Ninth Circuit Decision Clears the Way for California Employers to Require Arbitration Agreements

On February 15, 2023, the Ninth Circuit held that AB 51 is preempted by the Federal Arbitration Act (“FAA”) and consequently California employers are free to require employees to sign arbitration agreements as a condition of employment. See Chamber of Com. of the United States of Am. v. Bonta, No. 20-15291, 2023 WL 2013326 (9th Cir. Feb. 15, 2023). AB 51 made it a criminal offense for an employer to do so, whether for applicants or existing employees.

According to the Ninth Circuit, the California legislature purposely crafted AB 51 to circumvent the preemptive power of the FAA by criminalizing only arbitration contract formation, while still allowing an arbitration agreement executed in violation of the law to be enforceable. Despite AB 51’s creative construction, the Court found that “the FAA preempts a state rule that discriminates against the formation of an arbitration agreement, even if that agreement is ultimately enforceable.” Bonta, 2023 WL 2013326 at *2.

The path to this decision was by no means a direct one. AB 51 was introduced by the California Assembly in December 2018, signed into law by Governor Gavin Newsom in October 2019, and was set to take effect on January 1, 2020. However, the Eastern District of California prevented state officials from enforcing the law, first by issuing a temporary restraining order on December 29, 2019, and then a preliminary injunction on February 7, 2020.  See Chamber of Com. of the United States of Am. v. Becerra, 438 F. Supp. 3d 1078, 1085 (E.D. Cal. 2020). The Ninth Circuit initially reversed that decision in part and vacated the injunction on September 15, 2021, but in August 2022 a majority of the Ninth Circuit panel judges voted sua sponte to rehear the case, after which they withdrew the 2021 decision. See Chamber of Com. of the United States of Am. v. Bonta, 45 F.4th 1113 (9th Cir. 2022). This most recent decision followed, reversing course and affirming the district court’s grant of the preliminary injunction against AB 51 because it found the Chamber of Commerce is likely to succeed on the merits of its claim for declaratory and injunctive relief.

In light of this ruling, California employers should review their arbitration agreement policies and standard employment agreements. In circumstances where the FAA would apply to such agreements, employers should reconsider whether it would be beneficial to require either applicants or current employees to enter in an agreement to arbitrate.