The Ninth Circuit has Ruled That California Employers Can Require that Employees Sign Mandatory Arbitration Agreements
Last week, a California federal court issued a much-anticipated ruling that California employers can require their employees to sign arbitration agreements.
Specifically, as detailed below, the United States Court of Appeals for the Ninth Circuit (“the Ninth Circuit”) ruled in U.S. Chamber of Commerce v. Bonta that California’s Assembly Bill 51 (“AB 51,” which prohibited employers from requiring employees to sign arbitration agreements as a condition of their employment) is unenforceable due to federal law.
This is particularly big news for companies concerned about class actions or Private Attorneys General Act (“PAGA”) representative actions. With more certainty than ever, California employers are allowed to mandate arbitration agreements that contain waivers of class/PAGA lawsuits. Employers then can use those arbitration agreements to challenge class and PAGA lawsuits filed against them.
A reminder on AB 51. . . AB 51 (a California law that took effect on January 1, 2020) prohibited employers from requiring employees to sign arbitration agreements as a condition of their employment. Soon after its enactment, the Chamber of Commerce brought a federal lawsuit arguing that AB 51 ran afoul of the Federal Arbitration Act (“FAA,”) a federal law that protects and encourages the private arbitration of legal disputes. The Chamber argued that because the FAA is a federal law, it supersedes, or preempts, any state law that conflicts with it.
The district court initially issued a preliminary injunction that prohibited California from enforcing AB 51. California appealed this decision to the Ninth Circuit. In September 2021, a divided Ninth Circuit issued a ruling striking down the injunction, holding that AB 51 was valid and should go into effect. The Ninth Circuit reasoned at that time that California’s wording of AB 51 did not conflict with the FAA.
Then, in April of 2022, the U.S. Supreme Court decided Viking River Cruises v. Moriana, which provided new guidance on the FAA and the degree to which states, such as California, could interfere with the creation of arbitration agreements. After the Viking River Cruises ruling, the Ninth Circuit decided to revisit its decision in Bonta. Here is a link to our article on Viking River, for fun.
What Did the Ninth Circuit Decide in Bonta?
In the Bonta decision, the Ninth Circuit reversed its previous ruling and reinstated the preliminary injunction issued by the district court, effectively striking down AB 51. This means California employers now can mandate arbitration of employment claims, including class action and PAGA lawsuits. The Ninth Circuit observed that AB 51’s system of penalties–which was designed to discourage employers from requiring their employees to sign arbitration agreements–was an obstacle to the purpose of the FAA and therefore was invalid.
What’s Next?
California has a few options. It could seek a determination on the enforceability of AB 51 from the original district court. However, it is more likely that California will ask the Ninth Circuit to rehear the matter with more judges (known as en banc review) or appeal the Ninth Circuit’s decision to the U.S. Supreme Court. Whatever avenue California chooses, the injunction against AB 51’s enforcement remains in effect until and unless a different decision is reached.
What all of this means to California employers today?
This is an excellent time to consider implementing mandatory arbitration in your workplace!
- This decision is a win for California employers that want to require employees to sign arbitration agreements upon hire.
- If your company currently uses arbitration agreements, the ruling presents a good opportunity to review the language of your existing agreement, make sure it complies with California and federal law, and consider whether to make the agreements mandatory.
- If your workplace does not currently use arbitration agreements, this is great time to consider whether to implement mandatory arbitration agreements.
Remember, in order for an arbitration agreement to move you toward the goal of avoiding class actions and PAGA litigation, that agreement needs to have all the very-particular bells and whistles mandated by California and federal law. In addition, how an employer rolls out arbitration agreements is critical: courts regularly scrutinize whether the employer’s roll-out procedures was flawed.
Please reach out, if you are deciding whether arbitration is right for your workplace, and if you would like help in implementing or updating enforceable arbitration agreements in your workplace
Finally, keep in mind that laws change, particulary with respect to arbitration. Courts regularly issue evolving, and at times conflicting, interpretations of law regarding employment arbitration agreements in California. We will continue to keep you information on significant legal developments, or let us know if you have questions.
