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

From Lexology, Courtney McFate and Rishi Puri discuss the recent Ninth Circuit Court of Appeals decision to allow California’s ban on mandaotry employee arbitration agreements to be enforced. Courtney and Rishi write:

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.