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February 2023: California’s Ban on Mandatory Arbitration Agreements Invalidated

21 Feb

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Update Applicable to:
All employers in the state of California

What happened?
On February 15, 2023, the Ninth Circuit Court of Appeals issued a decision in Chamber of Commerce of the United States of America, et al. v. Bonta et al. No. 20-15291 (9th Cir. February 15, 2023), which invalidates California’s Assembly Bill 51 (AB 51) — the latest in the long-running litigation over whether California may prevent employers from requiring arbitration agreements as a condition of employment.

What are the details?
Taking effect on January 1, 2020, AB 51 prohibited employers from requiring employees to sign agreements to arbitrate any disputes arising from the employee’s employment — a longstanding employer practice. Since its passage in 2019, the California Chamber of Commerce and others have challenged the law, which resulted in it initially being invalidated at the trial court level before being reinstated at the Ninth Circuit Court of Appeals, and most recently had been left in limbo after the Ninth Circuit withdrew its initial opinion.

Now, the Ninth Circuit has reversed itself and agrees with the trial court’s decision that the FAA preempts AB 51, rendering the law unenforceable against employers. While California’s previous efforts to outlaw employment arbitration agreements altogether failed, AB 51 tried to criminalize the act of requiring employees to sign arbitration agreements as a condition of employment while still allowing the enforcement of arbitration agreements the employee signed.  

AB 51 created a circumstance where an employer committed a crime by requiring the execution of an arbitration agreement but could still enforce the fruits of its crime.

In light of the peculiar nature of this law, the Ninth Circuit reviewed U.S. Supreme Court precedent, finding that not only does the FAA preempt laws that outlaw arbitration agreements, it also preempts laws that discriminate or deter against the formation of arbitration agreements. With the inclusion of criminal (and civil) penalties available against employers who require arbitration agreements as a condition of employment, AB 51 deters employers from forming arbitration agreements in violation of the FAA.

With AB 51 currently unenforceable, California employers may continue to use mandatory arbitration agreements for now. AB 51’s future is uncertain — litigation could go to the U.S. Supreme Court. Further, as the Ninth Circuit reminds us, even executed mandatory arbitration agreements are unenforceable if they are either procedurally or substantively unconscionable.

For more information, please see the links below:

United State Court of Appeals for the Ninth Circuit Decision

Assembly Bill 51 (AB 51)

Article 1Article 2

What do employers need to do?
Employers should review the links above and consult with legal counsel for any policies regarding mandatory arbitration agreements.

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This communication is intended solely for the purpose of conveying information. The present post might incorporate hyperlinks directing readers to websites managed by third-party entities. The inclusion of any links within this communication is meant to serve as points of reference and could encompass opinion articles from various law firms, articles from HR associations, official websites, news releases, and documents of government agencies, and other relevant third-party sources. Vensure has no authority over these external websites and bears no responsibility for their content. Furthermore, Vensure does not endorse the materials present on these websites. The contents of this communication should not be interpreted as legal advice or as a legal standpoint concerning specific facts or scenarios. Nor should it be deemed an exhaustive compilation of facts potentially pertinent to federal, state, or local laws. It is strongly advised that employers solicit legal guidance from an employment attorney when undertaking actions in response to any legal updates provided. This is due to the possibility of future alterations occurring in federal, state, and local laws, regulations, as well as the directives and guidelines issued by governing agencies. These changes may transpire at any given time, potentially rendering certain portions of the content within this update void or inaccurate.

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