB 51's Goal of Criminalizing Legally Enforceable Mandatory Arbitration Agreements
Notwithstanding the FAA's long history of favoring arbitration nationally, California has engaged in a prolonged effort to bypass federal law and preclude California employers from requiring their employees to sign arbitration agreements as a condition of employment. After a similar measure was vetoed in 2015, California Governor Gavin Newsom signed AB 51 into law in October 2019, with an effective date of January 1, 2020.
AB 51 attempted to get around the FAA by subjecting employers to civil and criminal penalties if they required employees, as a condition of employment, to waive their right to litigate employment claims under the Fair Employment and Housing Act (FEHA) and the California Labor Code. In essence, an employer could enforce the mandatory arbitration agreement, while California simultaneously subjected that employer to criminal prosecution.
Ninth Circuit Shoots Down Penalizing Employers for Mandatory Arbitration Agreements
In affirming the district court's preliminary injunction order and holding that AB 51 is preempted by the FAA, the divided Ninth Circuit panel explained that AB 51's imposition of civil and criminal penalties for forming an arbitration agreement in violation of the law "stands as an unacceptable obstacle to the accomplishment and execution of the full purpose and objectives of Congress in enacting the FAA." The court rejected AB 51's scheme to penalize employers, while admittedly not seeking to make mandatory arbitration agreements unenforceable, holding that the "equal-treatment principle" inherent in the FAA "requires courts to place arbitration agreements on equal footing with all other contracts."
The court reasoned that AB 51's undercover purpose to disfavor contracts was incompatible with the FAA. Applying this analysis, the Ninth Circuit struck down AB 51 in its entirety, finding it wholly preempted by the FAA. Such a sweeping victory now gives California employers license to continue to mandate arbitration agreements as a condition of employment.
However, with California's history in the realm of arbitration agreements, this will likely not be the end of the story. The State of California now has a chance to appeal to the U.S. Supreme Court or, more likely, the California legislature will seek new approaches to ending the use of mandatory arbitration agreements.
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