Lesson Last Updated: March 20, 2023

Lesson Highlights

California has had quite the back and forth around arbitration agreements in employment in the last few years! First they were legal, then they were possibly not, and now they're back on the table. What a time to be alive. In this lesson, we'll talk about this back and forth.

What is an Arbitration Agreement?

To understand what an arbitration agreement is, you need to have a baseline understanding of what arbitration is. Arbitration is a form of "alternative dispute resolution" that can be used to avoid filing a lawsuit and going to court. Arbitration does, in practice, look similar to a court case in many ways (there are lawyers involved, information and evidence may enter the record, etc.), but instead of a judge or jury, an arbitrator (literally just means a decision-maker) will make the final decision on the issue and that decision is usually binding.

Arbitration is usually a faster process than litigation (that's what we call going to court and filing a lawsuit), with simpler proceedings that are far less formal, but in order to go to arbitration, both parties of a dispute have to agree. Arbitration agreements that are signed at the beginning of a relationship (for our purposes, at the beginning of an employment relationship) are usually the easiest way to ensure that any disputes will be arbitrated rather than litigated.

Arbitration has a few different benefits for employers:

• Because it's faster than litigation, it's also usually less expensive.
• You can choose ahead of time who the arbitrator will be, which can be helpful if you work in an industry that has specialized knowledge and you want to ensure that the arbitrator has a grasp on that knowledge.
• Arbitrations are confidential, which is appealing to employers that don't want their business reputation potentially impaired.

Arbitration also has downsides:

• Arbitration awards cannot be appealed like court decisions can.
• The rules of evidence in arbitration are more limited than they are in litigation.
• Employers have to foot most of the bill for arbitration in California. The employee has to pay for their own attorney, but virtually everything else needs to be paid for by the employer.
• Critics of arbitration argue that confidentiality makes the possibility of exploitation in the workplace higher, because the possibility of public shaming for bad behavior is lowered.

Traveling Back in Time: AB 51

Way back in 2019, Governor Gavin Newsom signed AB 51 into law. This law was intended to protect employees through various mechanisms, including banning employers from requiring job candidates and employees from entering into arbitration agreements as a condition of employment. [1] By entering into an arbitration employment with job candidates or employees, employers could force these individuals to waive their right to pursue Labor Code or California Fair Employment and Housing Act ("FEHA") claims in court, which the legislature thought could be used to silence possible discrimination claims.

The Bonta Case

This law was supposed to take effect on January 1, 2020. However, there were a lot of unhappy power players that used their collective might to stop this law in its tracks. The U.S. Chamber of Commerce and several others successfully filed for a preliminary injunction in federal district court in the final days of 2019, arguing the Federal Arbitration Act ("FAA"), a federal law, preempted AB 51. This case was known as Chamber of Commerce of the United States of America v. Bonta, and is in reference to the Chamber of Commerce pursuing litigation against the California Attorney General Rob Bonta, among other officials.

As a result of the Bonta case, the state was ordered by the court to halt enforcement of AB 51 while litigation was ongoing.

Then, about a month later, the district court granted the preliminary injunction. In its view, AB 51 violated the FAA, for several reasons, notably by threatening civil and criminal penalties against employers. [2]

The Appeals Process

The State of California appealed the district court’s decision, which meant the case would be heard by the Ninth Circuit. Without getting too far into the legal weeds, it's important to understand that the Ninth Circuit is a court of appeal for 15 federal judicial districts, not just California, [3] meaning that what the Ninth Circuit decides is usually telling for the fate of the other 14 judicial districts outside of California. In other words, it's a big deal.

In 2021, the Ninth Circuit partially reversed the district court’s decision, but the Chamber of Commerce was still not satisfied with this decision, so it then requested the Ninth Circuit to reconsider, which it did! It's absolutely wild how courts work, right?

Following a separate lawsuit, known as Viking River Cruises v. Moriana, the Ninth Circuit withdrew its original decision (the partial reversal) and decided to hold a rehearing of the Bonta case.

The Ninth Circuit's Final Decision

On February 15, 2023, the Ninth Circuit handed down a decision for the Bonta case and affirmed the district court’s (remember that first court way back in 2019?) grant of a preliminary injunction, meaning the State of California could not enforce AB 51's ban on mandatory arbitration agreements. The court held that the FAA preempted AB 51 because it “stands as an obstacle" to what Congress is trying to do, which is to encourage arbitration. [4]

What This Means for Employers

This is a huge (and surprising) legal development. California frequently leads the nation in creating laws that are protective of the employee (which is what the intent was with AB 51), meaning that this fight is probably not over. However, for now, employers can explore with their legal counsel whether or not an arbitration agreement is right for their workplace.

PAUSE: If this lesson has taught you anything, it should be that the law is often like a game of tennis, with volleys going back and forth rapidly. At least, relatively speaking! Never attempt to draft an arbitration agreement yourself, as the law you think you know may be outdated at any given moment. Always speak to an attorney first!

This Lesson's Sources:

[1] AB-51 Employment discrimination: enforcement. 

[2] Chamber of Commerce of the United States v. Bonta

[3] United States Court for the Ninth Circuit: What is the Ninth Circuit?

[4] Chamber of Commerce of the US, et al v. Rob Bonta