Recently, the U.S. Court of Appeals for the Ninth Circuit reversed itself and affirmed a district court’s grant of a preliminary injunction finding that the Federal Arbitration Act (FAA) preempted California Assembly Bill 51 (AB51).
On October 10, 2019, Governor Newsom signed AB51 into law. The law purported to preclude mandatory arbitration agreements affecting rights under the California Fair Employment and Housing Act or the California Labor Code in the employment setting. The law sought to impose civil and criminal sanctions on the employer for seeking such agreements with its employees.
The U.S. Chamber of Commerce, along with several other business groups, filed a suit challenging AB51 and specifically seeking a declaration that it was preempted by the Federal Arbitration Act (FAA). On January 31, 2020, U.S. District Judge Kimberly granted the Chamber’s request for a preliminary injunction halting enforcement of AB51 while the litigation on merits continued. The district court found that it was likely that AB51 was pre-empted by the FAA.
On September 15, 2021, in a 2-1 decision, the Ninth Circuit reversed in part the trial court’s conclusion that AB 51 was preempted by the FAA, vacated the preliminary injunction, and remanded for further district court proceedings. The court found that FAA did not preempt AB51 to the extent that it prohibits signing an arbitration agreement as a condition of employment because it exclusively regulates pre-agreement employer behavior, which is beyond the scope of the FAA. The court found, however, that the enforcement mechanism imposing civil and criminal penalties were preempted by the FAA since it punishes employers for executing an arbitration agreement. Chamber of Commerce of the U.S., et al. v. Bonta, et al., 13 F.4th 766 (9th Cir. 2021); Bonta (I).
The US. Chamber of Commerce subsequently filed a petition to have the case reheard en banc. In December 2021, the decision on rehearing was deferred pending the U.S. Supreme Court decision in Viking River Cruises v. Moriana, a case involving arbitration agreements in California. The Supreme Court ruled that FAA preempted California law prohibiting arbitration of individual Labor Code violations brought under PAGA.
In August 2022, instead of granting or denying the petition for rehearing, the Ninth Circuit surprisingly withdrew sua sponte its prior decision and granted a panel rehearing.
On rehearing, the Ninth Circuit, in a 2-1 panel decision, reversed and abandoned its prior conclusion and affirmed the district court’s grant of a preliminary injunction. In particular, the Ninth Circuit found that AB51 was preempted by the FAA. Chamber of Commerce v. Bonta, ____ F.4th ____, 2023 WL 2013326 (9th Cir. 2023) (“Bonta II“)
The court concluded that the California approach created the “oddity that an employer subject to criminal prosecution for requiring an employee to enter into an arbitration agreement could nevertheless enforce that agreement once it was executed.” Id. at *4.
The court noted the numerous instances in which the Supreme Court has struck down a California law relating to arbitration as preempted by FAA. It was apparent that the odd construction of the law was purposely drafted by the California legislation to evade preemption and discourage arbitration. In addition, this court pointed out that AB51 conflicted with the “national policy favoring arbitration and a liberal federal policy favoring arbitration agreements” embodied by FAA. Id. at *6 (internal quotations omitted). The court also rejected California’s arguments that it should sever the preempted clauses and allow the remaining parts to go into effect. Moreover, the court rejected California’s contention that AB51 was an effort to stop forced arbitration by noting that a contract may be “consensual” even if one party accepts unfavorable terms unless the contract is otherwise unenforceable under general contract rules.
The preliminary injunction remains in effect for the time being. The decision can still be appealed by the State of California by either requesting a rehearing en banc (as the U.S. Chamber of Commerce did previously) or appealing to the U.S. Supreme Court. The California Attorney General’s office stated that it is “reviewing the decision” and “assessing” the next steps.
This is a big win for California employers. For now, California employers may continue requiring employees to sign arbitration agreements as a condition of employment, subject to certain subject matter exceptions. That said, it is unlikely that the issue has been put to rest for long, and as Judge Ikuta wrote in his dissent in Bonta I: “Like a classic clown bop bag, no matter how many times California is smacked down for violating the Federal Arbitration Act (FAA), the state bounces back with even more creative methods to sidestep the FAA.”
In this ever-changing landscape of arbitration laws in California, employers should consult with employment law attorneys to ensure compliance with the law. Kronick is actively monitoring developments in this area.
Questions
If you have any questions regarding this Legal Alert, please contact the following attorneys from our office or the attorney with whom you typically consult.
Christopher Onstott
constott@kmtg.com | 916.321.4582
Kate Zemlo Rivas
kzemlorivas@kmtg.com | 916.321.4596
Relevant Content
If you found value in this article, you might be interested in these links: