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Last week, the Ninth Circuit issued a decision holding that California employers can require employees to enter into mandatory arbitration agreements as a condition of their employment.  In the decision, Chamber of Commerce v. Bonta, No. 20-15291 (9th Cir., Feb. 15 2023), a three-judge panel reversed the Ninth Circuit’s own prior decision and found that Assembly Bill 51 (AB 51), which sought to impose criminal and civil penalties on employers who require employees to enter into such agreements, is preempted by federal law.

California enacted AB 51 in 2019 to prohibit “forced arbitration” by criminalizing the act of requiring employees or job applicants to consent to arbitrate certain claims as a condition of employment.  But AB 51 criminalized only contract formation; an arbitration agreement executed in violation of AB 51 would remain enforceable.  As the panel noted, California had taken this approach to try to avoid conflict with Supreme Court precedent, which holds that a state rule that discriminates against arbitration is preempted by the Federal Arbitration Act (FAA).  California’s approach led to what the panel described as an “oddity that an employer subject to criminal prosecution for requiring an employee to enter into an arbitration agreement could nevertheless enforce that agreement once it was executed.”

The Ninth Circuit’s decision comes as a reversal of its prior ruling in September 2021, which had found that the FAA did not preempt AB 51 to the extent that AB 51 sought to regulate employer conduct prior to executing an arbitration agreement.  However, the Ninth Circuit sua sponte withdrew its opinion in August 22, 2022, after the US Supreme Court’s ruling in Viking River Cruises v. Moriana, and granted a panel rehearing, which led to the new ruling last week.

You can read our prior posts about AB51 here. Although the State of California may further appeal the decision, either by requesting a rehearing from the Ninth Circuit en banc or by appealing to the U.S. Supreme Court, this decision is welcome news for employers in California who want to take advantage of the benefits of arbitration.  At least for now, employers may continue to require employees and applicants to sign arbitration agreements as a condition of employment.