Ninth Circuit Court of Appeals Eliminates Obstacles to Enforce Employment Arbitration Agreements in California Under the Federal Arbitration Act.
After nearly three years of legal challenges, the 9th Circuit Court of Appeals, in Chamber of Commerce v. Bonta affirmed a district court injunction striking down California Assembly Bill 51 (“AB 51”) because it is preempted by the Federal Arbitration Act (“FAA”). As a result, California employers can continue to require employment arbitration agreements for employees’ claims for unpaid wages, discrimination, and numerous other causes of action under California’s Labor Code and Fair Employment and Housing Act (“FEHA”).
By any measure, the decision is a significant win for California employers.
California AB 51 Was Enacted to Ban Mandatory Arbitration
Congress enacted the FAA to promote agreements to arbitrate and combat hostility towards arbitration as a means of resolving disputes. Numerous courts have described the FAA as embodying a national policy favoring arbitration and a liberal federal policy favoring arbitration agreements. The U.S. Supreme Court has consistently found the FAA preempts state laws which would otherwise prevent the enforcement of arbitration agreements.
Since 2015, the California legislature has engaged in an effort to craft legislation that prevents employers from requiring employees to enter into arbitration agreements as a condition of employment and avoids conflicts with the FAA. After a number of fits and starts, and more than a few vetoes, Governor Gavin Newsom signed AB 51 into law effective on January 1, 2020.
The statute tried to prohibit employers from requiring employees to waive, as a condition of employment, the right to litigate claims under FEHA and the Labor Code. An employer that violated the statute could have been subject to civil and criminal penalties and found guilty of a misdemeanor. To try to avoid a conflict with the FAA, the statute stated if an employee did enter into a mandatory arbitration agreement it would nevertheless be enforceable. The law created the untenable result that an employer with a mandatory arbitration policy could be subject to criminal prosecution but still enforce its arbitration agreement with its employees.
How Did We Get Here?
The U.S. Chamber of Commerce and others filed suit in the Eastern District of California seeking a temporary restraining order and preliminary injunction on the grounds the FAA preempted AB 51. The district court granted the request and prevented enforcement of the law. It ultimately found the statute violated the FAA by placing arbitration agreements on unequal footing with other contracts because it imposed a higher consent requirement and levied civil and criminal penalties against employers. The State of California appealed the decision.
The 9th Circuit initially reversed part of the ruling. The original majority opinion concluded the FAA does not preempt AB 51 to the extent the law seeks to regulate an employer’s conduct prior to executing an arbitration agreement. The Chamber filed a petition for review before the full 9th Circuit. In December 2021, the 9th Circuit deferred its decision until the U.S. Supreme Court decided the case of Viking River Cruises v. Moriana, which involved another California statute limiting arbitration agreements. After the U.S. Supreme Court issued its decision in Moriana, the 9th Circuit withdrew its original decision in favor of a panel rehearing.
9th Circuit Decides the Federal Arbitration Act Preempts AB 51
On February 15, 2023, the 9th Circuit panel released its new opinion holding the FAA preempts AB 51. The decision contains several important holdings for future cases.
First, the panel ruled AB 51 created a burden on formation of arbitration agreements, was preempted by the FAA, and thus unenforceable. The 9th Circuit analyzed AB 51 under the principles of conflict preemption. The court found the FAA preempts a state law if it interferes with the fundamental attributes of arbitration or has a disproportionate impact on arbitration. It held that if a state law either interferes with arbitration (1) on its face or (2) covertly, the law cannot stand in harmony with the purposes of the FAA. The court ruled this principal applies to both formation and enforcement of arbitration agreements.
Second, the Court found the FAA preempts a state law that limits or prevents parties from entering into arbitration agreements in the first place. If AB 51 could criminalize the act of offering an employment arbitration agreement, it would defeat the purpose of the FAA and destroy Congress’ intent to place arbitration agreements on equal footing with other contracts.
Third, the 9th Circuit found that AB 51 disfavored the formation of arbitration agreements and therefore imposed a severe burden on contract formation. The civil and criminal penalties create a deterrent effect on employers and inhibited their willingness to create an arbitration agreement with employees. The court said AB 51 singles out arbitration provisions as an exception to generally applicable law, noting employers can mandate employees to enter contracts for compensation and drug usage, but not arbitration agreements. The court also stated the penalty-based scheme in the statute violated the equal treatment principal and demonstrated clear hostility toward arbitration.
Fourth, the 9th Circuit refused to sever the offending provisions of AB 51, finding instead that all provisions of the statute work together to burden the formation of arbitration agreements. Because AB 51 would still include a civil penalty if severed, it impedes employers’ ability to enter into arbitration agreements with their employees for fear of criminal sanctions.
Takeaways from the Decision and Where We Go From Here
While the decision may be subject to further appeals, at this time California employers may continue to implement mandatory arbitration agreements and are not restricted by AB 51. The decision is important because the 9th Circuit joined the 1st and 4th Circuits by finding obstructions to the formation of arbitration agreement are as unwarranted as impeding enforcement of arbitration provisions. The key takeaways seem to be as follows:
- State statutes or court created rules creating obstacles to formation of arbitration agreements are contrary to and likely preempted by the FAA.
- Arbitration agreements stand on equal footing with other contracts and will be analyzed in the 9th Circuit in accordance with FAA principles of equal protection treatment.
- California employers can continue to implement mandatory arbitration agreements for employees and new hires, absent any additional appeals, and should consult with their attorneys to ensure that implementation is lawful.
- Employers should review existing employee arbitration agreements in light of this decision.
About the Finkel Law Group
Finkel Law Group, with offices in San Francisco and Oakland, has more than 25 years of experience counseling companies and individuals in negotiating, preparing, forming and enforcing contracts in all context, including employment law, in federal and state court in California. We have the knowledge and experience to help your company navigate the delicate issues associated with negotiating employment and other sensitive contracts.
When you need intelligent, insightful, conscientious and cost-effective legal counsel to assist you with managing and planning for the future of your business enterprise, please contact us at (415) 252-9600, (510) 344-6601, or info@finkellawgroup.com to speak with one of our attorneys about your matter.