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In a rare reversal of a prior opinion (and major victory for employers), the Ninth Circuit Court of Appeals ruled that California’s ban on mandatory arbitration agreements in employment relationships (AB 51/Labor Code § 432.6) conflicts with the Federal Arbitration Act (“FAA”). The Court found the FAA preempts California’s ban and upheld the injunction preventing enforcement of AB 51.  With this ruling, California employers can rest easier knowing they can continue to require employees to sign arbitration agreements as a condition of hire or continued employment. 

The Ninth Circuit panel previously found the primary aspects of California’s ban on mandatory arbitration agreements were valid.  After the United States Supreme Court’s decision in Viking River Cruises v. Moriana (arbitrability of PAGA claims), however, the Ninth Circuit panel ordered a rehearing on the injunction against AB 51. The panel then reversed itself and ruled that California’s ban on mandatory arbitration agreements conflicts with the FAA’s strong preference for arbitration and impermissibly singles out arbitration agreements for disfavored treatment. 

Pending a potential further appeal to the United States Supreme Court, the Ninth Circuit’s ruling confirms that employers’ existing mandatory arbitration agreements are valid under the FAA and employers can continue to require arbitration, including class action waivers, as a condition of employment.  Arbitration agreements remain a critical tool for minimizing potential class and PAGA exposure, which means all employers should discuss mandatory arbitration agreements with counsel and ensure existing agreements remain up-to-date with changes in the law. 

There is still more to come from the courts on the topic of arbitration.  Employers are awaiting a decision in Adolph v. Uber Technologies, which will see the California Supreme Court determine whether individual plaintiffs maintain standing to bring representative PAGA claims in court on behalf of other employees even after an individual plaintiff’s PAGA claim is resolved in arbitration.  The California Supreme Court is expected to schedule oral arguments in the next few months.