Ninth Circuit Puts An End to California Interference With Employer - Mandated Arbitration Agreements

02.21.2023

Last week, the Ninth Circuit Court of Appeals dismantled AB 51, a California law forbidding employer-mandated arbitration agreements, which some regarded as a thinly-veiled attack on the Federal Arbitration Act (“FAA”). Chamber of Commerce v. Bonta (February 15, 2023) --- F.4th -- Case No. 20-15291. At this juncture, most California employers can safely require employees to sign arbitration agreements as a condition of employment.

The ruling is a welcome reprieve for California employers. Employers routinely rely on arbitration agreements to manage their workplace litigation risk, as a well-crafted arbitration agreement can prevent expensive class actions and potentially even representative PAGA actions (the Private Attorneys General Act of 2004, California Labor Code sections 2698-2699.8). The FAA aggressively protects arbitration agreements as long as the agreements have some connection to interstate commerce and as long as there is no fraud, duress, or unconscionability. Because the FAA trumps state law, courts must uphold a valid arbitration agreement even if it would be unenforceable under state law.

In an effort to block arbitration agreements in employment, California created AB 51 (effective January 1, 2020) to prohibit arbitration agreements as mandatory condition of employment. To avoid AB 51’s immediate demise under the FAA, California lawmakers developed a workaround. Instead of prohibiting the enforcement of the mandatory arbitration agreement itself, lawmakers simply made it a crime when employers required their employees to sign the agreements as a condition of employment in the first place. The rationale was that AB 51 did not infringe on arbitration agreements themselves, but only the formation of the agreements.

The Ninth Circuit thought otherwise. After a somewhat complicated history with a prior decision and stay, the Ninth Circuit issued a reconsidered panel decision, finding the workaround “too clever by half.” In Bonta, the panel held that the FAA preempts AB 51 and permits employers to require arbitration agreements as a condition of employment. The panel reasoned that the FAA’s protection extended to the formation of arbitration agreements, as AB 51’s criminal penalty clearly discouraged employers from entering into arbitration agreements. The court also found that AB 51 singled out arbitration agreements even though California law permits many other non-negotiable terms of employment (including requirements related to compensation or drug usage). The panel therefore found that AB 51 stood as an obstacle to the FAA’s purpose and objectives.

Takeaway for Employers:

Unless the matter is appealed to the U.S. Supreme Court or taken up for reconsideration by the Ninth Circuit en banc, the Bonta decision safely positions most California employers to use arbitration agreements as a condition of employment. Employers should be mindful that the benefits of the Bonta decision only apply to arbitration agreements governed by the FAA. A number of conditions can exempt an arbitration agreement from the FAA, such as a lack of connection to interstate commerce or circumstances and terms that render the agreement unconscionable. Also, the FAA features an express exemption for transportation workers. Employers that are not subject to the FAA’s protections still risk triggering AB 51’s criminal penalties by mandating arbitration, even after Bonta.

It is critical that California employers work with experienced employment counsel to ensure their arbitration agreements are governed by the FAA. Arbitration agreement audits should:

• Carefully review the agreement language for any objectionable terms
• Assess the onboarding and signature procedures for potential procedural objections
• Analyze company operations to evaluate the connection to interstate commerce as well as whether the transportation worker exemption applies.

If your business currently uses arbitration agreements or wishes to implement them, please contact the authors of this alert or your usual counsel at Atkinson, Andelson, Loya, Ruud & Romo for guidance.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR presentation does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

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