Ninth Circuit Rules Federal Arbitration Act Preempts AB51, Paving Way for Mandatory Arbitration Agreements

California disfavors arbitrations in the employment setting and, in 2019, the California Legislature passed AB51 prohibiting companies to require employees to sign arbitration agreements for employment-related disputes as a condition of employment. Contrary to California, the Federal Arbitration Act’s (FAA) purpose is to encourage arbitration. When AB51 took effect in California in January 2020, the U.S. Chamber of Commerce asked the federal district court for a preliminary injunction to stop AB51’s application to arbitration agreements governed by the FAA. The district court granted the injunction, ruling that the FAA preempted AB51. On appeal in 2021, the Ninth Circuit, in a divided panel of three, held that the FAA did not completely preempt AB51 where AB51 regulates an employer’s arbitration policy prior to executing an arbitration agreement. The U.S. Chamber of Commerce requested a rehearing, en banc. Instead of ruling on the en banc petition, the Ninth Circuit withdrew its prior opinion and granted a panel rehearing.

Good news for California employers. On Feb. 15, 2023, the Ninth Circuit panel ruled the FAA preempts AB51, citing the purpose of the FAA to encourage arbitration and holding that AB51 is an impediment to that purpose. It is unclear whether the California Attorney General’s Office will ask the Ninth Circuit for rehearing, en banc, or petition the U.S. Supreme Court for review. However, it appears promising that companies will be able to condition employment, including continued employment, on employees agreeing to mandatory arbitration.

Employers must still be mindful of limitations to arbitration agreements, such as the prohibition against compelling arbitration of sexual assault/harassment claims. Moreover, uncertainty remains regarding provisions requiring arbitration of all individual claims, including under California’s Private Attorney General Act (PAGA) for violations of the California Labor Code, and the effect of the individual’s standing to maintain a representative PAGA claim in light of the U.S. Supreme Court’s decision in Viking River Cruises.

If you are considering instituting an arbitration policy for your workforce or have not updated your arbitration policy recently, there are a number of considerations of which to be mindful in California. Please contact your regular AT lawyer or the author below for additional information specific to your company.