In a 2-1 decision, the U.S. Court of Appeals for the Ninth Circuit recently reversed a district court’s order enjoining the enforcement of California Assembly Bill 51 (“AB51”), which is codified as Labor Code section 432.6. The statute prohibits requiring arbitration of California Fair Employment and Housing Act (“FEHA”) and Labor Code claims as a condition of employment or continued employment. It further prohibits threatened or actual retaliation, discrimination, or termination against an applicant or employee for refusing to consent to such an agreement.
In California Chamber of Commerce v. Bonta, the Ninth Circuit held the Federal Arbitration Act (“FAA”) does not preempt section 432.6 as to these provisions, but does preempt any attempt to impose criminal or civil penalties for violations of the law. The Ninth Circuit reasoned that section 432.6 regulates only pre-agreement conduct and does not establish a contract defense to enforcement of an executed arbitration agreement, even if it violates the statute.
What Does Labor Code Section 432.6 Prohibit?
Labor Code Section 432.6 was supposed to go into effect on January 1, 2020, applying to contracts entered into, modified, or extended on or after that date. It prohibits employers from requiring arbitration of claims for violation of FEHA or the Labor Code as a condition of employment or continued employment, even if the employee can opt out of the agreement or receives a benefit by accepting the agreement. It also prohibits an employer from threatening, retaliating, or discriminating against or terminating an applicant or employee because of her or his refusal to agree to arbitration. Labor Code Section 433 made a violation of Section 432.6 a misdemeanor. The law also states, however, that it’s not intended to invalidate a written arbitration agreement that is enforceable under the FAA.
What did the Chamber of Commerce Lawsuit Challenge?
The Chamber of Commerce filed suit in federal district court to enjoin the effectiveness of the statute. The district court obliged, issuing a temporary restraining order enjoining enforcement of the law on December 30, 2019, just two days before it was supposed to go into effect. On February 7, 2020, the district court issued a preliminary injunction finding it likely that the Chamber of Commerce would prevail in its argument that the FAA preempts section 432.6. The State of California appealed, and on September 15, 2021, the Ninth Circuit vacated the preliminary injunction and ordered the district court to issue a narrower preliminary injunction that enjoins only enforcement of civil and criminal sanctions for violations of Labor Code section 432.6.
What did the Majority Opinion Say?
The majority found that the FAA does not preempt section 432.6 because it merely regulates pre-agreement employer behavior and does not invalidate or render unenforceable executed arbitration agreements governed by the FAA. The court, however, did find that the civil and criminal penalties prescribed by sections 433 and 12953 were preempted by the FAA because they punished employers for the act of executing arbitration agreements.
The court asserted that section 432.6 does not conflict with the FAA because it does not establish a contract defense that renders executed arbitration agreements invalid or unenforceable. Rather, section 432.6 regulates what constitutes a voluntary arbitration agreement’s formation. According to the majority, voluntary formation—that is, conduct that takes place before an arbitration agreement is created—does not fall within the scope of FAA preemption. The court sought to distinguish two key U.S. Supreme Court preemption decisions; Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S.Ct. 1421 (2017) and Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996). The court concluded these two cases were not applicable because they invalidated state laws that hindered the enforceability of executedarbitration agreements. The dissenting judge believed those decisions were applicable and compelled preemption of the entire anti-arbitration law.
The Ninth Circuit ruled that the FAA does preempt any civil and criminal sanctions for violation of Labor Code section 432.6. The court reasoned that a violation of the law would necessarily extend to the execution of an arbitration agreement governed by the FAA. Therefore, the civil and criminal sanctions associated with AB 51 were in direct conflict with the FAA.
What are the Implications of the Ninth Circuit’s Decision for Employers?
Because the Ninth Circuit has yet to issue a formal mandate, the district court’s injunction is still in effect. The Chamber of Commerce likely will seek review of this decision either by requesting en banc review in the Ninth Circuit or filing a writ of certiorari to the U.S. Supreme Court. If review is sought in the Supreme Court, the Chamber of Commerce likely will seek a stay of the Ninth Circuit’s ruling, further delaying the law’s enforcement. The Ninth Circuit has a history of ruling against FAA preemption, and a number of those decisions have been overturned by the Supreme Court.
If the injunction is lifted, section 432.6 will take effect. Until further developments, the impact of section 432.6 on enforceability of arbitration agreements required as a condition of employment or continued employment after January 1, 2020 remains unclear. Given the uncertainty of the decision’s impact, including if it will be reviewed by the full Ninth Circuit and possibly Supreme Court, employers who have mandatory arbitration programs should be aware of the decision and consult with counsel about the potential impact.
California employers with ongoing arbitration programs should carefully decide appropriate next steps. Because the District Court’s injunction remains in effect for now, time is not of the essence, unless, and until, the Ninth Circuit’s mandate issues. When that happens, some employers – confident that FAA preemption will be found in the end, and mindful that enforceable arbitration agreements still can be created even under the Ninth Circuit majority’s decision – may decide to continue to seek arbitration agreements from new hires or existing employees.
Other employers, daunted by the specter of possible penalties for seeking an arbitration agreement, may choose to err on the side of caution. Some employers may choose to make arbitration totally voluntary. Still others may choose to suspend implementation of new arbitration agreements until the meaning and enforceability of AB 51 is definitively resolved. If the Ninth Circuit’s decision is reversed, such employers could reinstate their arbitration program at that time and evaluate ways to recapture new hires and employees who have slipped through the cracks in the meantime. The particular path chosen by an employer will depend on each employer’s specific circumstances, assessment of the risks and benefits, and the guidance of employment counsel.