On September 15, 2021, a divided Ninth Circuit panel in Chamber of Commerce v. Bonta, Case No. 20-15291, upheld Assembly Bill 51 (“AB 51”), a bill that would prohibit employers from requiring employees to execute arbitration agreements as a condition of their employment.  The Ninth Circuit’s ruling reversed in part the District Court’s ruling that AB 51 is preempted by the Federal Arbitration Act (“FAA”).

The FAA provides that arbitration agreements, like other contracts, “shall be valid, irrevocable, and enforceable,” unless they are the product of fraud or unconscionability, or they are otherwise unenforceable as a matter of generally applicable contract law.  The majority concluded that AB 51 does not conflict with the FAA because it “does not make invalid or unenforceable any agreement to arbitrate, even if such agreement is consummated in violation of the statute.”  Rather, the Court noted, the law’s effects “are aimed entirely at conduct that takes place prior to the existence of any such agreement.”  The Court, however, held that AB 51’s accompanying enforcement mechanism that would impose criminal and civil sanctions on employers for violating AB 51 “directly conflicts with § 2 of the FAA” and is therefore preempted.

Judge Ikuta’s dissent heavily criticized the majority opinion, describing it as a clear “attempt to evade the FAA.”  Judge Ikuta cited to Senate Judicial Committee Report on AB 51, which candidly acknowledges that “AB 51 seeks to sidestep the preemption issue” by “applying only to the condition in which an arbitration agreement is made, as opposed to banning arbitration itself.”  Judge Ikuta also highlighted the perverse effects of the majority holding: “This holding means that an employer’s attempt to enter into an arbitration agreement with employees is unlawful, but a completed attempt is lawful.”

The business groups are expected to challenge the panel’s ruling, including up to the Supreme Court if necessary.  AB 51 likely will not take effect while these legal challenges play out.  In the meantime, employers are strongly encouraged to consult with counsel to evaluate potential changes to their arbitration agreement practices.