The Ninth Circuit Rules: California’s Ban on Mandatory Arbitration Agreements Preempted by Federal Law

Employers with California-based employees who have been struggling to understand California’s arbitration landscape for the past few years can thank the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit) for providing some clarity in its recent decision regarding California’s Assembly Bill 51 (AB 51). In its February 15, 2023, ruling, a divided Ninth Circuit panel concluded that AB 51, which prohibits employers from requiring employees to arbitrate disputes under the California Labor Code and Fair Employment and Housing Act (FEHA), is preempted by the Federal Arbitration Act (FAA). In short, employers with California-based employees can require employees to enter into arbitration agreements as condition of employment with confidence that they will be upheld, and there will be no criminal liability resulting from their use — at least for now.

A Look Back at AB 51 

As a brief reminder, AB 51 was originally slated to take effect January 1, 2020, and prohibited employers from requiring job applicants or employees to agree to mandatory arbitration of certain claims as a condition of employment, continued employment, or the receipt of any employment-related benefit. However, the law was met with several legal challenges. Below is a brief overview of AB 51’s labyrinthine litigation journey: 

• February 2020, Preliminary Injunction Granted: Opponents of the law initially succeed in obtaining a preliminary injunction, thus prohibiting the state’s enforcement of AB 51. 
• September 2021, Ninth Circuit Finds No Preemption for Portions of AB 51: The state of California appeals the preliminary injunction ruling to the Ninth Circuit, which finds, in a divided three-judge panel opinion, portions of AB 51 are not preempted by the FAA and lifts the lower court’s injunction that barred the law from taking effect. In response, the U.S. Chamber of Commerce petitions the Ninth Circuit for an en banc review.  
• February 2022, Ninth Circuit Announces Delay in Review: The Ninth Circuit announces it will wait and review the U.S. Chamber of Commerce’s en banc request after the U.S. Supreme Court rules on another California arbitration case, Viking River Cruises v. Moriana.  
• June 2022, Supreme Court Says Smooth Sailing for PAGA Arbitration: The U.S. Supreme Court rules in Viking River Cruises that the FAA allows arbitration of individual claims under California Private Attorneys General Act of 2004 (PAGA) (summarized in more detail by our prior Alert). 
• August 2022, New Review: The Ninth Circuit issues an order withdrawing its previous opinion from September 2021 and granting a rehearing. 

What Happened Next?

In its February 15, 2023, decision, the Ninth Circuit upheld the lower court’s decision granting the initial preliminary injunction that blocked California’s ban on mandatory arbitration, holding that the FAA preempted AB 51. 

Notably, the court explained that the FAA “embodies a national policy favoring arbitration,” and under U.S. Supreme Court precedent, the FAA preempts state rules that discriminate against arbitration. Moreover, the court noted that the FAA’s purpose is to further Congress’s policy of encouraging arbitration and found that AB 51 stood “as an obstacle to that purpose” and therefore was preempted. 

The Ninth Circuit found that all of AB 51’s provisions “work together to burden the formation of arbitration agreements,” and therefore the court declined to sever certain parts and uphold others. 

The Ninth Circuit also concluded that because the FAA preempted AB 51, the district court correctly held that the Chamber of Commerce was likely to succeed on the merits of its claim for declaratory and injunctive relief. Furthermore, because California did not challenge the district court’s holding that the remaining factors also weighed in favor of the Chamber of Commerce, the panel held that the district court did not abuse its discretion when it granted the Chamber of Commerce’s motion for a preliminary injunction. 

Is the Whiplash Over?

Not necessarily. The state could appeal this decision either to the full 11-judge panel of Ninth Circuit judges or to the U.S. Supreme Court. In response to the recent ruling, the California Attorney General’s office says it is “reviewing the decision” and “assessing” next steps. The Sidley Labor and Employment Team will continue to monitor and provide updates on the status of the law. 

Where Does This Leave California Employers?

The court’s ruling clarifies that for now, employers can require employees to sign arbitration agreements in California and require employees to confidentially arbitrate claims under the California Labor Code and FEHA, including claims for unpaid wages and discrimination. However, employers should consult with employment counsel to ensure that their arbitration agreements are up to date with respect to other arbitration-related legal requirements, including, for example, federal laws regarding prohibition of arbitration of workplace sexual harassment or assault.