Ninth Circuit strikes down California’s ban on mandatory arbitration agreements

In a major victory for California employers, the Ninth Circuit Court of Appeals struck down California Labor Code Section 432.6, which not only bars the use of mandatory arbitration agreements in the workplace as a condition of one’s employment, but could also lead to the imposition of civil and criminal penalties against California employers.

California passed AB 51 in 2019, codified at Labor Code section 432.6, to take effect January 1, 2020. In addition to prohibiting mandatory arbitration agreements for job applicants and employees, AB 51 provided a new private right of action for individuals to sue California employers who retaliated against them for refusing to sign such agreements. In a 2021 ruling, the Ninth Circuit partially upheld AB 51 by eliminating the civil and criminal penalty component, but otherwise leaving AB 51 in effect. Last year, the Ninth Circuit, on its own, withdrew its 2021 ruling to rehear the case.  

On February 15, 2023, in U.S. Chamber of Commerce v. Bonta, the Ninth Circuit issued its new ruling, holding that the Federal Arbitration Act (“FAA”) preempts California law, and therefore, AB 51 is unenforceable in its entirety.

This decision comes less than a year after Viking River Cruises, Inc. v. Moriana, where the United States Supreme Court held, in part, that the FAA preempts California law. As a result, individual claims brought under California’s Private Attorneys General Act  (PAGA) can in fact be split so that “individual claims” are subject to arbitration. 

The Ninth Circuit’s ruling raises the issue of whether California, and other states, can regulate arbitration agreements subject to the FAA. This case is great news for California employers since the FAA protects the integrity of many arbitration agreements. At least for now, California employers again can require employees and job applicants to sign arbitration agreements as a condition of their employment. But, this probably will not be the end of the fight - the California Attorney General’s office is "reviewing the decision and assessing next steps,” and advocates of AB 51 can try appealing for additional court review.

John Viola is a partner in Thompson Coburn's Labor & Employment group. Aya Elalami is an associate in Thompson Coburn’s Business Litigation group.