Mandatory Arbitration of Employment Disputes May Be Back on the Table

Some employers desire, for various reasons, to ensure that disputes with employees are resolved through private arbitration rather than in court. A recent legal development could signal that employers may once again regain the opportunity to make arbitration agreements a condition of employment.

Some background. When Gov. Newsom signed Assembly Bill (AB) 51 in 2019, it prohibited employers from requiring employees to sign arbitration agreements as a condition of employment. When AB 51 took effect in 2020, the U.S. Chamber of Commerce obtained a preliminary injunction in federal court enjoining (halting) enforcement of AB 51 with respect to arbitration agreements governed by the Federal Arbitration Act (FAA) on the grounds that the FAA preempted laws preventing arbitration. The State of California appealed.

In 2021, in a ruling described by a dissenting Justice as “tortuous,” the federal Ninth Circuit Court of Appeals held that the FAA preempts AB 51 only with respect to its provisions that impose penalties on employers who execute arbitration agreements governed by the FAA.

The U.S. Chamber of Commerce immediately sought rehearing. The Ninth Circuit initially deferred but, on August 22, 2022, ultimately withdrew its prior opinion and granted rehearing.

It is worth noting that Judge William Fletcher, who originally supported the opinion, voted in favor of withdrawing the panel opinion and granting rehearing. Whether this signals that Judge Fletcher has been persuaded that the FAA preempts AB 51 in its entirety remains to be seen, but employers desiring mandatory arbitration may be encouraged.