California's Mandatory Arbitration Ban Blocked by 9th Circuit

Author: David B. Weisenfeld

February 21, 2023

A California law barring employers from using compulsory arbitration agreements to resolve employment disputes conflicts with the Federal Arbitration Act (FAA), the 9th Circuit Court of Appeals has ruled in a big win for employers.

The California measure, known as AB 51, was passed in response to the #MeToo movement's argument that mandatory arbitration clauses effectively silence women who bring workplace sexual harassment claims. In particular, the law's sponsors aimed to protect workers in a variety of industries who they deemed as being compelled to sign these agreements, including:

  • Food service;
  • Hospitality; and
  • Retail workers.

In addition, the law would have made it a criminal offense for employers to force employees or job applicants to sign an arbitration agreement as a condition of employment.

But in a 2-1 ruling, a 9th Circuit panel found that the California mandatory arbitration ban "stands as an obstacle" to the FAA. Writing for the appellate court, Judge Sandra Ikuta explained, "The FAA's purpose is to further Congress's policy of encouraging arbitration."

The court held that an employee can consent to an employment contract, even if the contract was a product of unequal bargaining power and contains an arbitration provision that the employee dislikes, so long as the terms are not unconscionable.

"I suspect this opinion will make many employers sleep better at night," said Anthony Oncidi, co-chair of Proskauer's labor and employment law department. "In an environment like we have in California with record-setting employment verdicts … it's my view that employers should run (not walk) to adopt arbitration."

In 2021, the same 9th Circuit panel upheld California's law. But the Chamber of Commerce urged the appellate court to rehear the case, calling the California law a "clear overreach." And it agreed to do so following a pro-arbitration US Supreme Court ruling last year in Viking River Cruises v. Moriana.

California could seek to have a larger panel of 9th Circuit judges hear the case or appeal the ruling to the US Supreme Court. However, the Supreme Court has upheld the use of mandatory arbitration clauses in employment under the FAA.

Two other federal appellate courts - the 1st Circuit and the 4th Circuit - have reached similar holdings and struck down other state prohibitions on the use of mandatory arbitration to resolve disputes.