A divided Ninth Circuit panel dealt a blow to California employers recently in holding that a state law prohibiting mandatory arbitration agreements is largely not preempted by the Federal Arbitration Act (“FAA”).  California employers often have employees enter into such mandatory arbitration agreements as a condition of employment.

At issue in Chamber of Commerce v. Bonta was AB 51, which prohibits employers from coercing employees into agreeing to arbitrate claims under the California Fair Employment and Housing Act (“FEHA”) and the California Labor Code.  Specifically, AB 51 places a prohibition on employers who “threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee because of the refusal to consent to the waiver of any right, forum, or procedure for a violation of the [FEHA or Labor Code], including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court.”  Rather than invalidate the coerced arbitration agreement, AB 51 subjects the employer to civil and criminal penalties.

In Bonta, a district court enjoined enforcement of AB 51 on the grounds of FAA preemption, given the law’s impact on employers’ ability to require arbitration agreements as a condition of employment.  The Ninth Circuit reversed the district court in part, finding that AB 51 is largely not preempted by the FAA.  The majority found that the purpose of AB 51 is “to assure that entry into an arbitration agreement by an employer and employee is mutually consensual and to declare that compelling an unwilling party to arbitrate is an unfair labor practice.”

The Ninth Circuit did, however, find that portions of AB 51 imposing civil and criminal penalties for mandating arbitration in violation of AB 51 do conflict with the FAA and are therefore preempted.

The Ninth Circuit’s decision, heavily criticized in the dissent, leaves a number of questions unanswered.  For example, it is unclear whether some enforcement actions against an employer for failing to comply with AB 51 may be permissible in some situations, what remedies may be available to an employee who is discharged for refusing to sign an arbitration agreement, whether all claims for damages in this context would be preempted, when claims to enforce AB 51 are preempted, and whether enforcement of a mandatory arbitration agreement could be avoided by proving coercion.

Given the multitude of unresolved issues raised in this new decision, the ongoing litigation that can be expected and the unsettled law in this area, employers are strongly encouraged to seek advice of counsel in order to analyze the use of arbitration agreements and evaluate potential changes to their arbitration agreement practices.