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Ninth Circuit Allows Bar to Mandatory Arbitration to Go into Effect in California

In 2019, California’s governor signed a law that barred employers from requiring job applicants to waive their right to sue as a condition of employment. Under the law, employees and employers must mutually consent to arbitration. Employers failing to follow the law faced civil and criminal penalties. California passed this law amid the #MeToo movement. However, the Chamber of Commerce and other business groups sued to prevent the law from being enforced. In January 2020, a federal district court judge issued a temporary injunction that halted the law from going into effect. At the time, the judge stated the groups challenging the law presented “serious questions” about the hardships it would cause businesses and whether it improperly interfered with arbitration agreements considered valid under the Federal Arbitration Act (FAA). “Take it or leave it” terms and conditions of employment, such as salary and vacation time, are legal under the FAA.

The Ninth Circuit Court of Appeals reviewed an appeal of the injunction and removed it in a 2-1 split decision. The majority concluded California’s law does not violate the FAA because workers and employers may enter into arbitration agreements if they mutually consent and then such agreements would be enforceable. The law’s application to non-disclosure and non-disparagement agreements showed it did not “discriminate” against arbitration in violation of the FAA. However, the appellate court did agree with the district court that the civil and criminal penalties were preempted by the FAA as they interfere with the “liberal federal policy favoring arbitration agreements.” The dissenting judge on the panel asserted the Ninth Circuit’s decision created a split with the First and Fourth Circuits which have struck down similar provisions in other states. The Chamber of Commerce has expressed its intention to appeal the decision.