A divided federal appeals panel has blocked California from enforcing a state law designed to punish employers who use worker arbitration agreements to keep employee-employer disputes out of courtrooms, saying the law was an impermissible attempt by the state to achieve policy goals in defiance of federal law and prior Supreme Court rulings.
In a 2-1 ruling, a three-judge panel of the U.S. Ninth Circuit Court of Appeals upheld the ruling of a Sacramento federal judge, who had slapped on an injunction barring the state from enforcing the law known as AB 51.
The decision marked a victory for the U.S. Chamber of Commerce and other business advocacy groups, who argued the state law improperly conflicts with the Federal Arbitration Act by threatening employers with civil and criminal punishment for placing arbitration clauses in their workers’ employment contracts.
“… There is no support for California’s description of AB 51 as simply an assurance that employees will not be the victims of forced arbitration or be compelled to arbitrate claims against their wills,” the majority wrote.
“To the contrary, AB 51’s interference with the ability of the parties to agree to arbitration stands as an obstacle to the ‘accomplishment and execution of the full purposes and objectives of Congress,’ and thus creates a scheme inconsistent with the FAA.’”
The decision was authored by Circuit Judge Sandra S. Ikuta. Circuit Judge William A. Fletcher concurred in the judgment.
They were joined on the panel by U.S. Tenth Circuit Court of Appeals Judge Carlos F. Lucero, who sat on the panel by designation.
Lucero dissented, saying he believed the problematic criminal and civil penalties spelled out in AB 51 could be severed from the law and struck down, leaving the rest of AB 51 in place to address California’s goal of discouraging allegedly unfair employment arbitration.
The dispute dates back to 2019, when Gov. Gavin Newsom signed AB 51 into law. The legislation marked a long-sought achievement for trial lawyers and other progressive interests, who had pushed for years for legislation that would counter employers’ traditional efforts to include so-called mandatory arbitration clauses in workers’ employment agreements.
Those agreements, enforced under contract law, typically bar employees from suing their employers over work-related issues.
Such arbitration has long been designated as an approved way of doing business by the federal government under the Federal Arbitration Act. Courts have noted the law represented a desire by Congress to encourage arbitration. Therefore, courts, including the U.S. Supreme Court, have struck down state laws that discourage or even criminalize arbitration clauses, finding those laws conflict with federal law.
Immediately after Newsom signed the law, the Chamber and other business groups filed suit in federal court, asserting AB51 also conflicted with the FAA.
Newsom and other supporters of AB 51, however, said the law “successfully navigates around” federal law and prior court rulings.
While the law includes criminal and civil penalties for those who violate it, they argued the law doesn’t discourage or criminalize all arbitration agreements. Rather, they said it only applies to allegedly compulsory arbitration agreements, as a condition of being hired or keeping a job. It further prohibited employers from “retaliating against an employee or applicant who refuses to do so.”
Further, they asserted the law doesn’t prevent an employer from attempting to enforce an arbitration clause.
But judges have taken a different view of the law.
U.S. District Judge Kimberly J. Mueller, chief judge of the Eastern District of California in Sacramento, sets up a system under which employers can be prosecuted for entering into arbitration agreements, but can then use federal law to enforce those same agreements.
Particularly, Mueller and the Ninth Circuit majority found the threat of criminal prosecution effectively thwarts the creation of arbitration agreements, which she said runs afoul of the goals and objectives of Congress as expressed in the FAA law.
The appellate judges noted Mueller “relied on declarations from leaders of the various trade associations and business groups stating that members of their groups will have to change their contracting processes to avoid civil and criminal penalties.”
California Attorney General Rob Bonta’s office disputed those assertions.
But on appeal, the Ninth Circuit majority scoffed at California’s assertions.
“Given the substance of these declarations, and the common sense conclusion that criminal penalties will have a deterrent effect on behavior, the district court’s finding was not clearly erroneous,” the appellate judges wrote.
The majority said the law stands as an example of state laws that demonstrate “’hostility towards arbitration’ that the FAA was enacted to overcome.”
In dissent, Judge Lucero said the majority’s interpretation of the FAA was too broad and sweeping.
“My colleagues’ misinterpretation leaves state legislatures powerless to ensure that arbitration clauses in these employment agreements are freely and openly negotiated,” Lucero wrote, saying it would also “give employers unmitigated power to mandate the arbitration of all employer-employee disputes as a condition of employment.”
The majority, however, rejected those contentions, saying their ruling that FAA preempts AB 51 “does not create a ‘new substantive right’ for employers to mandate unconscionable or illegal arbitration requirements.”
Allowing AB 51 to stand, they said, would severely impair the ability of employers to enter into arbitration agreements and would limit the reach of the FAA, in violation of the U.S. Constitution’s Supremacy Clause.
The Chamber and other business groups were represented in the action by attorneys Andrew J. Pincus, Archis A . Parasharami and Daniel E. Jones, of Mayer Brown, of Washington, D.C.; Donald Falk, of Schaerr Jaffe, of San Francisco; Maurice Baskin, of Littler Mendelson, of Washington, D.C.; and Bruce J. Sarchet, of Littler Mendelson, of Sacramento.
The case also drew extensive outside interest with friend of the court briefs entered by the California Employment Lawyers Association; the California Employment Law Council; the Restaurant Law Center and California Restaurant Association; Employers Group; and the Civil Justice Association of California.
Editor's note: The Northern California Record is owned by the U.S. Chamber of Commerce's Institute for Legal Reform