Permanent Injunction Issued Precluding Enforcement Of California’s Ban On Mandatory Arbitration Agreements

By  Eden Anderson, Rebecca Bjork, and Gerald Maatman, Jr. 

Duane Morris Takeaways: Last year, the Ninth Circuit held in Chamber of Commerce of the United States v. Bonta, 62 F.4th 473 (9th Cir. 2023), that California Assembly Bill (AB) 51 — a statute that attempted to criminalize employers’ use of mandatory arbitration agreements — was preempted by the Federal Arbitration Act.  In Bonta, the Ninth Circuit affirmed a preliminary injunction prohibiting the State of California from enforcing AB 51.  On January 1, 2024, following remand in the case, the district court entered a permanent injunction that enjoins the State from enforcing the Labor and Government Code sections enacted as part of AB 51, and awarding the plaintiffs, as prevailing parties, $822,496.  The district court’s order brings finality, judgment, and ultimate success to a strong coalition of employer interests who banded together to challenge California’s attempt to criminalize the use of mandatory arbitration agreements. 

Case Background

AB 51, effective January 1, 2020, added Section 432.6 to the California Labor Code and Section 12953 to the California Government Code.  Labor Code Section 432.6 makes it a misdemeanor for employers to require employees or applicants to waive “any right, forum, or procedure for violation of any provision of the California Fair Employment and Housing Act” or the California Labor Code.  Government Code Section 12953 makes it an unlawful employment practice to violate Labor Code Section 432.6.

In December 2019, the U.S. Chamber of Commerce, California Chamber of Commerce, National Retail Federation, California Retailers Association, National Association of Security Companies, Home Care Association of America, and the California Association for Health Services at Home (“Plaintiffs”) filed a complaint against the State of California challenging AB 51 as preempted by the Federal Arbitration Act (FAA).

The district court granted the Plaintiffs’ motion for a preliminary injunction, finding that Plaintiffs were likely to succeed on the merits.  California appealed, and challenged only the district court’s holding that AB 51 was likely to be preempted by the FAA.  A divided panel of the Ninth Circuit initially reversed the district court in a September 2021 opinion but, after a rehearing petition was filed, the Ninth Circuit withdrew its opinion and issued a new opinion, which affirmed the district court’s preliminary injunction order and held that the FAA preempts AB 51.

The District Court’s Issuance Of A Permanent Injunction

After the decision, the case was remanded to the district court and, on January 1, 2024, the district court issued an order permanently enjoining the State of California from enforcing Labor Code Section 432.6 and Government Code Section 12953.  Additionally, the district court awarded the Plaintiffs, as prevailing parties, $822,496 in attorneys’ fees.  The order was obtained via stipulation of the parties whereby they agreed that the Ninth Circuit’s decision in Bonta was dispositive of the legal issues in the case and further agreed to the amount of attorneys’ fees to be paid by the State.

Implications For Employers

The district court’s order brings finality, judgment, and ultimate success to a strong coalition of employer interests who banded together to challenge AB 51.  Employers in California may permissibly use mandatory arbitration agreements.  However, the use of mandatory arbitration agreements potentially can be problematic when it comes to enforcing the agreement.  When an applicant or employee must sign an arbitration agreement as a condition of employment, the agreement is a contract of adhesion that will likely be found to be procedurally unconscionable.  Thus, a court may refuse to enforce a mandatory arbitration agreement if there are also terms in the agreement that are substantively unconscionable and non-severable.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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