California’s failed fight to ban Mandatory Arbitration

Since California passed AB 51 banning mandatory arbitration in January of 2020, the state has been doing battle across state and federal courts against the business community to defend that law. Unfortunately for individual employees, as of January 1, 2024, the state has officially lost that battle. While we’ve discussed the enforceability of dispute resolution in the past, we’re diving deeper into Arbitration this week and why California’s fight was important.

What is Mandatory Arbitration?

Mandatory arbitration is requiring employees to use arbitration as the dispute resolution method as opposed to the public court system. This means that employees who don’t agree to such a clause are effectively declining their employment. Employers broadly prefer arbitration because:

1. Privacy: Confidential cases to minimize the reputational damage that could come with public trials.

2. No Class Action: Every claim is tried individually as opposed to class action lawsuits which can be costly.

3. No Judge or Jury: No trial in front of a judge or jury, where juries tend to be sympathetic to employees.

4. Less Likely to Lose Big: Arbitration tends to favor employers over employees compared to public courts, so they lose less often and lose less money when they do lose.

In other words, employers like arbitration because it’s considered more favorable to them.

What was AB 51?

California signed Assembly Bill 51 into law on October 2019 to ban employers from requiring all new and existing employees to sign mandatory arbitration agreements. As a result, employment agreements were changed to make arbitration agreements optional and unrelated to an individual’s employment. Going against this law made employers liable to civil and criminal penalties, the latter of which involved up to 6 months of jail time.

How was AB 51 struck down?

Given the perceived benefits of arbitration for businesses, it was no surprise that AB 51 was challenged in court before it even came into effect.

1. December 6, 2019: Lawsuit was filed by a coalition led by the California Chamber of Commerce to stop the law.

2. December 30, 2019: Eastern District Court of California halts enforcement of the law while the lawsuit takes place.

3. January 31, 2020: Eastern District Court of California rules that AB 51 violates the Federal Arbitration Act (FAA) and is invalid. The state of California appealed.

4. September 15, 2021: Ninth Circuit Court of Appeals reversed the decision and reinstated the law.

5. August 22, 2022: Ninth Circuit Court of Appeals voted to rehear the case, making the law invalid again for the time being.

6. February 15, 2023: Ninth Circuit Court of Appeals upheld the lower court’s decision to invalidate AB 51.

7. January 1, 2024: Having its decision upheld, the Eastern District Court of California permanently bans AB 51.

In short, California had its new law challenged immediately, and due to an unsuccessful appeal to the higher courts, AB 51 has been made invalid.

Are there any exceptions even if Mandatory Arbitration is allowed?

There are currently still two ways a Mandatory Arbitration could be ruled unenforceable in California:

1. Unconscionability: This term points to how unfair a contract may be. Courts frown upon contracts that are extremely one-sided. In the case of arbitration, an example would be when the employee must go through arbitration but the employer does not.

2. Non-FAA Arbitration: As mentioned earlier, this piece of federal legislation that governs arbitration. However, if a contract does not make reference to arbitration that follows the FAA, it’s much more likely to be challenged in California.

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We previously covered another California-specific topic regarding the 2024 Non-Compete laws. We occasionally write specifically on California not because we are biased towards one state, but because California has historically led the way to new standards that other states pick up as a result. As California has continuously normalized non-compete bans, the national movement to ban them has grown. In the case of mandatory arbitration, unfortunately, California has lost the battle and will need a new path forward. You can be sure the other states are keeping watch!

For advocacy and beyond,
The Ask Ginkgo Team