Employment Arbitration Agreements are Here to Stay, but are Not “One Size Fits All”

Recently, the Ninth Circuit Court of Appeals issued its decision in Chamber of Commerce v. Bonta, a closely watched case regarding the use of employment arbitration agreements in California. The court held, in part, that a California law that sought to penalize employers who used mandatory arbitration agreements was preempted by the Federal Arbitration Act (“FAA”). This is a significant victory for employers.

History of the Litigation

In October 2019, California Governor Newsom approved Assembly Bill 51 (“AB-51”), which sought to prevent employers from making arbitration agreements mandatory and a condition of employment. Importantly, AB-51 contained severe civil and criminal penalties – including six months incarceration – for employers who made consenting to arbitration agreements a requirement for employment. The law was set to take effect on January 1, 2020.

On December 9, 2019, the California Chamber of Commerce and other business associations sued the California Attorney General over the law. The district court granted an injunction two days before the law was set to take effect, which blocked it from being enforced. 

In the Ninth Circuit’s most recent decision, the court found that the civil and criminal penalties “stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress [through the FAA]”. The court declined to sever the parts of the law that were preempted by the FAA from those that were not and remanded the case to the district court for further proceedings. Accordingly, mandatory arbitration agreements are safe, for now, in California.

Other Arbitration Agreement Considerations

While employers can still condition employment on entering into arbitration agreements, there are many other issues to consider, as arbitration agreements have been the subject of statutory initiatives and court decisions in several jurisdictions in recent years. Just last year, President Biden signed into law the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (“EFAA”). The EFAA amends the FAA and gives employees the option to invalidate arbitration agreements with respect to sexual assault and sexual harassment claims. Several states have passed state-level legislation with similar aims, including California, Illinois, Maryland, New Jersey, New York, and Vermont.

Beyond the substance of the agreement, some courts have focused on things such as formatting and placement of arbitration provisions when deciding whether to invalidate or otherwise render an arbitration agreement unenforceable. For example, in South Carolina, the Uniform Arbitration Act mandates that arbitration agreements are typed in underlined capital letters, or highlighted prominently, on the first page of a contract. Also, the Fourth Circuit Court of Appeals (which covers Maryland, North Carolina, South Carolina, Virginia, and West Virginia) recently found that an arbitration agreement was “illusory, and thus invalid” because it was a provision in an employee handbook and the employer had retained the right to change or modify the employee handbook. Other states, such as California, may invalidate an arbitration agreement where it is not provided in the employee’s primary language. These are just some of the continuing obstacles to enforcement.

For businesses that use arbitration agreements, having a tailored and up-to-date form is critical to enhance enforceability. Though the arbitration landscape has evolved, many companies are relying on agreements that have not been reviewed for years, which may not be in compliance with recent developments.

If your business needs assistance drafting or reviewing arbitration agreements for use with your workforce, contact one of Honigman’s Labor and Employment Attorneys here.