September 22, 2021Client Alert

Ninth Circuit Partially Upholds California’s Ban on Mandatory Employment Arbitration Agreements

On September 15, 2021, in a highly anticipated decision, the Ninth Circuit Court of Appeals partially upheld a California law prohibiting employers from requiring employees to arbitrate most employment claims.

A. Background

On October 10, 2019, Governor Gavin Newsom signed California Assembly Bill No. 51 (AB 51), which generally made it unlawful for employers to require employees to arbitrate discrimination, harassment and retaliation claims under the California Fair Employment and Housing Act (FEHA), and wage and hour claims under the California Labor Code. AB 51 also covered a range of other topics. The language regarding arbitration stated, in part:

A person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right, forum or procedure for a violation of any provision of [FEHA] or [the California Labor Code] (Section 432.6).

Section 432.6 was a significant blow to employers who, for instance, rely on the benefits of arbitration agreements coupled with class action waivers.

Shortly after the law’s passage, several business organizations filed a lawsuit in federal court challenging Section 432.6 under the Federal Arbitration Act (FAA). The FAA expresses a federal policy generally favoring arbitration as an alternative form of dispute resolution. For this reason, courts across the country regularly have held state laws that single out arbitration agreements for disfavored treatment are preempted by the FAA. In the lawsuit challenging AB 51, Chamber of Commerce of the United States et al. v. Becerra, the plaintiffs argued the FAA specifically preempts and therefore invalidates Section 432.6. The plaintiffs asked the trial court to enjoin the State of California from enforcing the state law.

On February 6, 2020, the trial court granted the plaintiffs’ request and temporarily enjoined the State from enforcing Section 432.6. Though the trial court did not conclude Section 432.6 was unlawful, the decision at least temporarily cooled concerns within the business community. Not surprisingly, the State appealed to the Ninth Circuit, which sits in California.

B. The Ninth Circuit’s Decision

After months of waiting, the Ninth Circuit held the FAA does not preempt Section 432.6, which leaves the California law in place for now. The Ninth Circuit reached this conclusion by distinguishing between laws that attempt to invalidate arbitration agreements versus laws that target how arbitration agreements are formed.

First, the Ninth Circuit determined Section 432.6 does not conflict with the FAA, which generally allows arbitration agreements. To the contrary, the Ninth Circuit explained Section 432.6 does not invalidate agreements to arbitrate. Rather, Section 432.6 only places conditions on how employers obtain a valid waiver of the right to file claims in court—meaning, agreements must be voluntary and not a condition of employment.

Second, the Ninth Circuit determined Section 432.6 does not pose an obstacle to Congress’ goal of preserving the validity and enforceability of arbitration agreements through its passage of the FAA. The Ninth Circuit reasoned Section 432.6 only regulates “pre-agreement employer behavior” by requiring arbitration agreements to be voluntary on the part of the employee and not a condition of employment. The Ninth Circuit noted nothing in the FAA gives employers the right to “force” arbitration agreements on “unwilling employees.” The Ninth Circuit stated the only federal right is to have consensual agreements.

If there is any silver lining to the Ninth Circuit’s decision, employers will be reassured to know the Ninth Circuit held AB 51’s criminal and civil sanctions for entering into an unlawful arbitration agreement are preempted by the FAA and, thus, unenforceable.

C. Takeaways

Becerra raises several key questions:

  1. How will the Ninth Circuit’s decision impact trends in other states to limit or restrict arbitration agreements?
  2. If mandatory arbitration agreements are unenforceable, can employers obtain the benefits of class and collective action waivers by including those provisions in other types of agreements?

1. Becerra’s Impact in Other States

There are benefits of arbitration. Arbitration can—though not always does—provide a cost-effective, speedy and private process for resolving disputes compared to litigation. Yet, across the country state laws have been popping up seeking to curb mandatory arbitration agreements. For instance, Illinois employers will recall that in 2019, Governor J.B. Pritzker signed into law legislation voiding employment arbitration agreements which do not meet certain conditions. Other states also have unique laws affecting employment arbitration agreements. It remains to be seen how, for instance, courts will treat the Illinois restrictions under the FAA. But the Ninth Circuit’s decision may make it more difficult in the short-term for employers challenging similar laws in other states. And the future of AB 51 also remains unknown, as the parties in Becerra may appeal the Ninth Circuit’s decision to the U.S. Supreme Court.

2. Waivers in Other Employment Agreements

In Epiq Systems Corporation v. Lewis, 138 S. Ct. 1612 (2018) (Epiq), the Supreme Court held class and collective action waivers in mandatory arbitration agreements generally are enforceable. However, there currently is no consensus among federal courts on whether class and collective actions waivers are enforceable in agreements that do not allow arbitration as an alternative forum. The Ninth Circuit has yet to rule on this issue. If, on the one hand, the FAA’s policy favoring arbitration drives the outcome, employers might expect courts to refuse to enforce waivers when they are contained in agreements that do not provide an arbitral forum. On the other hand, if courts believe (as some indeed have) that wage and hour laws do not establish a non-waivable substantive right to participate in a class or collective action, employers might expect waivers to be enforced regardless of the type of agreement involved. The Ninth Circuit’s decision to uphold most of AB 51 makes this issue more relevant for employers reviewing class and collective action waivers.

Employers should weigh these and other considerations when deciding whether to obtain class and collective actions waivers and/or agreements from employees to arbitrate.

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