Does the Ninth Circuit’s permanent injunction barring enforcement of California’s arbitration agreement law actually put this issue to rest?
Maybe not! Outright wins for employers in California are rare, to say the least. So, the recent permanent injunction against enforcing Assembly Bill 51, California’s ban on mandatory arbitration agreements, gives employers hope. This is not an outright win for employers, but we can call it a win with a caveat.
On January 1, 2020, the California legislature added Section 432.6 to the California Labor Code, and Section 12953 to the California Government Code (AB 51), which would have criminalized the use of mandatory arbitration agreements by employers. AB 51 was passed to protect employees from what the legislature termed "forced arbitration" for disputes arising under the California Fair Employment and Housing Act (FEHA). The law imposed civil liability and criminal penalties on employers that required an existing employee or an applicant to agree to arbitrate claims as a condition of employment in California.
As expected, litigation ensued. Shortly after the law took effect, the U.S. Chamber of Commerce was granted a preliminary injunction by a federal district court to stop enforcement of AB51 as long as the arbitration agreement was governed by the Federal Arbitration Act (FAA).
The State of California appealed the preliminary injunction to the Ninth Circuit, and in 2021, a divided Circuit held that the FAA does not completely preempt AB51. In a surprising move a year later, the Circuit Court withdrew their own opinion and ordered a rehearing on the issue. The case was remanded back to the district court, where the permanent injunction was granted in late 2023.
What happens if an arbitration agreement is not covered by the FAA?
The FAA generally applies to any business that is involved in interstate commerce but has specific exemptions for “contracts of employment of seamen, railroad workers, or any class of workers engaged in foreign or interstate commerce.” 9 U.S.C. §1. This exemption was interpreted to mean workers who actually transport goods across state lines, such as truck drivers and pilots.
The Supreme Court, however, got involved in the issue of the scope of the exemption in Southwest Airlines v. Saxon, No. 21-309 (June 6, 2022); and held that the exemption may not be so limited. The Court determined that ramp workers or a supervisor who loaded cargo that would be crossing state lines fell within the exemption. As such, the issue of which workers fall within the exemption is still an open question, and the Supreme Court has signaled that it will take up additional cases to determine the exact scope of the FAA, so stay tuned.
AB 51 was an attempt to criminalize the use of arbitration agreements as a condition of employment in California. With the Ninth’s Circuit permanent injunction in place, the State of California is currently barred from enforcing AB51 against employers as long as the FAA governs the agreement. However, for arbitration agreements that are not governed by the FAA, the jury is still out as the ongoing battle over the scope of the FAA finds new battlegrounds.
Employers that enter into arbitration agreements with employees can contact the California Legal Services team with any questions. We can be reached at CAinfo@employerscouncil.org.
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