Arbitration Lovers Rejoice: Ninth Circuit Holds That Federal Arbitration Act Preempts California’s AB 51, Allows Arbitration Agreements as Condition of Employment

The California Assembly introduced Assembly Bill (AB) 51 in late 2018, the latest in a prolonged effort to create legislation that would sidestep the Federal Arbitration Act (FAA) and prevent employers from requiring employees to enter into arbitration agreements as a condition of employment.¹ This effort included creative legislation in both 2015 and 2018 (AB 465 and 3080, respectively) that then-Governor Jerry Brown ultimately vetoed on the grounds that the bills would likely violate the FAA.

After then-Governor Brown left office his successor, Governor Gavin Newsom, signed AB 51 into law, which added a section to the California Labor Code that would prohibit employers from requiring employees to waive the right to litigate certain claims. These claims include those under the California Fair Employment and Housing Act (FEHA). Practically, AB 51 would have prohibited employers from requiring employees to enter into arbitration agreements as a condition of employment for disputes arising under the FEHA. Violations could result in prosecution for a criminal misdemeanor offense and fines of up to $1,000. Under the provisions of AB 51, while employers could not force employees to sign arbitration agreements, they could ultimately enforce arbitration agreements that employees signed voluntarily.

After AB51 was signed into law, trade and business organizations including the US Chamber of Commerce sought to challenge the law and succeeded in enjoining enforcement AB 51. California appealed and succeeded in 2021, when the Ninth Circuit held that the FAA only partially preempts AB 51. However, after the US Supreme Court decision in Viking River Cruises, Inc. v. Moriana (finding the FAA preempted certain interpretations of the Private Attorneys General Act), and a petition from organizations headed up by the US Chamber of Commerce, in 2022, the Ninth Circuit withdrew the prior opinion and permitted rehearing.²

Today, the Ninth Circuit affirmed the 2019 ruling, and held that the FAA preempts AB 51. As a result, California employers may now require employees to sign arbitration agreements as a condition of employment. The court agreed with the Fourth and First Circuits that the FAA preempts a state rule, here AB 51, which discriminated against arbitration by discouraging the formation of an arbitration agreement. The court further found that the criminal penalty provision of the Labor Code would have a deterrent effect on employers’ use of arbitration agreements, that is antithetical to the FAA. Finally, the court reasoned that parties may consent to contracts or arbitration agreements, even if the agreement is more favorable to one side due to unequal bargaining power, and that procedurally and substantively unconscionable contracts are nonetheless unenforceable under basic contract law. For all of these reasons, the majority opinion stated that AB 51 does not prevent employees from being forced into arbitration against their will and should be on par with other contractual agreements.

California employers have long-awaited this decision – until now, they have been forced to navigate confusing legislation and subject to punitive measures for failure to appropriately to so.  While employers should still tread lightly in requiring employees to sign arbitration agreements as a condition of employment (because the aftermath of this historic decision is uncertain) it is fair to say that employment arbitration agreements live to fight another day in California.