The End of AB 51?

On Feb. 15, 2023, the Ninth Circuit in Chamber of Commerce v. Bonta issued its ruling on the ongoing question of Assembly Bill (AB) 51's enforceability in relation to arbitration agreements, where the court once again affirmed that the Federal Arbitration Act (FAA) preempts AB 51.

Background on AB 51

California has attempted to legislate the prohibition of mandatory arbitration agreements since 2015, when California drafted AB 4052, which sought to ban employers from requiring arbitration agreements as a condition of employment. At the time, Gov. Jerry Brown vetoed the bill, finding that similar laws were struck down for being in clear violation of the FAA. Then in 2018, the Legislature introduced AB 3080, drafted to prohibit employers from requiring employees to waive a judicial forum as a condition of employment. AB 3080 faced the same defeat as AB 4052 by Gov. Brown.

In 2019, California's Legislature drafted AB 51, which sought to ban an employer from requiring an employee to enter into any agreement as a condition of employment, continued employment, or the receipt of any employment-related benefit that would require the employee to waive any right, forum, or procedure for a violation of the California Fair Employment and Housing Act (FEHA). Employers who violated the provision would face both civil and criminal penalties, including a misdemeanor punishable by imprisonment and/or fine. However, AB 51 varied from past attempts to bar mandatory arbitration agreements as it included provisions ensuring that if the parties entered into the arbitration agreement, it would nonetheless be enforceable. Therefore, AB 51 endeavored to regulate an employer's conduct prior to executing the arbitration agreement.

Cue Litigation

In 2019, trade associations and business groups filed suit in the Eastern District of California seeking a declaration that the FAA preempted AB 51, as well as a permanent injunction that would prohibit California officials from enforcing it. On Jan. 31, 2020, the district court granted the preliminary injunction. See GT's blog post on the district court's ruling.

On Sept. 15, 2021, a divided Ninth Circuit panel reversed in part the district court's ruling that AB 51 was preempted by the FAA, but affirmed that the penalties associated with AB 51 were preempted. The Court then vacated the preliminary injunction and enjoined enforcement of AB 51. Shortly thereafter, the U.S. Chamber of Commerce filed a petition for rehearing en banc. The Ninth Circuit deferred this petition until the U.S. Supreme Court reached its decision in the case Viking River v. Moriana. Then, in August 2022, the Ninth Circuit withdrew its prior opinion and granted a rehearing on the matter.

On Feb. 15, 2023, the Ninth Circuit affirmed the district court's ruling, holding that the FAA preempts AB 51. As the court explained, under the "equal treatment principle" courts are required to place arbitration agreements on equal footing with all other contracts. Chamber of Commerce v. Bonta, 62 F.4th 473, 483. According to the decision, the FAA preempts state rules affecting the enforceability of arbitration agreements and state rules that discriminate against the formation of arbitration agreements by targeting their defining characteristics.

The Ninth Circuit held there "is no doubt" that AB 51 disfavors the formation of agreements. Id. at 486. AB 51 prohibits an employer from entering into a contract that includes non-negotiable terms requiring an employee to waive "any right, forum, or procedure for a violation of any provision" of the FEHA, including "the right to file and pursue a civil action." Pursuant to AB 51, an employee who agrees to arbitrate disputes must waive their right to bring civil actions regarding any agreed employment dispute in any forum. Hence, by its own terms, AB 51 discriminates against the essential characteristics of arbitration agreements.

The Ninth Circuit held that the criminal penalties would impede an employer's willingness to create an arbitration contract with employees. Accordingly, such a deterrence to enter into an arbitration agreement is "antithetical to the FAA's ‘liberal federal policy favoring arbitration agreements'" and it violates the equal treatment principle of the FAA. Id. at 487. The Ninth Circuit thus concluded that the FAA preempts all aspects of AB 51 regarding arbitration agreements.

This is a victory for California employers attempting to enforce mandatory arbitration agreements. Employers should not expect the decision to be appealed to the California Supreme Court, as there are strict requirements that a party must file a petition for review within 10 calendar days after the Court of Appeal decision becomes final, which generally is 30 days after the decision is filed. The Ninth Circuit filed its ruling on Feb. 15, 2023. Accordingly, the deadline to submit a petition to the California Supreme Court has passed.