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Arbitration Agreements Back for Employers in California

In October 2019, California Governor Gavin Newsom signed a new labor code provision into law regarding the use of arbitration agreements in employment. The law, AB 51, prohibits employers from requiring employees to sign arbitration agreements for claims under the California Fair Employment and Housing Act or Labor Code. Soon after its passage, a federal district court granted a preliminary injunction, placing a hold on the law. California appealed to the Ninth Circuit Court of Appeals. Initially, the Ninth Circuit held the Federal Arbitration Act (FAA) did not completely preempt AB 51 and lifted the temporary injunction.

However, the Ninth Circuit reviewed its decision and reinstated the preliminary injunction. Congress's expressed intent in passing the FAA was to promote arbitration. The court concluded AB 51 conflicts with that intent because it burdens the formation of arbitration agreements. The court concluded AB 51 singled out arbitration agreements, contravening the FAA's "equal treatment" requirement of arbitration agreements compared to other types of contracts. The Ninth Circuit refused to parse out clauses of AB 51 not preempted by the FAA because the statute could not be dissected and salvaged. The court reasoned the statute's provisions worked together to "burden" the formation of arbitration agreements. The appellate court relied on similar conclusions reached by the First and Fourth Circuits. Employers have welcomed the Ninth Circuit's decision as it allows them to continue using arbitration agreements. California has not yet indicated whether it intends to appeal the latest decision. If the state does not appeal, a federal district court will make a final determination on the legality of AB 51.