Ninth Circuit Vacates Injunction Against California’s Ban on Mandatory Arbitration Agreements

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Ninth Circuit Vacates Injunction Against California’s Ban on Mandatory Arbitration Agreements

The Ninth Circuit Court of Appeals has vacated a preliminary injunction barring enforcement of AB 51, a ban on mandatory arbitration agreements. As a result, California may proceed with enforcing this law.

AB51 inserts section 432.6 to California’s Labor Code as well as 12953 into the Government Code. These laws bar employers from mandating as a condition of employment or continued employment employees to waive any rights such as forum in regard to pursuing a claim under California’s Labor Code or Fair Employment and Housing Act. What this means is that it bars employers from mandating arbitration agreements as a condition of employment.

Early last year, a federal trial court issued a preliminary injunction barring implementation of AB 51. This decision was issued on the basis that section 432.6 would be preempted by federal legislation. Specifically, it would conflict with the Federal Arbitration Act (FAA). This injunction barred California’s Labor Commissioner, Attorney General, and labor regulatory agencies from enforcing Government Code 12953 and Labor Code 432.6, where the waiver of a right, forum, or procedure would be the entrance into arbitration agreements provided under the FAA. 

This injunction was appealed to the Ninth Circuit, and in its ruling, it partially reversed the trial court’s decision, most notably vacating the lower court’s preliminary injunction. The Ninth Circuit found that the FAA’s provision to allow consensual agreements for arbitration does not preempt section 432.6. This is because 432.6 is only concerned with behavior prior to entering into an arbitration agreement.

The majority in the court felt that the FAA is not intended to preempt requirements that the arbitration agreement is voluntary. However, the court also found that the sanctions provided for by the law would punish employers for entering into an arbitration agreement and, as a result, are preempted by the FAA. 

Many already assume that this case will find its way before the US Supreme Court, and it is hard to say what way they will rule on the matter. However, until further decisions are made, it is important for employers to immediately review their practices concerning employer arbitration agreements.

Employers may still attempt to enter into consensual arbitration agreements with employees. However, they mustn’t be a condition of employment or employment-related benefits either for prospective or current employees. For this reason, it is important to provide for this in writing as a part of the arbitration agreement, clearly providing that the employee is voluntarily entering into the agreement and no adverse action will result if they do not agree to enter into it.