Red Light! Green Light!... Yellow Light?: Ninth Circuit Lifts Injunction On Law Banning Mandatory Employee Arbitration Agreements In California

Employers with California employees, multi-state arbitration agreements, or remote workers in California may want to reconsider the use of mandatory arbitration agreements after the Ninth Circuit recently published its long-awaited decision in Chamber of Commerce of the U.S.A. et al. v. Bonta et al.

In the ruling, the Ninth Circuit Court of Appeals lifted the injunction that had prevented enforcement of California Labor Code §§ 432.6 and 433 and Government Code § 12953. These provisions ban employers from utilizing mandatory arbitration agreements. Given that the decision is sure to be appealed, the path forward can seem unclear. Below, we provide a brief background of Bonta  as well as considerations for employers who currently utilize mandatory arbitration agreements for employees working in California.

Red Light!: California Labor Code § 432.6 Is Enacted 

• Assembly Bill 51 was signed into law by Governor Gavin Newsom in 2019 and went into effect on January 1, 2020. This new law was then codified as California Labor Code §§ 432.6 and 433 and Government Code § 12953. The law only applies to arbitration agreements entered into on or after January 1, 2020.
• Labor Code § 432.6 prohibits employers from requiring an applicant or employee to waive any right, forum, or procedure for adjudication of violations of the Fair Employment and Housing Act (FEHA) or the California Labor Code, as a condition of employment, continued employment, or receipt of employment-related benefits. It also prohibits employers from threatening, retaliating, discriminating against, or terminating any applicant or employee for refusing to waive such violations. 
• In the most controversial portion of the new law, violations of Section 432.6 are misdemeanors, “punishable by imprisonment in a county jail, not exceeding six months, or by a fine not exceeding one thousand dollars ($1,000), or both.” (Labor Code §§ 23 and 433.) 
• Additionally, Government Code § 12953 makes a violation of Section 432.6 “an unlawful employment practice.” This means an individual or entity who violates Section 432.6 is subject to civil sanctions, including state investigation and private litigation. (See Gov't Code §§ 12960–12965.) 
• The law does not invalidate arbitration agreements that are entered into in contravention of Section 432.6. Section 432.6(f) expressly provides that: “Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act ( 9 U.S.C. Sec. 1 et seq.).” As such, Section 432.6 focuses on pre-agreement conduct by an employer.

Green Light!: Enforcement of the New Law Is Enjoined 

• The Chamber of Commerce of the United States of America and other entities filed a motion for preliminary injunction against the enforcement of Section 432.6 with the U.S. District Court for the Northern District of California. 
• The District Court ruled that Section 432.6 was preempted by the Federal Arbitration Act (FAA) and granted the preliminary injunction shortly before the law went into effect, and the law has not been enforced since then. This effectively gave employers a “green light” to continue requiring California employees to sign arbitration agreements. 
• The state of California appealed the District Court's ruling to the Ninth Circuit Court of Appeals, the appellate court with jurisdiction over California and many other western states.

Yellow Light?: Bonta 

• The Ninth Circuit's opinion, Chamber of Commerce v. Bonta, Case No. 20-15291, was issued on September 15, 2021. 
• Bonta  holds: (1) Section 432.6 is not preempted by the FAA and does not invalidate written arbitration agreements that are otherwise enforceable under the FAA, even if the employment was entered into in violation of Section 432.6; and (2) the criminal and civil liability mandated by Section 433 is preempted by the FAA only to the extent it applies to already executed agreements.

This means that if an employer offers an arbitration agreement to a prospective employee as a condition of employment, and the prospective employee executes the agreement, the employer may not be held civilly or criminally liable under Section 433. Liability attaches only if the California-based employee does not execute a mandatory arbitration agreement. 

Next Steps for Employers 

It is widely anticipated that the Chamber of Commerce will appeal the Ninth Circuit's decision in Bonta  to the U.S. Supreme Court or that a majority of the Ninth Circuit will request a rehearing of the panel's decision en banc. If the case is appealed and accepted by the U.S. Supreme Court, the decision may be reversed on the ground that the law is fully preempted by the FAA. This has been the fate of many similar cases arising under California laws that are hostile to arbitration. The question becomes: what can employers do in the meantime?

Employers should remember that arbitration agreements entered into before January 1, 2020 are not covered by Section 432.6. 

For arbitration agreements entered into on or after January 1, 2020, up to the date of the Ninth Circuit's opinion, September 15, 2021, employers can either continue enforcing the agreements (with the understanding that enforcement of Section 432.6 will likely be enjoined pending appeal) or not enforce the agreements unless and until the law is enjoined pending appeal. Employers should note that a delay in enforcing an arbitration agreement could result in a potential waiver of the ability to compel arbitration at a later time.

Going forward, employers that wish to utilize arbitration agreements have several options:

• Continue requiring applicants to sign the agreements as a condition of employment.  This risks potential criminal and civil liability. 
• Continue offering arbitration agreements to applicants, but make them voluntary until the law is enjoined or struck down. This could be a path for more risk-averse organizations.

How employers with California employees choose to respond to the Ninth Circuit's ruling will depend on several factors, including their organization's risk tolerance, litigation risk profile, and their workforce. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.