Mandatory arbitration agreements have been the subject of considerable litigation in California. As we previously reported, much of this discord stems from 2019's Assembly Bill 51 (AB 51), which broadly prohibited employers from requiring employees to execute an arbitration agreement as a condition of employment.
In its recent U.S. Chamber of Commerce v. Bonta opinion, the U.S. Court of Appeals for the Ninth Circuit (the federal appellate court covering California and several other Pacific states and territories) concluded that the Federal Arbitration Act (FAA) preempts the state rule and California employers can require their employees to sign arbitration agreements.
After previously upholding the California anti-arbitration law in a 2021 ruling, the Ninth Circuit elected to revisit the question in order to settle a paradox created by U.S. Supreme Court precedent. Under the Supreme Court's standard, a state law that discriminates against arbitration is preempted by the FAA. The authors of AB 51 designed the bill with this in mind, criminalizing only the formation of the arbitration agreements, not their enforcement. In other words, AB 51 imposed misdemeanor penalties on employers for requiring employees to enter into arbitration agreements, but permitted enforcement of those same agreements once formed.
In Bonta, the federal appellate court held that AB 51's penalty-based scheme to inhibit arbitration agreements prior to formation violates the "equal-treatment principle" inherent in the FAA. This principle "requires courts to place arbitration agreements on equal footing with all other contracts." The Court reasoned that AB 51's covert objective to disfavor contracts was incompatible with the FAA.
Applying this reasoning, the Bonta decision struck down AB 51 in its entirety, finding it wholly preempted by the FAA. Such a sweeping abrogation now gives California employers license to continue to mandate arbitration agreements as a condition of employment.
However, employers should keep abreast of subsequent developments, as this case could be reviewed again by the federal appeals court or by appealing to the U.S. Supreme Court. We will keep you advised of any significant developments in this area.
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