California Law Barring Arbitration Agreements as a Condition of Employment Enjoined by Federal Court

California Law Barring Arbitration Agreements as a Condition of Employment Enjoined by Federal Court

A federal district court in the Eastern District of California has entered a permanent injunction barring the State of California from enforcing Assembly Bill 51—a state law that prohibits California employers from requiring arbitration agreements as a condition of employment.

Decision

In the case of Chamber of Commerce of the USA et al. v. Bonta, No. 2:19-cv-02456 (E.D. Cal. Jan. 1, 2024), Chief U.S. District Judge Kimberly J. Mueller held that under the injunction, the State of California—including administrative agencies like the California Department of Fair Employment and Housing, the California Labor and Workforce Development Agency, and Civil Rights Department—is:

  1. Enjoined from enforcing sections 432.6(a), (b), and (c) of the California Labor Code where the alleged “waiver of any right, forum, or procedure” is the entry into an arbitration agreement that is covered by the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (“FAA”); and
  2. Enjoined from enforcing § 12953 of the California Government Code where the alleged violation of “Section 432.6 of the Labor Code” is the entry into an arbitration agreement that is covered by the FAA.

With Judge Mueller’s ruling, Assembly Bill 51 is no longer an impediment to employers who want to require arbitration agreements as a condition of employment in California—provided the FAA applies and governs the agreement.

Background

The law, which took effect in 2020, was designed to prohibit California employers from mandating that employees sign arbitration agreements as to issues arising under the California Fair Employment and Housing Act or Labor Code as a condition of employment or employment-related benefits. AB 51 was to apply to any arbitration agreement entered into, modified, or extended on or after January 1, 2020.

The plaintiffs in this case were the Chamber of Commerce of the United States of America, the California Chamber of Commerce, the National Retail Federation, the California Retailers Association, the National Association of Security Companies, the Home Care Association of America, and the California Association for Health Services At Home.

The U.S. Chamber explained that it is “is the world’s largest business federation, representing approximately 300,000 direct members and indirectly representing an underlying membership of more than three million U.S. businesses and professional organizations” across the United States.” Moreover, many U.S. Chamber members are California businesses that require arbitration agreements as a condition of employment or require those who wish to avoid arbitration to affirmatively opt out.

A California federal district court granted the U.S. Chamber of Commerce’s request for a preliminary injunction in February 2020 and enjoined enforcement of the law concerning arbitration agreements governed by the FAA. The State appealed to the Ninth Circuit, which, in a divided Ninth Circuit panel, first concluded that the FAA does not completely preempt AB 51. But in 2021, the Ninth Circuit withdrew its opinion on its own unexpectedly and granted a panel rehearing on the matter. The Court of Appeals subsequently held that the FAA in fact does preempt AB 51 completely and affirmed the district court’s preliminary injunction.

“AB 51’s deterrence of an employer’s willingness to enter into an arbitration agreement is antithetical to the FAA’s ‘liberal federal policy favoring arbitration agreements,’” the Court of Appeals said, quoting an earlier Supreme Court decision. The Court reasoned that AB 51’s penalty-based scheme to inhibit arbitration agreements before they are formed violates the “equal-treatment principle” inherent in the FAA, and is the type of “device” or “formula” evincing “hostility towards arbitration” that the FAA was enacted to overcome.

As a result, “[b]ecause the FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 is therefore preempted.”

Takeaway

California’s AB 51, banning employers from requiring employees to enter mandatory arbitration agreements, was struck down because it violates the Federal Arbitration Act’s (FAA) preemption of state laws that disfavor arbitration agreements.

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