WHAT’S GOING ON WITH CALIFORNIA’S MANDATORY ARBITRATION AGREEMENTS?

Many employers subject to risk and uncertainties.

On September 15, 2021, in the Chamber of Commerce of the U.S. vs Bonta, the Ninth Circuit partially upheld Assembly Bill 51 (AB 51) in a 2-1 split decision. This decision vacated the district court’s initial ruling that inhibited the enforcement of AB 51, a state law that prohibits California employers from requiring employees to agree to arbitration as a condition of employment covered by the Federal Arbitration Act (FAA).

The following is a summary of the AB 51 regulations that went into effect (Cal. Lab. Code § 432.6.):

■ Bans mandatory arbitration agreements for any claims arising under the California Fair Employment and Housing Act or the California Labor Code as a condition of employment or receipt of any employment-related benefit.

■ Establishes criminal and civil penalties for employers that violate the regulations of AB 51—including “imprisonment in a county jail, not exceeding six months, or—a fine not exceeding one thousand dollars ($1,000), or both.”

■ Safeguards against retaliation and discrimination for workers who do not want to consent to a mandatory arbitration agreement or who file a claim to enforce AB 51.

■ Pertains to arbitration agreements entered into or modified on or after January 1, 2020.

■ Is not relevant to arbitration agreements otherwise enforceable under the FAA.

The Ninth Circuit remanded this case to the district court for further proceedings. According to the court, AB 51 does not run against the FAA because it regulates “pre-agreement employer behavior” that does not impede the validity or enforcement of an arbitration agreement. It also highlighted that AB 51’s stated objective – “to assure that entry into an arbitration agreement by an employer and employee is mutually consensual” – is consistent with the congressional objective for the FAA to not forestall state laws requiring “voluntary” arbitration agreements.

The court also stated that AB 51 does not generate a contract defense or “make invalid or unenforceable any agreement to arbitrate, even if such agreement was consummated in violation of the statute.” What this means is that the Ninth Circuit’s decision does not impact the enforceability of executed arbitration agreements for California employers, including existing mandatory arbitration agreements. In this vein, employees are not able to nullify a signed arbitration agreement solely because of an infraction of AB 51. However, for new workers or those who have not already signed an arbitration agreement, this decision preserves AB 51’s ban on employers requiring that such employees sign arbitration agreements as a condition of employment and continues to prohibit employers from retaliating against an employee for refusing to do so.

Additionally, although the ruling eliminates the imposition of civil and criminal penalties in connection with an executed arbitration agreement, civil and criminal penalties could still be imposed if the employer were to terminate, refuse to hire, or otherwise retaliate against an employee or applicant because they refused to sign an arbitration agreement.

However, even with the ruling, it does not mean that the enforcement of AB 51 will be immediately imposed. This decision will come into being only when the court issues its “mandate” renouncing jurisdiction over the case. A Petition of Rehearing and a Petition for Writ of Certiorari to the U.S. Supreme Court can overturn the Ninth Circuit’s ruling. In fact, the Chamber of Commerce has already been granted an extension of time to file a Petition for Rehearing, which insinuates that a rehearing request is imminent in the near future. If and when the petition is filed, the Chamber may move to stay issuance of the Ninth Circuit’s mandate for a few months, pending review by the U.S. Supreme Court.

Because of the delay in issuing the mandate and lifting AB 51’s injunction, many California employers who use mandatory arbitration agreements have become subject to risk and uncertainties. As we anticipate the U.S Chamber of Commerce’s rehearing, California employers should take time to consult legal counsel about how AB 51 applies to their existing policies, programs, and practices on arbitration agreements. In doing so, employers will be ready to take action once the final resolution of the case is determined. If any part of AB 51 remains after further judicial examination, employers that make use of arbitration agreements will need to make certain that these agreements are purely voluntary. If an employer is to revise an arbitration agreement, make sure to keep in mind that “opt-out” clauses do not exempt an arbitration agreement from AB 51 and will still be considered a “condition of employment.”

We recommend all California employers that use mandatory arbitration agreements and those who wish to continue to require their workers to enter into arbitration agreements to enlist legal counsel to discuss various options and the associated risks.