A split Ninth Circuit panel vacated a 2020 preliminary injunction that blocked the enforcement of California’s A.B. 51, which prohibits mandatory arbitration clauses in employment contracts. If the majority decision stands, it will mean that California employers can no longer require their employees or new hires to sign arbitration agreements (among other types of waivers) as a condition of employment.

A.B. 51

A.B. 51 was signed into law in October 10, 2019, adding section 432.6 to the California Labor Code. The law generally prohibits an employer from requiring any applicant or employee, as a condition of employment or receipt of any employment-related benefit, to waive any right, forum, or procedure for a violation of the California Fair Employment and Housing Act (FEHA) or the California Labor Code, subject to certain exceptions. Such a waiver includes, for example, mandatory arbitration clauses in an employment contract, but the law is not limited specifically to arbitration agreements. A.B. 51 also prohibits an employer from threatening, retaliating, or discriminating against any applicant or employee because of the refusal to consent to such a waiver. A.B. 51’s restrictions stated that they would apply to all employment contracts entered into, modified, or extended on or after January 1, 2020.

Additionally, the law specifies that a violation of the above prohibitions would constitute an unlawful employment practice and, consequently, impose criminal and civil penalties. Such penalties might include a misdemeanor offense, state investigation, or private litigation.

2020 Order Granting Preliminary Injunction

On December 9, 2019, a lawsuit was filed in the U.S. District Court for the Eastern District of California to enjoin enforcement of A.B. 51 on the grounds that the law was preempted by the Federal Arbitration Act (FAA). In ruling on the motion for a preliminary injunction, the district court held A.B. 51 placed arbitration agreements on unequal footing with other contracts and that A.B. 51 was inconsistent with the purposes and objectives of the FAA. On December 30, 2019, the district court issued a temporary injunction, and, shortly thereafter, the district court preliminarily enjoined enforcement of A.B. 51 as to arbitration agreements covered by the FAA (the Order).

The Ninth Circuit Majority Decision Vacating The District Court’s Order

The Ninth Circuit reviewed the Order granting a preliminary injunction, and issued its opinion on September 15, 2021. The majority decision states that it vacates the injunction preventing the state from enforcing A.B. 51, but also invalidates the new criminal and civil penalties added by the law at least as applicable to executed arbitration agreements.

In the majority opinion, the panel held that A.B. 51’s restriction on requiring waiver of an employee’s rights, forums, or procedures for violations of the FEHA or Labor Code did not affect the validity and enforceability of arbitration agreements in a way that conflicts with the FAA or stands as an obstacle to the federal law’s purposes and objectives. Specifically, the majority held that those provisions of A.B. 51 involving the regulation of pre-agreement employer behavior were not preempted by the FAA and, thus, valid. The panel held, however, that A.B. 51’s criminal and civil penalties were preempted by the FAA and, thus, invalid at least as applicable to executed arbitration agreements. Unlike the restrictions on pre-agreement behavior, the potential penalties would punish employers for entering into arbitration agreements, which stand as an obstacle to the purposes and objectives of the FAA. Accordingly, the majority partially reversed the Order, vacated the preliminary injunction, and remanded to the district court for further proceedings.

Given the importance of this issue, it is likely that rehearing en banc and/or an appeal to the U.S. Supreme Court will be sought. Nonetheless, California employers should immediately review contracts that may be affected by this ruling and consult with their employment attorneys regarding their approach to those agreements in the wake of this decision.