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By Stacy L. Fode, Esq., Nana J. Yee, Esq. and Catherine Williams, Esq.

Finally some good news for California employers, but the fight is not over yet. On February 15, 2023, the U.S. Court of Appeals for the Ninth Circuit issued a decision, Chamber of Commerce of the U.S., et al. v. Bonta, et al., No. 20-15291, that signals a reprieve for California employers seeking to require their employees to sign arbitration agreements as a condition of employment. Under California’s Assembly Bill 51 (AB 51), which was signed into law and became effective on January 1, 2020, California employers face criminal penalties for requiring their employees to sign arbitration agreements as a condition of employment. However, in early 2020, a federal district court entered a preliminary injunction that prevented AB 51 from being enforced with respect to arbitration agreements governed by the Federal Arbitration Act (FAA). 

On appeal, a Ninth Circuit panel initially vacated the preliminary injunction, but in an unusual move, soon withdrew its decision and decided to rehear the case. On February 15, the Ninth Circuit panel issued a new decision affirming the district court’s decision and agreeing that AB 51 is pre-empted by the FAA. The decision explained that AB 51 is the latest in a long line of attempts by California’s legislature to limit the use of arbitration agreements, which conflicts with the “national policy favoring arbitration” that is “embodied” in the FAA. (Op. at 8.) The decision further explained that in accordance with this policy favoring arbitration, the Supreme Court has held that the FAA preempts both state rules that affect the enforceability of arbitration agreements and state rules that “discriminate against the formation of arbitration agreements.” (Op. at 18-19.) The decision concluded that although AB 51 does not render arbitration agreements unenforceable, it “impose[s] a severe burden” on the formation of arbitration agreements, and is therefore pre-empted. (Op. at 24, 26.)

The Ninth Circuit’s decision is not the final word with respect to AB 51. California may appeal the decision or seek a re-hearing by the Ninth Circuit en banc. If the decision is not appealed (or is affirmed on appeal), the case will return to the district court for a final decision regarding AB 51’s enforceability. Such a decision would be a significant victory for California employers seeking to enter arbitration agreements with their employees.

At this time, most California employers may continue to implement mandatory arbitration agreements for employees and new hires, absent any further appeals.  

If you need assistance reviewing arbitration agreements to ensure compliance with the above, please reach out to the NFC Attorney with whom you typically work or call us at 619.292.0515.


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