California’s Proposed Ban on Mandatory Arbitration Agreements as a Condition of Employment

By Samuel Silverman

California is casting uncertainty on the employer’s ability to implement mandatory arbitration agreements on employees.[1]  In October 2019, Governor Newson signed Assembly Bill No. 51,[2] which would apply to employment contracts entered, modified, or extended on or after January 1, 2020.[3]  This bill created Labor Code Section 432.6, banning mandatory arbitration agreements as a condition of employment in California.[4]  This would work around the Federal Arbitration Act, which requires courts to enforce arbitration agreements, preempting the state laws that stood in its way.[5]  Critics argue that the process favors employers and discourages prospective employees from bringing legal claims.[6]  On the other hand, proponents of the FAA have said it provides an efficient and cheaper alternative, benefiting both workers and employers.[7]  The Eastern District Court issued a restraining order,[8] and preliminary injunction, finding it violated the FAA.[9]  The court upheld the bill.[10]  The court reasoned that the FAA  protects enforcement of arbitration agreements but not involuntary and mandatory arbitrate agreements.[11]  Previously signed agreements may not be invalidated by the bill.[12]  Instead, Section 432.6 focuses on “pre-agreement” conduct, which is not subject to FAA law.[13]  Additionally, the bill regulates “employer conduct,” not agreement formations, and therefore does not conflict with the FAA.[14]  The outcome is that mandatory arbitration agreements are banned yet enforceable.[15]

August 2022 brought Judge Fletcher to withdraw his majority decision and join Judge Ikuta in voting to withdraw the opinion and rehear the case.[16]  Ikuta argued that the FAA prohibits states from enacting laws that burden the formation and enforcement of arbitration agreements.[17]  Therefore, they reasoned that Section 432.6 violates the FAA.[18]

February 15, 2023, brought an the end of this saga.  Ikuta, joined by Fletcher, upheld the FAA preemption over Section 432.6 because the law discourages the formation of arbitration agreements.[19]  The argument that the FAA only required enforcement of arbitration agreements and not the pre-agreement conduct fell flat when it was ruled that policies impeding a party’s ability to form arbitration agreements hinder the broad national policy favoring arbitration.[20]  The Ninth Circuit found that the FAA preempts state law if it interferes with the fundamental attributes of arbitration” or has a “disproportionate impact on arbitration.[21]  If a state law interferes with arbitration on its face or covertly, such a rule cannot stand in harmony with the purposes of the FAA.[22]  Because the FAA’s purpose is to encourage arbitration, and Section 432.6 is an obstacle to that purpose, (AB)-51 is preempted.[23]  The 9th Circuit joined the 1st Circuit and the 4th Circuit in finding that “the FAA preempts a state rule that discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement.”[24]

Additionally, the appeals court declined to sever certain parts and upheld others[25] because all of (AB)-51’s provisions work together, and it, therefore, still impedes the ability of employers to enter into arbitration agreements.[26] Although the reimposed preliminary injunction only temporarily blocks the law, this ruling signals that the final outcome does not appear hopeful for (AB)-51.[27]

The main takeaway is that the Federal Courts still favor arbitration and will strike down state laws that discriminate against arbitration.[28]  Courts will protect arbitration at all costs.[29]

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[1] Beth Graham, California Bans Mandatory Arbitration Agreements as a Condition of Employment, ADR Toolbox

 (Nov. 19, 2019) http://www.adrtoolbox.com/2019/11/california-bans-mandatory-arbitration-agreements-as-a-condition-of-employment/ [https://perma.cc/M5ZM-JLRQ].

[2] Cal. Ass. Bill No. 51.

[3] Spencer C. Skeen ET AL., Ninth Circuit Blocks California’s Ban on Mandatory Arbitration in Employment, Ogletree Deakins (Feb. 16, 2023) https://ogletree.com/insights/ninth-circuit-blocks-californias-ban-on-mandatory-arbitration-in-employment/ [https://perma.cc/6GWK-UMLP].

[4] Cal. Lab. Code § 432.6.; Id.

[5] See, e.g., Concepcion, 563 U.S. at 352 (holding the FAA preempted a California rule finding contract provisions disallowing classwide arbitration are unconscionable); Preston v. Ferrer, 552 U.S. 346, 349–50 (2008) (holding the FAA preempted a California law giving a state agency primary jurisdiction over a dispute involving the California Talent Agency Act despite the parties’ agreement to arbitrate such disputes); Perry v. Thomas, 482 U.S. 483, 484, 491 (1987) (holding the FAA preempted a statute permitting collection actions, despite a valid arbitration agreement).

[6] Brendan Pierson, Appeals court blocks California ban on mandatory arbitration for workers, Reuters (Feb. 15, 2023, 5:05 PM EST) https://www.reuters.com/legal/appeals-court-blocks-california-bar-mandatory-arbitration-workers-2023-02-15/ [https://perma.cc/R89F-NVWR].

[7] Id.

[8] Jack S. Sholkoff, et al., Ninth Circuit Upholds Portions of California Law Prohibiting Use of Mandatory Arbitration Agreements, Ogletree Deakins (Sep. 16, 2021) https://ogletree.com/insights/ninth-circuit-upholds-portions-of-california-law-prohibiting-use-of-mandatory-arbitration-agreements/ [https://perma.cc/NH64-JSMC].

[9] Id.; 9 U.S.C.A. § 2.

[10] Chamber of Commerce of the United States v. Bonta, 2023 U.S. App. LEXIS 3586.

[11] Id.

[12] Id.

[13] Id.; Supra note 4.; Sholkoff, supra note 8.; Supra note 9.

[14] Laura Devane ET AL., Ninth Circuit Eliminates Obstacles to Enforcement of Employment Arbitration Agreements in California, Littler (Feb. 17, 2023) https://www.littler.com/publication-press/publication/ninth-circuit-eliminates-obstacles-enforcement-employment-arbitration [https://perma.cc/3BY4-UHJV].; Supra note 4.

[15] Spencer C. Skeen & Zachary V. Zagger, Ninth Circuit Panel to Reconsider Decision Upholding California Mandatory Arbitration Ban, Ogletree Deakins (Aug. 26, 2022) https://ogletree.com/insights/ninth-circuit-panel-to-reconsider-decision-upholding-california-mandatory-arbitration-ban/ [https://perma.cc/9SMJ-K5C3].

[16] Skeen, supra note 3.

[17] Id.

[18] Id.

[19] Chamber of Commerce v. Bonta, supra note 10.

[20] Skeen, supra note 3.

[21] Devane, supra note 14.

[22] Id.

[23] Michael W. McTigue Jr. ET AL, Ninth Circuit Blocks California’s Ban on Mandatory Arbitration Agreements, Skadden (Feb. 16, 2023), https://www.skadden.com/insights/publications/2023/02/ninth-circuit-blocks-californias-ban-on-mandatory-arbitration-agreements[https://perma.cc/DXW2-CT8Z].

[24] Anet Drapalski ET AL, Federal Appeals Court Blocks California’s Ban on Mandatory Arbitration Agreements: 7 Key Takeaways for Employers, Fisher Philips (Feb. 16, 2023) https://www.fisherphillips.com/news-insights/federal-appeals-court-blocks-californias-ban-mandatory-arbitration-agreements.html [https://perma.cc/4XGF-8KJS].

[25] Id.

[26] Devane, supra note 14.

[27] Drapalski, supra note 24.

[28] Id.

[29] Id.