Appeal Decision Clouds California Ban on Mandatory Employment Arbitration Clauses | Akerman LLP – HR Defense


California employers can’t make employment conditional on entering into an arbitration agreement, but for now, it looks like they can continue to enforce those agreements. The situation is muddled following a Federal Court of Appeals ruling blocking a 2019 California law that prohibited an employer from conditioning employment or “any employment benefit” upon entering into a contract. arbitration agreement. On September 15, 2021, the Ninth Circuit Court of Appeals, which reviews rulings from federal district courts in the nine westernmost states, including California, overturned a district court injunction blocking the 2019 law. , known as the Assembly Bill (AB) 51. The US Chamber of Commerce, along with six other business groups, filed a complaint shortly before it went into effect on January 1, 2020, seeking to have the law struck down on the grounds that it is preempted by the Federal Arbitration Act (FAA). The district court issued a temporary restraining order on December 30, 2019, followed by a preliminary injunction on February 7, 2020, preventing the law from coming into force. The state then appealed.

Ninth Circuit ruling partially overturning Judge Mueller’s injunction restores ban on binding employment arbitration agreements, but continues to block civil and criminal penalties against employers who obtain arbitration agreements in violation of the law. This creates a strange paradox. Even though AB 51 again makes binding employment arbitration agreements illegal, under its terms AB 51 does not overrule existing arbitration agreements, and the court’s decision to quash civil and criminal penalties. seems to be completely disobeying the law. Unfortunately for employers, the answers on how to proceed with arbitration agreements are crystal clear.

AB 51 is not preempted because it does not Invalidate Arbitration agreements

California has long tried to limit, if not outright ban, employment arbitration, which has contributed to much of the recent federal arbitration case law. With this collected knowledge, the California legislature carefully designed AB 51 to survive an FAA preemptive challenge. Accordingly, section 432.6 (f) of the Labor Code provides that “[n]nothing in this section is intended for invalidate a written arbitration agreement that is otherwise enforceable under federal arbitration law. This exclusion was an intentional evasion of the legislature; in trying to avoid preemption, the legislator has only done make employment conditional on arbitration illegal, but it did not invalidate already executed arbitration agreements.

So essentially AB 51 is trying to ban arbitration by making it illegal to offer arbitration as a condition of employment. The US chamber argued in the district court that in doing so, California was putting arbitration agreements “on a par” with other contracts, in violation of the FAA. The district court agreed, explaining that “[i]In its stated purpose and operation, AB 51 emphasizes the requirement to conclude arbitration agreements and thus subjects such agreements to unequal treatment.

The Ninth Circuit disagreed, finding no conflict between AB 51 and the FAA because the “effects of AB 51 are entirely directed at conduct that takes place prior to the existence of such an agreement.” In reaching this conclusion, the tribunal explained its view that “[p]the imposition of a condition precedent to the agreement on the waiver of “any right, forum or proceeding” does not affect the validity or enforceability of an arbitration agreement. “

Where, then, does this “illegal, but enforceable” status leave employers with mandatory arbitration programs? In its final form, AB 51 provided for criminal penalties of up to six months in prison, a fine of $ 1,000, or both against anyone proposing a binding arbitration agreement, and civil remedies. enforcement through a private right of action for employees with binding arbitration agreements. and enforcement measures by the Ministry of Fair Employment and Housing. The district court ordered the execution of these sentences.

The Ninth Circuit upheld and upheld the injunction of civil and criminal enforcement measures “to the extent that they apply to executed arbitration agreements covered by the FAA.” This result leads to a second strange paradox. By limiting the injunction to executed arbitration agreements, the court left open the possibility of civil and criminal enforcement provisions when a binding arbitration agreement is not performed, presumably because the employee may have rejected it. The dissent noted this counterintuitive result, commenting that “the majority hold that if the employer has succeeded in ‘forcing’ employees ‘into arbitration against their will,’. . . the employer is safe, but if the employer’s efforts fail, the employer is a criminal.

Dissent predicts future confrontation

In dissent, Circuit Judge Sandra Ikuta noted that “the Supreme Court has made it clear that the FAA preempts this type of workaround, which is only the latest of the” great variety of devices and formulas “against the ‘arbitration’. Discussing recent guidance from the Supreme Court, Justice Ikuta concluded that “a state cannot distinguish between arbitration agreements by imposing special limiting rules at the stage of formation”. Moreover, the dissent observed that the majority decision creates a division between the federal courts of appeal. Specifically, the First Circuit previously struck down a Massachusetts regulation prohibiting securities forms from requiring customers to enter into arbitration agreements, and the Fourth Circuit struck down a Virginia law that required automakers to include a clause effectively prohibiting arbitration clauses. The apparent tension between the court’s decision on AB 51 and these other decisions of the Federal Court of Appeal means that the fight over AB 51 is likely not over. It is possible that the Ninth Circuit will agree to hear the case again before a larger “en banc” panel of the tribunal, or that the United States Supreme Court will agree to reconsider the decision. It is very likely that the panel’s decision will not be the last word on AB 51.

What does this mean for labor arbitration in California?

The Ninth Circuit ruling adds more confusion than clarity for employers with California employment arbitration agreements. What is clear, however, is that arbitration agreements submitted to the FAA remain enforceable on their terms, even if they are entered into after January 1, 2020. Employers who are sued by employees with agreements to do so Existing arbitration can still apply these agreements and seek to compel arbitration. . Thus, employers should avoid making changes to existing arbitration agreements or taking actions that could invalidate them.

However, it is not clear what consequences, if any, employers risk by continuing to present employees with binding arbitration agreements. With civil and criminal penalties being at least partially imposed, it is not clear whether the state or individual employees would take action against an employer who obtained arbitration agreements in violation of BA 51. But the ruling leaves great uncertainty as to what would happen if employees are not forced into arbitration, but decline to accept the arbitration agreement, because the decision of the Court leaves open the possibility that civil and criminal sanctions may be imposed if the employer’s behavior does not lead to the execution of an arbitration agreement . In the meantime, employers must continue not to threaten, retaliate or discriminate against any employee who refuses to enter into an arbitration agreement.

It also leaves open the question of whether an employer can one day seize a voluntary arbitration agreement with an employee and, if so, what the employer would have to prove to prove that the agreement was voluntary and mutually consensual. The court ruling failed to address two key aspects of AB 51 that determine whether an arbitration agreement is truly binding. First, section 432.6 (a) of the Labor Code not only prevents the employer from making employment conditional on arbitration, but also prohibits offering “any employment benefit” in exchange for an agreement. arbitration. Because every contract must be backed by a consideration, and every benefit offered by an employer to an employee is inherently employment related, it is difficult to imagine a pre-litigation arbitration agreement that could be voluntary and enforceable. and also compliant with AB 51 Second, section 432.6 (c) of the Labor Code provides that “an agreement which requires an employee to withdraw from a waiver or to take positive measures in order to preserve his rights is considered to be a condition of employment “. This makes an agreement where an employee can choose to opt out of arbitration – the standard form of voluntary employment arbitration agreements – into a legally binding agreement. Because of these sections, it seems very unlikely that an employer could ever enter into a pre-litigation arbitration agreement with an employee during employment without substantial risk.

Of course, over time, the viability of employment arbitration in California may well be determined by the United States Supreme Court. For now, it’s a rocky and uncertain road for employers looking to enter into employment arbitration agreements in California.

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