9th Circuit: Core Provisions of California’s AB 51 Are Not Preempted by Federal Law

By: Daniel J. McCoy

A three-judge panel of the U.S. Court of Appeals for the Ninth Circuit has issued its long-awaited ruling on the appeal of a California trial court’s injunction that prohibited the State of California from enforcing AB 51, which prohibits employers from forcing employees to arbitrate legal claims under California’s Labor Code and Fair Employment and Housing Act. Our summaries of the enacted law, and the trial court proceedings, can be found here and here.

In a 2-1 decision, issued on September 15, 2021, the majority held that AB 51 does not conflict with the congressional purposes surrounding, and is otherwise not preempted by, the Federal Arbitration Act (FAA), principally because AB 51 is focused on behavior by the employer before an arbitration agreement is entered into, and does not allow for the invalidation or non-enforcement of actual arbitration agreements. As such, the law, principally codified at California Labor Code 432.6, lawfully co-exists with the FAA.

The appeals court emphasized that the only applicable FAA right is to have consensual arbitration agreements enforced, and that AB 51 merely prohibits non-consensual agreements. Specifically, Labor Code 432.6 prohibits an employer from threatening, retaliating, discriminating against or terminating an applicant or employee because they refused to consent to an arbitration agreement that compels them to arbitrate Labor Code and/or Fair Employment and Housing Act claims. The majority held that the law is thus narrowly focused on an employer’s behavior before any such agreement arises.

The majority nevertheless held that AB 51’s civil and criminal sanctions are preempted in part by the FAA, because they can be applied where an employer and employee have already entered into an arbitration agreement. In this respect, AB 51’s sanctions punish employers for entering into an actual arbitration agreement; they are not limited to the “pre-agreement” conduct that the majority held is not preempted by the FAA. As such, the appeals court struck down the sanctions to the extent they would be applied to an actual agreement.

The appeals court lifted the injunction against California from enforcing AB 51, and in all events, AB 51 continues to apply to private employers with respect to arbitration agreements entered into, modified or extended on or after January 1, 2020.

This ruling now creates a split of authority among the U.S. Court of Appeals. Further, the ruling triggered a spirited dissent. As such, further appellate activity—in the form of en banc review by the Ninth Circuit and/or the U.S. Supreme Court review—is likely.