On February 15, 2023, the United States Court of Appeals for the Ninth Circuit issued its decision in Chamber of Commerce v. Bonta, holding that federal law preempts California’s AB 51, legislation that outlawed arbitration agreements for claims under the California Fair Employment and Housing Act (FEHA), as well as wage and hour claims under the Labor Code. The decision represents a major win for California employers.
Background of AB 51 and Current Litigation
California’s AB 51 became effective on January 1, 2020, and effectively prevented employers from requiring employees to enter into arbitration agreements. In the weeks prior to it becoming effective, however, the United States Chamber of Commerce (Chamber) filed suit against the State of California arguing the Federal Arbitration Act (FAA) preempted AB 51. The United States District Court for the Eastern District of California issued an injunction against the enforcement of AB 51 in February 2020.
The injunction did not last, however, as the Ninth Circuit reversed the lower court in September 2021. The Chamber immediately requested a rehearing en banc, but before the Ninth Circuit decided to rehear the case, the United States Supreme Court agreed to hear Viking River Cruises, Inc. v. Moriana, a different case involving arbitration in California. The Ninth Circuit announced it would wait for the Supreme Court to rule in Viking River before it considered the request for an en banc rehearing. In an unusual turn, the Ninth Circuit also withdrew its prior September 2021 decision that had reversed the lower court’s injunction.
The Supreme Court issued its ruling in Viking River in June 2022 and held employers are permitted to force individual claims filed under the California Private Attorney General Act (PAGA) to arbitration. Our prior alert analyzing Viking River is available here. Viking River set the stage for the Ninth Circuit to revisit AB 51.
The Ninth Circuit’s Decision
The Ninth Circuit’s most recent decision held the FAA preempts AB 51 and that employers are free to require mandatory arbitration of claims in employment agreements. The Ninth Circuit called out AB 51’s attempt to evade preemption under the FAA and stated the Supreme Court’s reasoning in prior cases invalidating state rules that burden the formation of arbitration agreements applied AB 51, which the Ninth Circuit determined discriminated against the formation of arbitration agreements but did not make those agreements unenforceable. The Ninth Circuit noted permitting such an “unusual structure” would “wholly eviscerate Congressional intent to place arbitration agreements on the same footing as other contracts” and, therefore, the FAA preempts AB 51, which prevented parties from entering into arbitration agreements in the first place.
The result of the Ninth Circuit’s decision is that California employers can again require employees to enter into arbitration agreements as a condition of employment. Additionally, this most recent decision builds upon the momentum of Viking River, which permits employers to force individual PAGA claims to arbitration (assuming there is an enforceable arbitration agreement between the employer and employee).
California employers may wish to consider requiring arbitration agreements if they do not have them currently in place. It would also be a good time to review older arbitration agreements to make sure they comply with the current rules.