Alert: What California Employers Need to Know About Mandatory Arbitration Agreements Following Chamber of Commerce v. Bonta

On February 15, 2023, the Ninth Circuit Court of Appeals issued its decision in Chamber of Commerce of the United States of America et al. v. Bonta et al. (9th Cir. No. 20-15291), which invalidates California Assembly Bill (AB) 51. This case is the latest development in the long-running litigation over whether California may prevent employers from requiring arbitration agreements as a condition of employment. The Ninth Circuit panel held that the Federal Arbitration Act (FAA) preempts AB 51 because it criminalizes the formation of mandatory arbitration agreements and, thus, violates the FAA’s purpose of encouraging arbitration.

Background: Enactment of AB 51 & Lower Court Litigation

AB 51, which was set to take effect on January 1, 2020, was enacted to protect employees from “forced arbitration” by making it a criminal offense for an employer to require an existing employee or an applicant for employment to consent to arbitrate specified claims as a condition of their employment. After AB 51 was enacted in 2019, the U.S. Chamber of Commerce along with other trade associations and business groups, filed this action against the State of California to invalidate AB 51. The trial court initially granted a preliminary injunction in favor of the Plaintiffs, blocking the enforcement of AB 51; but the law was later reinstated by the Ninth Circuit on appeal. Then, in August 2022, the Ninth Circuit withdrew its initial opinion and agreed to a rehearing on the Plaintiffs’ appeal, leaving the validity of AB 51 in limbo until its decision last week.

The Ninth Circuit’s Legal Analysis

Now, the Ninth Circuit has reversed itself and agrees with the trial court’s decision that the FAA preempts AB 51 rendering the law unenforceable against employers. In its opinion, the three-judge panel explained that while California’s previous efforts to outlaw employment arbitration agreements altogether failed, AB 51 tried to criminalize the act of requiring employees to sign arbitration agreements as a condition of employment, while still allowing the enforcement of arbitration agreements executed in violation of this law. Therefore, AB 51 created an illogical circumstance where an employer committed a crime by requiring the execution of an arbitration agreement but was still able to enforce that agreement once it was executed.

In light of the peculiar nature of AB 51, the Ninth Circuit reviewed U.S. Supreme Court precedent, finding that not only does the FAA preempt state laws that outlaw arbitration agreements, it also preempts state laws that discriminate or deter against the formation of arbitration agreements. With the inclusion of criminal (and civil) penalties available against employers who require arbitration agreements as a condition of employment, AB 51 deters employers from the formation of arbitration agreements in violation of the FAA.

With AB 51 currently unenforceable, California employers may continue to use mandatory arbitration agreements for the time being. AB 51’s future is uncertain—the California Attorney General could appeal the decision to be heard by the full Ninth Circuit or to the U.S. Supreme Court. Further, as the Ninth Circuit cautioned in its opinion—even executed mandatory arbitration agreements are unenforceable if they are either procedurally or substantively unconscionable. For these reasons, employers are strongly encouraged to consult with legal counsel for any policy or practice related to the use of mandatory arbitration agreements, including the drafting and review of the agreements themselves.

Ferber Law is available to help you navigate the ever-changing landscape of arbitration agreements in California. We look forward to assisting you.