California has finally received long awaited clarification from the United States Court of Appeals for the Ninth Circuit, which has appellate jurisdiction over the U.S. District Courts in California, on Assembly Bill 51 (AB 51).

arbitration spelled out on blocks

AB 51 was intended to prevent California employers from imposing mandatory arbitration agreements on their job applicants and employees beginning in January 2020. It did so by creating potential exposure to employers for civil and criminal penalties if they made arbitration agreements a mandatory condition of employment. However, two days before the new law took effect in January 2020, it was challenged in federal court and temporarily blocked while it worked its way through the court system.

In the Ninth Circuit court’s ruling last week in U.S. Chamber of Commerce v. Bonta, the court upheld the trial court’s decision granting a preliminary injunction that blocked the enforcement of AB 51. The trial court determined that AB 51 was in conflict with the Federal Arbitration Act (FAA), and that the FAA preempted California from enforcing AB 51. This means that the court permitted the use of mandatory arbitration agreements as allowed under federal law, and disagreed that the State of California could impose civil and criminal penalties on employers for making arbitration agreements a mandatory condition of employment. The Ninth Circuit court agreed.

Unless the case is appealed to the full Ninth Circuit (a three-judge panel issued the Bonta decision) or to the United States Supreme Court, California employers should be able to continue to require applicants and employees to sign mandatory arbitration agreements as part of their application process and as a condition of employment with the business.

The Ninth Circuit reasoned that the FAA encourages arbitration and requires arbitration agreements to be treated the same way that other contracts are treated. It found that AB 51 created an obstacle to arbitration by imposing civil penalties and making it a misdemeanor for an employer to require arbitration as a condition of employment. The California Legislature used this strategy in drafting AB 51 because prior court decisions found that mandatory arbitration agreements were legally enforceable, and that holding otherwise would violate the FAA.

AB 51 intended to create a scenario where an employer who was willing to require mandatory arbitration agreements could do so and the agreements would be enforceable, however the employer could face potential civil penalties and criminal charges as a result. This created a confusing rule where an employer was subject to potential civil and criminal liability for requiring an applicant or employee to enter into an arbitration agreement, yet the agreement itself would be enforceable assuming it was an otherwise valid and legal contract.

The Ninth Circuit’s decision in U.S. Chamber of Commerce v. Bonta upholds the preliminary injunction blocking the ban on mandatory arbitration agreements. This allows employers to implement mandatory arbitration agreements currently. However, to be enforceable those arbitration agreements must still comply with federal and state law.

While this outcome is a win for California employers, the ruling may not be the final word on the issue. The State of California could attempt to resuscitate AB 51 by asking the Ninth Circuit or the U.S. Supreme Court to review the Bonta decision. It is important for employers who require arbitration agreements as a condition of employment to continue to monitor state and federal law on this issue. California employers should also remember that while they may be able to require applicants and employees to sign arbitration agreements as a condition of employment, the agreements must still comport with basic contract law principles as well as other requirements to be enforceable. Employers may wish to seek competent employment legal counsel to ensure their strategy complies with current federal and state law.

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