Ninth Circuit Vacates Injunction Against California Ban on Businesses Which Forced Workers to Submit to Arbitration Agreements

A divided three-judge panel of the Ninth Circuit Court of Appeals vacated the January 2020 preliminary injunction against enforcement of Assembly Bill 51 (AB 51), and upheld portions of the law that prohibited employers from making arbitration agreements a condition of employment. As a result of this decision, the Ninth Circuit has resurrected California Labor Code § 432.6, that bars businesses from requiring workers to arbitrate job-related claims. However, the court invalidated portions of AB 51 imposing civil and criminal penalties for mandating arbitration in violation of § 432.6.

Passage of AB 51 and Procedural History

In 2019, Gov. Gavin Newsom signed Assembly Bill 51 (AB 51) into law, which was codified in California Labor Code § 432.6 to the California Labor Code, and was scheduled to take effect on January 1, 2020.  Section 432.6 provides that:

A “person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provision” of the California Fair Employment and Housing Act (FEHA) or this code. § 432.6(a).

An employer is prohibited from “threaten[ing], retaliat[ing] or discriminat[ing] against, or terminat[ing] any applicant for employment or any employee because of the refusal to consent to the waiver of any right, forum, or procedure” for a violation of the FEHA. § 432.6(b).

An agreement that requires an employee to “opt out” of a waiver or “take any affirmative action” in order to preserve their rights is deemed a condition of employment. § 432.6(c).

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The statute explicitly states that “nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable” under the FAA. §432.6(f).

AB 51 creates a civil right of action, but as written, also provides for the imposition of civil and criminal penalties against employers who require an applicant or employee to agree to an arbitration agreement.

On December 9, 2019, the plaintiffs-appellants, including the Chamber of Commerce of the United States (Chamber of Commerce) filed a lawsuit for declaratory and injunctive relief, seeking a declaration that AB 51 was preempted by the Federal Arbitration Act (FAA) and asking the U.S. District Court of the Eastern District of California to enjoin the enforcement of the statute. On January 31, 2020, the district court granted the Chamber of Commerce’s motion for preliminary injunction and concluded that AB 51: (1) frustrated the purposes of the FAA; and (2) placed arbitration agreements on “unequal footing” with other contracts, and preliminary enjoined the enforcement of § 432.6(a)-(c) as to the arbitration agreements covered by the FAA. The district court’s written opinion on the matter was published Feb. 6, 2020.

AB 51 Is Consistent with the FAA’s Purpose of Upholding Consensual Arbitration Agreements

In vacating the injunction, the majority’s decision emphasized that the purpose of the FAA was to give effect to arbitration agreements that are “voluntary and consensual,” consistent with Supreme Court precedent. It discussed how § 432.6 was consistent with that purpose because it “assure[s] that entry into an arbitration agreement by an employer and employee is mutually consensual.”

The majority distinguished existing Supreme Court decisions that held that the FAA preempted state laws that attempted to regulate executed arbitration agreements and make invalid or unenforceable an executed arbitration agreement. By contrast, the Ninth Circuit found that § 432.6 “does not make invalid or unenforceable any agreement to arbitrate, even if such agreement is consummated in violation of the statute. Rather, while mandating that employer-employee arbitration agreements be consensual, it specifically provides that ‘[n]othing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.’” As such, the Ninth Circuit held that a pre-agreement condition, such as mandating that the employer-employee arbitration agreement be consensual, does not undermine the validity or enforceability of the agreement. Thus, California’s law regulating pre-agreement employer behavior and barring employers from requiring arbitration agreement does not run afoul of the FAA.

Ultimately, the court found the district court erred in concluding that § 432.6 was preempted entirely by the FAA and vacated the preliminary injunction because it found that the Chamber of Commerce did not establish that it was likely to succeed on the merits of its complaint for declaratory and injunctive relief.

AB 51’s Civil and Criminal Penalties Struck Down with Regard to Enforcement

The court however found that the enforcement of civil and criminal penalties associated with pre-agreement employer behavior frustrated the purposes of the FAA and held they were preempted to the extent they applied to executed arbitration agreements covered by the FAA. Section 433 of the California Labor Code makes any violation of § 432.6 a misdemeanor offense, that incarcerates an employer for six months and/or subjects them to a $1,000 fine. AB 51 also makes a violation of § 432.6 “an unlawful employment practice” that subjects an individual or entity who violates § 432.6 to civil sanctions including state investigation and private litigation. See Cal. Gov’t Code §§ 12960–12965.

Dissent Declares AB 51 a “Too-Clever-By-Half Workaround”

In a lengthy dissent, Judge Ikuta found that AB 51 is entirely preempted by the FAA, was focused on opposing arbitration and “sidestepping” the FAA’s preemptive sweep. She noted the dissent was the latest of the “great variety of devices and formulas” disfavoring arbitration.  Judge Ikuta found that the statute “covertly discriminat[es]” against arbitration agreements in the same way as statutes that have been previously struck down on preemption grounds. As Judge Ikuta pointed out, remarkably, AB 51 “closely tracks” statutes that were struck down by the First and Fourth Circuits, thereby creating a circuit split.

Judge Ikuta also discussed how AB 51 “criminalizes offering employees an agreement to arbitrate, even though the arbitration provision itself is lawful and enforceable once the agreement is executed” and took issue with the majority’s decision.

 Under the basic principles of contract law, Judge Ikuta said, a contract is not enforceable unless there is mutual, voluntary consent.  A party can consent to a contract, even if one party accepts unfavorable terms due to unequal bargaining power or dislikes the terms, as long as the terms (i.e., the arbitration provision) are not invalid due to unconscionability or other generally applicable contract principles. The dissent found that AB 51 disproportionately targets and burdens employers offering arbitration agreements as a condition of employment, which “does not place arbitration contracts on equal footing with all other contracts” and “fails to give due regard to the federal policy favoring arbitration.”

Judge Ikuta also described the “bizarre” outcome of the majority’s decision, which strikes down civil and criminal penalties under AB 51 to the extent it seeks penalties on employers who have successfully executed an arbitration agreement.  This means that an employer’s attempt to enter into an arbitration agreement with employees is unlawful, but a completed attempt is lawful. Judge Ikuta compared the majority’s “tortuous” ruling to a statute that makes it unlawful for a dealer to attempt to sell illegal drugs, but if the dealer succeeds in completing the drug transaction, the dealer cannot be prosecuted.

Recommended Next Steps for California Employers

The Ninth Circuit’s decision created a split between the U.S. Courts of Appeals for the First and Fourth Circuits (which the majority was silent on). It is possible that the Ninth Circuit en banc (a full panel rather than a panel of three judges) or the U.S. Supreme Court will likely have the final word on the issue. On September 22, the Chamber of Commerce filed an unopposed motion for a 21-day extension of time to file a petition for rehearing en banc. If the 21-day extension is granted and a petition for rehearing en banc is filed, the preliminary injunction against enforcement of AB 51 with respect to arbitration agreements governed by the FAA could remain in place until the petition is decided.

Until there is further clarity on arbitration agreements, employers should consult with counsel to assess the implications of this decision on their arbitration agreements and discuss whether to put a pause on requiring arbitration agreements or continuing to do so, keeping in mind that § 432.6 only applies to arbitration agreements that were entered into, modified or extended on or after January 1, 2020. § 432.6(h). Therefore, agreements entered into prior to January 1, 2020 are presumably not affected by AB 51 and enforceable.