February 16, 2023

Ninth Circuit Upholds Injunction Blocking a California Law That Would Have Severely Limited Employment Arbitration Agreements

Yesterday, a Ninth Circuit panel sided with a coalition of business groups to affirm a preliminary injunction that stopped California state officials from enforcing California’s AB 51, a 2019 law that would have effectively prevented the formation of employment arbitration agreements in California. (Mayer Brown lawyers, including the authors of this Legal Update, filed the lawsuit on behalf of the U.S. Chamber of Commerce and the California Chamber of Commerce and led briefing and argument in the Ninth Circuit.) 

If AB 51 had been allowed to go into effect, the law would have imposed criminal and civil penalties on businesses offering to enter into arbitration agreements—whether as a condition of employment or on an opt-out basis. The business group plaintiffs argued that AB 51 is preempted by the Federal Arbitration Act (“FAA”), and the coalition persuaded the district court to issue a temporary restraining order and preliminary injunction against the law. 

On appeal, a divided Ninth Circuit panel initially reversed in part, concluding that California could evade FAA preemption by regulating the formation or attempted formation of arbitration agreements so long as it did not prevent the enforcement of an arbitration agreement once formed. After the business groups sought rehearing by the Ninth Circuit en banc, the panel withdrew its opinion and yesterday replaced it with a new opinion reaching the opposite result.

In the new opinion, the Ninth Circuit panel, by a 2-1 vote, held that the FAA “applies to state rules that prevent parties from entering into arbitration agreements in the first place.” The Ninth Circuit further “agree[d] with our sister circuits that the FAA preempts a state rule that discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement.” “AB 51’s penalty-based scheme to inhibit arbitration agreements before they are formed,“ the court said, reflects the type of hostility to arbitration “that the FAA was enacted to overcome.” The panel concluded: “Because the FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 is therefore preempted.”  

The opinion was authored by Judge Sandra Ikuta, who had dissented from the panel’s initial ruling; notably, she was joined by Judge William Fletcher, who had initially voted to uphold the law but changed his vote on rehearing. The dissent was written by Judge Carlos Lucero, a visiting judge from the Tenth Circuit sitting by designation.

This decision eliminates the considerable uncertainty about the use of arbitration to resolve employment disputes that had been caused by the enactment of AB 51 and makes clear that California may not circumvent the FAA’s requirement that arbitration agreements be enforced by trying to block their formation on the front end.

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