California’s Law Barring Mandatory Arbitration Agreements Permanently Enjoined

A federal district court recently entered a permanent injunction barring California from enforcing Assembly Bill 51, the law intended to preclude employers from requiring arbitration agreements as a condition of employment. The court said the state law is preempted by the Federal Arbitration Act (FAA).

As a result, Assembly Bill 51 no longer stands as an obstacle to employers that wish to require arbitration agreements as a condition of employment in California, so long as the FAA applies and governs the agreement. No appeals or further legal challenges to the law are anticipated, and the court’s permanent injunction is expected to be the final chapter in the four-year legal challenge to Assembly Bill 51.

Background

Assembly Bill 51 was intended to prohibit employers from requiring individuals to sign, as a condition of employment or employment-related benefits, arbitration agreements concerning disputes arising under the California Fair Employment and Housing Act or Labor Code. The law purports to apply to any arbitration agreement entered into, modified, or extended on or after Jan. 1, 2020.

As the law took effect in 2020, a California federal district court granted the U.S. Chamber of Commerce’s request for a preliminary injunction and enjoined enforcement of the law with respect to arbitration agreements governed by the FAA.

California appealed the preliminary injunction to the U.S. Court of Appeals for the Ninth Circuit. In 2021, a divided Ninth Circuit panel initially held the FAA does not completely preempt the state law. A year later, however, the Ninth Circuit unexpectedly withdrew its opinion on its own and granted a panel rehearing on the matter. The Ninth Circuit then concluded that the FAA does completely preempt the state law and affirmed the district court’s preliminary injunction.

In affirming the district court’s grant of a preliminary injunction, a majority of the Ninth Circuit panel stressed long-standing U.S. Supreme Court precedent that state rules that burden the formation of arbitration agreements are an obstacle to the legislative intent of, and thus preempted by, the FAA. The majority also noted the U.S. Court of Appeals for the First and Fourth Circuits reached similar conclusions when confronted with state laws that attempted to prevent parties from entering arbitration agreements.

The Ninth Circuit panel majority also rejected arguments from California that it should sever clauses that were deemed preempted by the FAA and leave the remainder of the law intact. The majority explained that Assembly Bill 51 could not be dissected and salvaged because the statute’s provisions all work together to burden the formation of arbitration agreements and, in any event, there was no authority in the legislation to sever the penalty portions of the law.

The matter was subsequently remanded to the district court, where the permanent injunction was granted after the U.S. Chamber of Commerce and California stipulated to the permanent injunction and dismissal of the case.

Next for Arbitration Agreements

The California law cannot be enforced with respect to arbitration agreements governed by the FAA. What happens when the FAA does not apply?

While the scope of the FAA is broad (it generally applies to any business involved in interstate commerce), the FAA specifically exempts from its coverage “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

This exemption was historically viewed as limited to workers in the transportation industry who actually transport goods across state lines, such as truck drivers, sailors, and pilots. However, the U.S. Supreme Court ruled in 2022 that the exemption may not be so limited and concluded that a baggage handler who loaded cargo onto a plane destined to cross state lines fell within the exemption.

Moreover, the U.S. Supreme Court has agreed to review another case that is expected to further analyze the contours of this exemption to the FAA. Accordingly, all eyes are on the exact scope of the FAA as the next battleground in the battle over the enforceability of employment arbitration agreements.

Mia Farber, William Robert Gignilliat, IV, Scott P. Jang & Corey Donovan Tracey are attorneys with Jackson Lewis. © 2024. All rights reserved. Reprinted with permission.