Hands signing a document

The U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit) recently said that it will take another look at California Assembly Bill 51 (AB 51), a state law affecting mandatory employment-related arbitration agreements.[1] 

AB 51 prohibits employers from requiring that employees enter into mandatory arbitration agreements for disputes arising under the California Fair Employment and Housing Act and the California Labor Code. Violations of the law can result in fines of up to $1,000 and up to six months of incarceration.

The law was to go into effect at the beginning of 2020. However, in 2019, an employers’ coalition obtained a temporary restraining order from the U.S. District Court for the Eastern District of California (District Court). This prevents enforcement of AB 51 as to arbitration agreements that are covered by the Federal Arbitration Act (FAA).

The District Court held that the FAA pre-empted AB 51. This was so because AB 51 discriminates against arbitration agreements in violation of the FAA’s provision that such agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

The District Court further explained that California employers faced irreparable harm because, if they continued to rely on mandatory arbitration agreements, they risked criminal and civil penalties. Further, if the employers stopped using arbitration agreements, they would incur costs associated with redrafting employment agreements and would lose the benefits of arbitration.

The State of California appealed and the Ninth Circuit reversed the District Court’s decision in part on September 15, 2021. On one hand, the Ninth Circuit affirmed that civil and criminal penalties associated with AB 51 are pre-empted by the FAA. On the other hand, it found that the FAA did not entirely pre-empt AB 51 because it does not prevent employers and employees from entering into consensual arbitration agreements. Rather, it seeks to govern conduct that occurs prior to the existence of the arbitration agreement.

More recently, the Ninth Circuit withdrew it September 15, 2021 opinion and so it will rehear the case. Thus, the District Court’s preliminary injunction remains in effect for now.

We will continue to monitor this matter and will report any developments in the litigation.

Thanks to Benita Ikpo for assistance in the preparation of this article.

[1] Rather than granting a hearing en banc the Ninth Circuit issued an order withdrawing the panel’s September 15, 2021 decision.