Yesterday, a three-judge Ninth Circuit panel revisited its own 2021 order and finally struck down California’s anti-mandatory employment arbitration law, Assembly Bill 51 (“AB 51”).  In an opinion drafted by the former dissenting judge, Judge Sandra Ikuta, the new majority declared AB 51 was preempted by the Federal Arbitration Act (“FAA”).

The statute in question, signed into law by Governor Newsom in 2019, was California legislators’ third attempt to side-step the FAA.  Two prior legislative enactments had been vetoed by former Governor Brown.  Among other things, AB 51 made it unlawful for employers to require employees to agree to arbitration of claims pursuant to California’s Fair Employment and Housing Act or Labor Code—whether as a condition of employment or receipt of any other employment benefit, even with an opt-out provision.  The law also purported to impose both civil and criminal penalties for violations.  As Judge Ikuta noted in yesterday’s opinion, the legislators had made it obvious they were trying to evade the U.S. Supreme Court’s arbitration jurisprudence by carefully carving out from AB 51’s reach any agreements subject to the FAA.

In late 2019, a coalition of business groups led by the U.S. Chamber of Commerce (“Chamber”) first challenged the law and were successful in getting a district court to enjoin its enforcement (as we reported here).  Thereafter, in 2021, the same three judge panel issued an order holding that AB 51 was partially preempted by the FAA to the extent it purported to impose civil or criminal penalties on employers who obtained signed arbitration agreements; the panel left intact AB 51’s penalties for any employer who was unsuccessful in getting an employee to sign.  In a sharply worded dissent, Judge Ikuta wrote that “the majority[’s opinion] abet[ed] California’s attempt to evade the FAA and the Supreme Court’s caselaw by upholding this anti-arbitration law on the pretext that it bars only nonconsensual agreements.”  Chamber of Com. v. Bonta, 13 F.4th 766, 782 (9th Cir. 2021) (Ikuta, J., dissenting).  As she further explained, the former majority’s “holding mean[t] that an employer’s attempt to enter into an arbitration agreement with employees is unlawful, but a completed attempt is lawful.  This tortuous ruling is analogous to holding that a statute can make it unlawful for a dealer to attempt to sell illegal drugs, but if the dealer succeeds in completing the drug transaction, the dealer cannot be prosecuted.”  Id. at 791.  Well, Judge Ikuta got the last word.

Following the U.S. Supreme Court’s June 2022 ruling in Viking River Cruises, Inc. v. Moriana, 142 S. Ct. 1906 (2022), the same three judge Ninth Circuit panel voted sua sponte to rehear the challenge to AB 51.  The new majority opinion, written by Judge Ikuta, who was joined by Judge William Fletcher, held that AB 51 was preempted by the FAA in its entirety because it discriminated against the formation of arbitration agreements.  The majority noted that AB 51 singled out arbitration provisions for different treatment than other contracts because “California law generally allows an employer to enter into a contract with an employee that includes non-negotiable terms as a condition of employment.”  The majority also rejected California’s and the dissent’s argument that AB 51 merely targeted involuntary agreements, noting that non-negotiable agreements are not the same as involuntary agreements, and that the former are a routine part of daily life.

At this point, California may seek full en banc review, though it is unclear that AB 51 would fare better before the broader Ninth Circuit.  As Judge Ikuta noted in her new majority opinion, at least two other Circuits have rejected similar laws that seek to prevent parties from entering into arbitration agreements.  Furthermore, even if California could obtain its preferred outcome before the full Ninth Circuit, most commentators believe that AB 51 would meet its match before the U.S. Supreme Court.

Accordingly, in light of this new decision, employers are now free to resume requiring employees to execute arbitration agreements as a condition of employment—with or without opt-out provisions—without the specter of AB 51’s civil and criminal penalties.  However, as Judge Ikuta noted, any such agreements remain subject to normal contract defenses—including unconscionability.  Thus, employers may wish to consult counsel when designing mandatory arbitration programs and/or agreements.