Think back pre-Covid, the end of 2019, a law was set to take effect in California that banned mandatory arbitration, and imposed criminal penalties on employers for mandating arbitration.  This law (AB51) also prohibited the often used opt-out clauses, which actually are allowable under current California law and rebut procedural unconscionability under the Armendariz standard.

AB51 was stopped at the last minute (by a temporary restraining order at year end 2019), then an injunction in January 2020 in the US District Court.  So mandatory arbitration remained legal.  Many felt this ruling was correct, that AB51 conflicted with the Federal Arbitration Act, and was therefore unconstitutional.

Fast forward to today, as if operating in California weren’t hard enough, the 9^th Circuit has made it more complicated by ruling that AB51 is only partially unconstitutional (as to the criminal penalties for existing agreements) (Chamber of Commerce v. Bonta).  However, as to imposing arbitration only when both the employer and the employee agree, well that may be fine.  So, back to the US District Court the case goes.

Given the vigorous dissent (and the circuit split), maybe the 9th Circuit will rehear the case en banc, or the US Supreme Court will take up this issue.  But in the meantime, depending on their risk tolerance, California employers are faced with a panoply of options on what to do with their current mandatory arbitration agreements (or their existing arbitration agreements with opt outs).

A conservative option is to do away with all mandatory arbitration immediately or arbitration agreements that require opt-out, and make them all truly voluntary both going forward for new hires and for your current workforce.  But oh my, will this have an impact in that many workers will not voluntarily sign.

A less conservative option is to wait-and-see if this decision is stayed pending further appeal.  Also perhaps to reconsider your approach going forward while all of that is pending (such as changing your protocol for new hires).

Which decision is right for your business is a fact specific inquiry to discuss with your employment counsel!

Post updated on September 18, 2021.  Please see this Alert for a more detailed analysis of this ruling and of employer options in response.