Ripple effect of Viking River making waves in employment disputes

California employers have been in limbo for the past few years on whether mandatory arbitration agreements are legal in the Golden State. Recent legal precedent, including the U.S. Supreme Court Viking River Cruises decision, is starting to provide some clarity, to the benefit of employers.

Where We Were with AB 51

Signed into law by Gov. Gavin Newsom in Oct. 2019, AB 51 prohibits employers in California from requiring employees to sign arbitration agreements concerning disputes arising under the Fair Employment and Housing Act (FEHA) or Labor Code as a condition of employment, continued employment, or the receipt of any employment-related benefit. AB 51 also allows for criminal penalties for violations of the Labor Code and imposes civil liability against any employer that retaliates, discriminates, terminates, or threatens any such action, against employees who refuse to accept mandatory arbitration.

Where Things Stood with Bonta

While AB 51 was to become effective as of Jan. 1, 2020, the United States District Court for the Eastern District of California issued a preliminary injunction prohibiting its enforcement, holding that AB 51 violates the Federal Arbitration Act (FAA) by unfairly requiring greater consent on arbitration agreements and potential civil and criminal penalties against employers seeking to enter into arbitration agreements that is absent with other contracts.

In 2021, a divided Ninth Circuit panel in Chamber of Commerce of the U.S., et al. v. Bonta, et al., held that the FAA does not completely preempt AB 51 to the extent that AB 51 seeks to regulate an employer's conduct prior to executing an arbitration agreement. The panel held that the FAA preempts AB 51 only to the extent that AB 51 seeks to impose civil and criminal penalties on employers who have successfully executed arbitration agreements governed by the FAA.

The U.S. Chamber of Commerce subsequently filed a petition for rehearing en banc, positing that AB 51 should be preempted in its entirety as it effectively limits employers' freedom to contract. However, the Ninth Circuit deferred pending the U.S. Supreme Court's decision in Viking River Cruises v. Moriana.

Where We Are Now Following Viking River Cruises

The U.S. Supreme Court issued its decision in Viking River Cruises, Inc. v. Moriana on June 15, 2022, holding that claims brought under the California Private Attorneys General Act (PAGA) can be split into individual PAGA claims and non-individual PAGA claims brought on behalf of other individuals, and that an employee's individual PAGA claims may be compelled to arbitration. The decision further held that because of PAGA's standing requirements, once an employee's individual PAGA claims are compelled to arbitration, the non-individual PAGA claims brought on behalf of other individuals cannot be maintained in court and must be dismissed.

Moreover, the U.S. Supreme Court concluded that the FAA broadly preempts rules that interfere with parties' freedom to determine the issues subject to arbitration and the rules by which they will arbitrate. As a result, Viking River Cruises has been proclaimed a meaningful victory for employers.

On Aug. 22, shortly after the Viking River Cruises decision was issued, rather than grant or deny the Chamber of Commerce's petition for rehearing en banc as anticipated, the Ninth Circuit withdrew its prior opinion, resubmitted the case, and granted a panel hearing, rendering the Chamber of Commerce's petition for rehearing moot.

Risk Management Considerations

The pending Ninth Circuit panel hearing, when coupled with the current state of arbitration agreements following Viking River Cruises, implicates a likelihood that the new panel might find that the FAA preempts AB 51 in its entirety, in which case, employers will not be precluded from requiring their employees to sign arbitration agreements as a condition of employment, and be free, once more, to decide whether to mandate arbitration agreements as a condition of employment.

For now, employers and HR professionals must review and update their existing arbitration agreements (based on current law) to ensure that the language of the agreement reflects that it is entered into voluntarily and that there will be no retaliation in the event the employee rejects the agreement. By doing so, employers will be insulated from exorbitant time, fees, and costs in litigation, considering that arbitration agreements generally curtail exposure and high damage awards on claims arising out of employment.

Similarly, employers should also ensure that any settlement agreement entered into between the employer and an employee involving an employment dispute includes a waiver of PAGA claims to further mitigate exposure.