A federal appellate court in a 2-1 decision has held that particular segments of a California law (AB 51) that prohibits mandatory arbitration cannot be preempted by the Federal Arbitration Act (FAA).
“California Assembly Bill 51 and the Ninth Circuit Court of Appeal’s ruling are among the latest forays in the long-running battle over the enforceability of arbitration agreements in employment contracts under the FAA—a battle that has pitted California’s legislature and the Ninth Circuit against the U.S. Supreme Court. It is a fair bet that this time, the latter will once again have the last word,” Caruso Law School professor Thomas J. Stipanowich, the William H. Webster Chair in Dispute Resolution at Pepperdine University’s Straus Institute, told the Northern California Record by email.
Stipanowich noted the Ninth Circuit’s ruling in Chamber of Commerce v. Bonta partially overturns a district court opinion enjoining enforcement of AB 51, which added Section 432.6 to the California Labor Code.
“That bill, made law in 2019, prevents any employer from requiring an employee as a condition of employment ‘to waive any right, forum, or procedure [including the right to sue in Court] for a violation of any provision of the’ Fair Employment and Housing Act (FEHA) or any other law that governs employment,” Stipanowich said. “In other words, workers who opt not to sign an arbitration agreement cannot be retaliated against or coerced to do so by their employers.”
Stipanowich noted that despite AB 51’s obvious application to arbitration agreements, the bill nonetheless states: “Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under [the FAA].”
“In other words, after the effective date of the act, employers can still ask employees to enter into arbitration agreements but cannot require them as a condition of employment,” Stipanowich said. “AB 51 creates both civil and criminal liability for violations, and makes intentional violations of certain sections a misdemeanor. The bill also authorizes plaintiffs to recover attorney fees for violations of its provisions related to unfair employment practices under FEHA.”
And since the law is part of the labor code, any violation could lead to the imposition of penalties under other California laws, Stipanowich said.
“The U.S. Chamber of Commerce went to federal court to prevent enforcement of the law on the basis that it was preempted by the FAA, which the Supreme Court has found to be a source of federal substantive law supporting broad enforcement of agreements to arbitrate, and which preempts contrary state law,” Stipanowich said.
“The district court preliminarily enjoined enforcement with respect to arbitration agreements on the basis that it placed agreements to arbitrate on unequal footing with other contracts and stood as an obstacle to the purposes and objectives of the FAA. In a 2-1 ruling, a Ninth Circuit panel affirmed the district court’s determination that the civil and criminal penalties associated with AB 51 were preempted by the FAA, but vacated the district court’s preliminary injunction enjoining AB 51’s enforcement and remanded for further proceedings.”
The Sept. 15 ruling, which was authored by Justice Carlos F. Lucero, of the Tenth Circuit U.S. Court of Appeals, sitting by designation, included a dissent from Ninth Circuit Justice Sandra S. Ikuta.
“Although the panel majority affirmed the district court’s conclusion that the civil and criminal penalties to be imposed for violations of AB 51 were preempted by the FAA, the majority insisted that the remainder of the act did not conflict with the FAA since the latter ‘was focused on the enforcement and validity of consensual written agreements to arbitrate and did not intend to preempt state laws requiring that agreements to arbitrate be voluntary’ (emphasis added),” Stipanowich said.
“In other words, there is no conflict with the FAA because the law was aimed solely at ‘pre-agreement employer behavior,’ and not the arbitration agreement itself,” Stipanowich said. “The decision may also be read to say that arbitration agreements made as a condition of employment are not truly ‘consensual’ or ‘voluntary’ and therefore not subject to the FAA.”
The dissent by Justice Ikuta, which approaches the length of the opinion, elucidates the conflict with Supreme Court precedent as well as decisions by the First and Fourth federal circuits.
“Judge Ikuta’s dissent calls out the majority for underpinning a law clearly aimed at denying enforcement to arbitration agreements on the basis that it bars only non-consensual arbitration agreements and focuses on ‘pre-agreement employer behavior,’ arguments which Judge Ikuta describes as 'conflict[ing] with the Supreme Court’s clear guidance in Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S. Ct. 1421, 1425 (2017), which held that the FAA invalidates state laws that impede the formation of arbitration agreements.’ Judge Ikuta’s perspective probably offers an accurate forecast of the perspectives of the conservative majority of the current Supreme Court,” Stipanowich said. “Efforts to in any way police formation of arbitration agreements, whether through state statutes or by judicial doctrines such as unconscionability, have received short shrift from those justices.”
Stipanowich noted that for the time being, the Ninth Circuit’s decision is likely to cause some companies to review their policies with respect to arbitration agreements in employment contracts governed by California law.
“For now, new arbitration agreements cannot be made a condition of employment; some companies may therefore consider giving employees a chance to opt out of an agreement to arbitrate within a certain period of time,” Stipanowich said. “However, employers no longer need be concerned about facing civil or criminal penalties for imposing arbitration agreements. In any case, it is probable that the next step will be a determination by the Supreme Court.”
(Editor's note: The Northern California Record is owned by the U.S. Chamber Institute for Legal Reform).