In an unexpected move, the U.S. Court of Appeals for the 9th Circuit recently withdrew its 2021 opinion that had previously allowed the enforcement, in large part, of AB 51, a ban on mandatory arbitration agreements as condition of employment in California. The 9th Circuit has granted a panel rehearing on the matter which has yet to be scheduled. In the meantime, the district court's preliminary injunction blocking the enforcement of AB 51 remains in effect pending the 9th Circuit’s panel rehearing.

AB 51 and Chamber of Commerce of the U.S. v. Bonta

Governor Newsom signed into law AB 51, effective January 1, 2020, which prohibited California employers from requiring employees to sign arbitration agreements as a condition of employment effective January 1, 2020. Before the law was to take effect, the U.S. Chamber of Commerce and several other business groups filed suit in the U.S. District Court for the Eastern District of California challenging AB 51, alleging—among other things—that the law was preempted by the Federal Arbitration Act (FAA). On December 30, 2019, two days before the new law was to take effect, the federal district court granted a temporary restraining order halting the enforcement of the AB 51. Later, in January 2020, the court granted the U.S. Chamber of Commerce’s request for a preliminary injunction and prohibited the enforcement of AB 51 with respect to arbitration agreements governed by the FAA.

Following an appeal by the State of California, a panel of the 9th Circuit vacated the preliminary injunction and reversed in part the trial court’s finding that AB 51 was preempted by the FAA. In a 2-1 majority opinion written by Judge Carlos Lucero and joined by Judge William Fletcher, the three-member panel found that the FAA did not preempt AB 51 insofar as it applied to prohibitions on making arbitration agreements a condition of employment; but it did preempt the statute from imposing any civil or criminal penalties if an employee actually signed an arbitration agreement. Notably, employers could still be subject to civil and criminal penalties if an employee was fired for not signing an arbitration agreement, or if an applicant was not hired because they refused to sign the arbitration agreement. In her forceful dissent, Judge Sandra Ikuta described AB 51 as a "blatant attack on arbitration agreements, contrary to both the FAA and longstanding Supreme Court precedent." (See DWT's blog post on this ruling, Chamber of Commerce of the U.S. v. Bonta.)

Shortly thereafter, the U.S. Chamber of Commerce filed a petition with the 9th Circuit for a rehearing en banc (i.e., to have the decision vacated and reheard by the full court). In December 2021, the 9th Circuit panel issued an order deferring its decision on the rehearing petition until the U.S. Supreme Court decided another case involving California law restricting arbitration agreements, Viking River Cruises v. Moriana. In June 2022, the U.S. Supreme Court ruled on Viking River and held the FAA preempted California case law that precluded the arbitration of individual Labor Code violation claims brought under the state’s Private Attorneys General Act (PAGA).

Current Status and Impact on California Employers

On August 22, 2022, the 9th Circuit panel issued an order in the AB 51 Bonta case, withdrawing its previous opinion. Judge Fletcher signaled a potential upcoming change of opinion by joining Judge Ikuta in voting in favor of a panel rehearing, while Judge Lucero voted against it. In its order, the 9th Circuit panel also denied the U.S. Chamber of Commerce’s petition for rehearing en banc as moot. The 9th Circuit panel has not yet set a date for the rehearing but is expected to do so soon.

With the withdrawal of the 9th Circuit’s opinion, the trial court’s preliminary injunction enjoining the enforcement of AB 51 with regard to arbitration agreements governed by the FAA should remain in effect. However, even after this matter is reheard by the 9th Circuit, an appeal to the U.S. Supreme Court is likely, and it could be some time before a final decision is rendered. In the meantime, while these issues remain uncertain, California employers should consult with legal counsel regarding mandating employees’ consent to arbitration agreements as a condition of employment or continued employment.

As always, DWT will continue to monitor these issues and provide updates as they occur. In the meantime, the DWT Employment Services Group is available to assist with questions related to arbitration agreements.