Arbitration agreements

Mixed News for Employers on Arbitration Agreements

Rulings on arbitration agreements continue to come thick and fast. Arbitration is a dispute resolution procedure where legal disputes are resolved by private arbitrators – typically retired judges – rather than in the public court system. Employers generally consider arbitration to be a more favorable forum for deciding disputes than litigating in court, though the costs to arbitrate are expensive. For one, juries who find against employers tend to be more generous in their awards than arbitrators. Second, arbitration clauses can include class action waivers, making it hard or impossible for employees to bring class action lawsuits. For these reasons, employers have increasingly required employees to sign arbitration clauses. Recent weeks have brought significant rulings on their enforceability, both good and bad.

The Good News – Arbitration Agreements Can be Mandatory

In a helpful ruling for California employers, the Ninth Circuit issued a decision in February 2023 holding that California’s Assembly Bill 51—a statute that attempted to criminalize the use of arbitration agreements by employers—is preempted by the Federal Arbitration Act.

AB 51, effective January 1, 2020, prohibited California employers from requiring employees to agree to mandatory arbitration as a condition of employment. A federal district court promptly issued a preliminary injunction barring enforcement of AB 51 as preempted by the Federal Arbitration Act.

In September 2021, a panel of the Ninth Circuit initially reversed the district court. (See 9th Circuit Decision on Arbitration Agreements.) In August 2022, after a petition for rehearing was filed, the Ninth Circuit withdrew its opinion. [See In Win For Employers, California Arbitration Agreements Can Be Mandated as a Condition of Employment (For Now).]

The Ninth Circuit has now issued a new opinion affirming the district court’s preliminary injunction order and holding that AB 51 is preempted by the FAA. Unless there is further review by the en banc Ninth Circuit or the Supreme Court, AB 51 will now likely be permanently enjoined on remand.  As a result, California employers remain able to require employees to sign arbitration agreements in connection with their employment without the risk of potential criminal liability.

The Bad News – PAGA Representative Actions May Still Survive

Employers are likely already familiar with wage and hour class actions. The US Supreme Court held several years ago that arbitration agreements can validly contain a class action waiver, which has reduced the risk of such actions. As a result, plaintiff lawyers are increasingly filing lawsuits under the California Private Attorneys General Act of 2004 (PAGA), which  authorizes any “aggrieved employee” to seek civil penalties against an employer for a range of Labor Code violations.

Employers breathed a sigh of relief when in its 2022 decision in Viking River Cruises  v. Moriana, the United States Supreme Court suggested that a plaintiff whose individual PAGA claim has been compelled to arbitration would not retain standing under state law to pursue the non-individual PAGA claims in court. This meant that an arbitration agreement could validly require dismissal of a PAGA action, to the extent it asserted claims on behalf of other employees.

Three recent decisions by California courts have muddied the waters, however. In Galarsa v. Dolgen California LLC, decided in February 2023, and Piplack v. In-N-Out Burgers, and Gregg v. Uber Technologies, both decided in March 2023, the courts each disagreed with the Viking River decision. They held that even after a plaintiff’s individual PAGA claim had been sent to arbitration, the plaintiff maintained standing to pursue a representative PAGA action. They noted that their holdings conflicted with the holding of the US Supreme Court in Viking River, but explained that standing was an issue of state law, that the US Supreme Court was not binding on issues of state law, and that they were compelled to follow a prior decision of the California Supreme Court addressing a different aspect of PAGA standing. In each case, the decision compelled the plaintiff’s individual PAGA claim to arbitration, while permitting the representative PAGA action to continue in court.

These rulings are not the last word, however, because the same issue will be decided by the California Supreme Court later this year in the pending case of Adolph v. Uber Technologies, Inc.

Employer Takeaway

Employers should consider mandating arbitration provisions as a condition of employment, particularly because doing so can reduce or eliminate class action liability. Given that arbitration has both advantages and disadvantages, we highly recommend consulting with employment law counsel before mandating arbitration provisions as a condition of employment.

However, even if an employee agrees to arbitrate, employers should be aware that there may well be continuing liability from PAGA representative actions. For this reason, employers should take additional care to ensure that their policies and practices are compliant with the Labor Code.

Please feel free to contact us if you would like assistance with an existing or new arbitration program, or with auditing your policies and practices to minimize the risk of liability.

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