California Employers Can Mandate Arbitration, 9th Circuit Says

​The 9th U.S. Circuit Court of Appeals recently confirmed that California employers can require job candidates and employees to sign arbitration agreements as a condition of employment.

The Feb. 15 ruling said the Federal Arbitration Act (FAA) takes precedence over California's law, AB 51, which prohibits employers from requiring workers to sign arbitration agreements.

"We agree with our sister circuits that the FAA pre-empts a state rule that discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement," the court said.

Background

The U.S. Chamber of Commerce, the California Chamber of Commerce, the National Retail Federation, the California Retailers Association and the National Association of Security Companies were among the business groups that sued over the state law. They argued that AB 51 treats arbitration agreements differently from other contracts and conflicts with the purposes of the FAA. The state countered that AB 51 isn't pre-empted by the FAA and protects workers from being forced to waive their rights to a court trial.

A district court temporarily blocked the law from taking effect in 2020. The 9th Circuit originally upheld AB 51 in September 2021 but decided in August 2022 to reconsider that decision. The latest ruling continues the injunction against the law.

"The decision is great news for employers," said Spencer Skeen, an attorney with Ogletree Deakins in San Diego. "The decision clarifies things greatly."

Another attorney in California agreed.

"It's a great ruling," said Pascal Benyamini, an attorney with Faegre Drinker in Los Angeles. "It's a much-needed ruling for employers."

However, AB 51 isn't quite dead yet. If the state decides to continue pursuing the case, it could appeal to the U.S. Supreme Court, which could opt to hear the case or remand it back to a district court in California, Benyamini said.

"I feel good about what could come down eventually, from an employer standpoint, but we just don't know," he said.

Ultimately, AB 51 may fail to take effect.

"In light of the ruling, California's Attorney General's Office said they are assessing next steps. Thus, there is a chance that AB 51 never sees the light of day," said Tyler Rasmussen, an attorney with Fisher Phillips in Irvine, Calif.

Green Light for Arbitration Agreements

As things stand now, businesses "should feel more comfortable making arbitration agreements a condition of employment" and should assess their messaging as to whether the agreement is mandatory or optional, Rasmussen said. Make sure you are accurately tracking how many of your employees have signed arbitration agreements, he recommended.

The new ruling may make things less complicated for companies that operate in multiple states and prefer to use arbitration agreements.

"Multistate employers with operations in California will likely be able to argue the FAA applies to their arbitration agreements," Skeen said. "Those employers now have the assurance that their arbitration program may be lawful in California, provided their agreement is otherwise enforceable under general contract principles.

"Multistate employers need to make sure their arbitration agreements are free from traditional contract defenses, like the unconscionability doctrine," he added, referring to the legal rule against contract terms that are so unfair or overwhelmingly one-sided in favor of the party with superior bargaining power that they are contrary to good conscience.

Pros and Cons of Arbitration

It's up to employers to weigh the pros and cons of requiring workers to sign arbitration agreements. "If you create a checklist of all the pros and all the cons, I think most companies would prefer to be in arbitration," Benyamini said.

Arbitration can be faster and less expensive than court trials, but that's not guaranteed.

"There are a lot of benefits to arbitration, including the ability to resolve single plaintiff disputes cost-effectively and avoid class actions through class-action waivers," Skeen said. "Arbitration is generally more cost-effective than a full-blown jury trial, regardless of arbitrator costs. Additionally, arbitration usually occurs in a private setting, whereas other litigation occurs in a courthouse open to the public. Resolving disputes in court can take years, depending on the court docket, whereas arbitration usually proceeds more quickly."

In addition, juries in court trials can be unpredictable.

"There's no jury in an arbitration," Benyamini said. "Arbitrators are less likely to be swayed by emotions and award punitive damages."

However, some companies choose not to require arbitration agreements because of cost concerns or recruiting needs. In California, employers must pay the full amount of arbitration costs.

If you require workers to sign arbitration agreements, then you may "have employees who refuse to execute the arbitration agreements, and you are forced to either not hire or separate their employment, potentially losing good employees," Rasmussen said.