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California’s Mandatory Arbitration Ban Barred by Court

In 2020, California's AB 51 took effect. The law prohibited employers from requiring employees to sign mandatory arbitration agreements concerning disputes arising under the California Fair Employment and Housing Act as a condition of employment. The U.S. Chamber of Commerce sought a preliminary injunction to prevent the law's enforcement quickly after it went into effect. The Chamber of Commerce asserted AB 51 conflicted with the Federal Arbitration Act (FAA). A federal district court granted that injunction.

The State of California appealed the preliminary injunction to the Ninth Circuit Court of Appeals. Initially, the circuit court found the FAA did not wholly preempt AB 51. However, a panel of the entire circuit revisited the ruling. It concluded the FAA completely preempted AB 51, based on U.S. Supreme Court decisions holding that state rules burdening arbitration agreement formations obstruct the legislative intent behind the FAA. The Ninth Circuit affirmed the lower court's preliminary injunction and rejected requests by California to leave parts of the law standing.

Following the Ninth Circuit decision, a federal district court granted a permanent injunction and dismissed the case. California may not enforce AB 51 against any agreement that is "covered by the FAA." The FAA applies to written arbitration agreements for employment that affect interstate commerce. Some California courts have found situations where the FAA does not apply to employment, including for wage claims brought under state code.