Ninth Circuit Decision Upholding Mandatory Arbitration Agreements as Condition of Employment is Stayed

On September 15, in a decision long-anticipated by California employers, the Ninth Circuit upheld Assembly Bill (A.B.) 51, a law that prohibits employers from requiring employees to sign arbitration agreements as a condition of employment. Arbitration agreements often contain class action waivers and thus A.B. 51 significantly impacts an employer’s ability to prevent class litigation from ensuing. 

Several organizations have challenged A.B. 51, initially set to take effect on January 1, 2020, as preempted by the Federal Arbitration Act (“FAA”). In February 2020, the District Court granted a preliminary injunction in favor of these organizations and stopped the law from going into effect. 

The Ninth Circuit reversed the District Court’s decision, holding that A.B. 51 is not completely preempted by the FAA including because it does not hinder the ability of employers and employees to enter into arbitration agreements. Rather, the Court found that the law governs “conduct that takes place prior to the existence of” an arbitration agreement and assures that entry into an arbitration agreement is mutually consensual. 

On October 20, however, the Plaintiffs/Appellees (which include the U.S. Chamber of Commerce among others) filed a petition for hearing en banc arguing the Ninth Circuit decision conflicts with Supreme Court and other circuit court precedent. Defendants/Appellants must respond to the petition by November 11. 

Significantly, the mere filing of the petition stays the Ninth Circuit’s decision to vacate the District Court’s preliminary injunction and thus A.B. 51 once again will not take effect for the time being. Winston & Strawn will continue to monitor all filings and rulings in this matter and will provide additional updates as they arise.     

Below is a summary of the key provisions of A.B. 51 and suggestions for California employers considering the Court’s decision.

A.B. 51

A.B. 51, which added section 432.6 to the California Labor Code, prohibits employers from requiring employees -- as a condition of employment, continued employment, or receipt of employment-related benefits -- to waive “any right, forum, or procedure” to pursue a claim under the FEHA or the California Labor Code.  While the law does not specify the “rights, forums, or procedures” it targets, mandatory arbitration agreements are plainly in its cross-hairs. The prohibition also likely encompasses agreements when an employee waives his or her right to a jury trial or the ability to bring or participate in a class action. A.B. 51 expressly excludes post-dispute settlement agreements and negotiated severance agreements from its scope. The law applies to contracts entered into, modified, or extended on or after January 1, 2020. 

Violations of A.B. 51  not only invalidate the offending agreement, but also independently violate the FEHA. In addition, a prevailing plaintiff-employee enforcing his or her rights under A.B. 51 may recover attorney’s fees. 

The law, as passed, also imposes civil and criminal sanctions for violations, including imprisonment and fines of up to $1,000. The Ninth Circuit struck down this portion of the law on preemption grounds, but this portion of the decision also is subject to the rehearing and thus could change.   

Importantly, A.B. 51 permits employers and employees to agree to waive any “right, forum, or procedures” so long as the employee voluntarily agrees to the agreement and does not suffer (and is not under any threat of) adverse employment consequences as a result of rejecting the agreement. We expect, however, that courts will closely scrutinize the voluntariness of any such agreements when challenged by employees. 

Next Steps for Employers

California employers should consult their labor and employment counsel to ensure they remain up-to-date on whether (and potentially when) A.B. 51 will take effect and take steps to be ready to implement and review new and/or revised employment policies and contracts to ensure compliance with A.B. 51 should it take effect at some future date.