California’s latest attempt to restrict employment arbitration was foiled by the Ninth Circuit Court of Appeals last Wednesday. On February 15, 2023, a three-judge panel decided that AB 51 (which prohibits employers from “forcing” job applicants or employees to enter into pre-dispute employment arbitration agreements covering certain discrimination and retaliation claims) is preempted by the Federal Arbitration Act (FAA). In doing so, the Ninth Circuit reversed its prior decision in the same case, issued by the same three-judge panel, which partially upheld AB 51 in 2021. While we expect the California Attorney General to challenge the Ninth Circuit’s February 15 decision, California employers can breathe a sigh of relief for now knowing it’s still lawful for most to continue to require arbitration agreements.
How Did We Get Here
California’s hostility to arbitration is nothing new. Legislators in the Golden State have long tried to curtail the use of arbitration agreements, and courts have relied repeatedly on the FAA to strike down those efforts on preemption grounds. For instance, in 2011, the U.S. Supreme Court confirmed that the FAA preempts state laws that bar contracts (in this case, consumer contracts) from containing class action waivers (see AT&T Mobility LLC v. Concepcion).
But California is not alone. In the wake of the #MeToo movement, many states adopted measures designed to curb sexual harassment in the workplace. Some of these new laws focused on training or non-disclosure agreements. Others took aim at mandatory arbitration agreements, asserting that arbitration agreements were being weaponized to shield serial harassers from the public eye and court system.Several states, including New York, Maryland, New Jersey, Vermont, and Washington, enacted laws prohibiting employers from imposing mandatory pre-dispute arbitration agreements in the context of sexual harassment claims. These early attempts to prohibit arbitration largely were unsuccessful. For instance, a federal district court in New York ruled that the FAA preempted that state’s ban on arbitration agreements (see Latif v. Morgan Stanley & Co. LLC). But then, in early 2022, Congress amended the FAA through the enactment of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021. As amended, the FAA now permits any person alleging sexual harassment or sexual abuse, in his or her discretion, to invalidate an arbitration agreement or class/collective action waiver that otherwise would require the sexual harassment or abuse claim to be arbitrated. This new law effectively removed sexual harassment and assault claims from employment arbitration, unless the parties to the dispute all want to arbitrate.
California’s efforts to limit pre-employment binding arbitration began much earlier. In 2018, the California State Assembly passed AB 3080, proposing, among other things, to effectively prohibit pre-dispute mandatory arbitration for certain categories of employee claims. The bill was framed as protecting employees’ right to a judicial forum and did not expressly prohibit arbitration agreements. However, then California Governor Jerry Brown promptly vetoed the bill, saying it plainly violated federal law (i.e., the law was preempted by the FAA).
A little over a year later, California Governor Gavin Newsom signed AB 51, which contains very similar language to AB 3080, and prohibits employers from requiring applicants or employees to waive any right, forum or procedure for an alleged violation of the California discrimination statute, the Fair Employment and Housing Act, or certain other employment laws. Like AB 3080, AB 51 does not directly prohibit arbitration; rather, it prohibits requiring employees to waive a “forum” (i.e., a civil court) or “right” (i.e., a jury trial) as a condition of employment, continued employment, or the receipt of any employment-related benefit. But unlike AB 3080, AB 51 tried to save itself by declaring, “[n]othing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the [FAA].” And AB 51 declared that a violation of its provisions is a crime.
California businesses promptly challenged AB 51 in court. In December 2019, just before the new law was to take effect, Judge Kimberly Mueller in the United States District Court for the Eastern District of California issued a temporary restraining order prohibiting California from enforcing AB 51. This matter eventually made its way to the Ninth Circuit, and in 2021, a three-judge panel composed of Justices Lucero, Fletcher, and Ikuta partially upheld AB 51. Dissenting, Judge Ikuta stated that AB 51 had a disproportionate impact on arbitration agreements by making it a crime for employers to require arbitration provisions in employment contracts. Judge Ikuta stated that the majority’s ruling conflicted with the Supreme Court’s clear guidance in Kindred Nursing Ctrs. Ltd. P’ship v. Clark, which held that the FAA invalidates state laws that impede the formation of arbitration agreements. See the full 2021 decision HERE.
Following the decision, the petitioners moved for a rehearing of the case en banc, meaning that all Ninth Circuit Court justices would hear and decide the matter. The Ninth Circuit chose to wait until after the U.S. Supreme Court ruled on Viking River Cruises, Inc. v. Moriana. And after the Supreme Court held in Viking River Cruises that employers may compel employees to arbitrate individual PAGA claims (see our prior blog post HERE), Judges Ikuta and Fletcher took the unusual step to vote to withdraw their 2021 decision and to rehear the case as a panel (see the relevant order HERE).
On Wednesday, February 15, 2023, the same three-judge panel reversed course and held that the district court was correct to find the plaintiff was likely to succeed on the merits of its claim for declaratory and injunctive relief because AB 51 was preempted by the FAA. Judge Ikuta, who dissented in 2021, wrote the majority opinion. This time, she was joined by Judge Fletcher, who had sided with Judge Lucero in 2021. See the full decision HERE.
Is This The End Of The Story?
Not likely! The California Attorney General announced that its office is reviewing the decision and assessing next steps. We expect the AG might petition the Ninth Circuit to weigh in on this matter en banc (the tactic taken by petitioners in the case previously) or even ask the U.S. Supreme Court to settle the dispute. And if California does not act to appeal the decision, the case will return to the district court, which will determine the legality of AB 51 on the merits.
For the time being, however, employers can rest a little easier knowing that the district court’s preliminary injunction preventing enforcement of AB 51 remains in place, and that arbitration agreements can continue to be required to even the playing field in the California employment litigation wars.