The US Court of Appeals for the Ninth Circuit held Wednesday that workers in California will not be forced into arbitration as a condition of employment.
In 2019, California passed Assembly Bill 51 (AB51), to limit workplace arbitration agreements. It prohibits employers from requiring employees to sign arbitration agreements as a condition of employment. Violations of the law can be considered a misdemeanor offense, which potentially may result in civil sanctions for the employer. There are also potential criminal penalties, under which an employer could be incarcerated for up to six months.
In 2020, a federal judge granted a preliminary injunction that prevented state officials from enforcing several sections of AB51. The judge found that the law was preempted by the Federal Arbitration Act (FAA).
The appeals court lifted the preliminary injunction in a 2-1 decision on Wednesday. The court said that the FAA does not preempt those parts of AB51 that prohibit employers from retaliating against workers who do not sign arbitration agreements as a condition of employment. The court held that AB51 did not make any agreement to arbitrate invalid or unenforceable. The arbitration agreements just had to be consensual and otherwise enforceable under the FAA.
However, the court affirmed the lower court’s determination that AB51’s civil and criminal penalties were preempted. It determined that a state law that places an employer in jail for six months for entering into an arbitration agreement directly conflicts with the FAA.
Thus, the court lifted the preliminary injunction and remanded the case for further proceedings. As a result of this ruling, California employers cannot currently require workers to sign arbitration agreements as a condition of employment. Dissenting Judge Sandra Ikuta criticized the majority decision stating:
a contract may be ‘consensual,’ as that term is used in contract law, even if one party accepts unfavorable terms due to unequal bargaining power…too-clever-by-half workarounds and covert efforts to block the formation of arbitration agreements are preempted by the FAA…we don’t need to wait until the next Supreme Court reversal to know that we must apply those principles here.