Ninth Circuit upholds controversial California law restricting employment arbitration

In Chamber of Commerce v. Bonta, in a 2-1 decision, the US Court of Appeals for the Ninth Circuit reversed in part a federal district court's order enjoining the State of California from enforcing Assembly Bill 51. The law had been blocked since shortly after it took effect in January 2020. AB 51 prohibits employers from requiring employees, as a condition of employment, to waive their rights to sue for discrimination, harassment and related claims in court. Termination and other forms of retaliation against employees who refuse to sign the agreements are unlawful. AB 51 does not invalidate existing arbitration agreements.

California officials defended AB 51 against a Federal Arbitration Act (FAA) preemption challenge on the grounds that the FAA covers state laws that invalidate agreements to arbitrate only and does not affect generally applicable state contract law as to consent and the voluntary nature of the parties' conduct before the existence of any agreement. The Ninth Circuit majority agreed, though it did invalidate criminal penalties included in AB 51 that would have applied to already executed arbitration agreements. Those same penalties (including fines and up to six months of incarceration), however, will continue to apply to unsuccessful attempts to enter into arbitration agreement.

In a colorful dissent, Judge Ikuta writes: "Like a classic clown bop bag, no matter how many times California is smacked down for violating the Federal Arbitration Act (FAA), the state bounces back with even more creative methods to sidestep the FAA." She noted the several cases in which the Supreme Court and appellate courts have found California law to preempted by the FAA. She cited Supreme Court authority at odds with her colleagues' decision, noted that the Ninth Circuit has created a split with two other circuits with this decision and predicted that the Supreme Court would again intervene. In her view, AB 51 clearly singles out employment arbitration agreements for unfavorable treatment in violation of the FAA and that (contrary to the California legislature's opinion) even arbitration agreements presented as take-it-or-leave-it adhesion contracts are not inherently non-consensual.

We expect the plaintiff will be preparing a request for en banc review by the Ninth Circuit. Barring further action by the court of appeals, this case presents a compelling basis for the US Supreme Court's intervention.

In light of this decision, employers should tread carefully and consider whether new employment arbitration agreements (even if there is no consequence for employees who opt out) are worth the risk until this AB 51 litigation has concluded.