Summary
Ninth Circuit holds the Federal Arbitration Act (FAA) preempts AB 51, which attempted to prohibit employers from requiring employees to waive, as a condition of employment, the right to litigate claims under the FEHA and the California Labor Code.
Arbitration agreements are on an equal footing as other contracts and will be analyzed in the Ninth Circuit in accordance with FAA principles of “equal protection treatment.”
California employers can continue to use mandatory arbitration agreements for employees and new hires.
In a significant win for California employers, the Ninth Circuit Court of Appeals, in Chamber of Commerce v. Bonta,1 affirmed a district court injunction striking down California Assembly Bill 51 (“AB 51”) as preempted by the Federal Arbitration Act (FAA), after nearly three years of legal challenges.
Since 2015, the California legislature has engaged in a “prolonged effort to craft legislation that would prevent employers from requiring employees to enter into arbitration agreements as a condition of employment, avoiding conflict with the FAA.”5 Following a history of vetoes of similar measures, Governor Gavin Newsom signed AB 51 into law, with an effective date of January 1, 2020. AB 51 attempted to prohibit employers from requiring employees to waive, as a condition of employment, the right to litigate claims under the FEHA and the California Labor Code. An employer that violated AB 51 could have been subject to civil and criminal penalties and found to have committed a misdemeanor. In an effort to avoid a conflict with the FAA, AB 51 stated if an employee did enter into a mandatory arbitration agreement, it would nevertheless be enforceable.6 The law created an “oddity” whereby an employer with a mandatory arbitration policy could be subject to criminal prosecution but could nevertheless enforce the agreement.
The U.S. Chamber of Commerce and several other business groups filed suit in the Eastern District of California seeking a temporary restraining order and a preliminary injunction, arguing the FAA preempted AB 51.
On February 15, 2023, the Ninth Circuit panel released its new opinion holding the FAA preempts AB 51. The panel ruled AB 51 created a burden to the formation of an arbitration agreement, and was preempted by the FAA, and therefore unenforceable.
The Ninth Circuit analyzed AB 51 under the principles of conflict preemption, which occurs when it is “impossible for a private party to comply with both state and federal requirements” or, where a state law “creates an unacceptable obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”
The Court found the FAA preempts a state rule 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 “eviscerate Congressional intent to place arbitration agreements upon the same footing as other contracts.” The Ninth Circuit rejected California’s argument AB 51 was intended to regulate “employer conduct,” not the formation of the arbitration agreement, and thus was not in conflict with the FAA. California also argued AB 51 shielded employees from involuntary contracts “forced upon them by employers” and protected them from being “forced to sign arbitration agreements that are illegal.” The Ninth Circuit noted these arguments misunderstand the meaning of consent: “a contract may be ‘consensual’ as that term is used in contract law, even if one party accepts unfavorable terms due to some degree of unequal bargaining power.”
The key takeaways are as follows:
- State statutes or judge-made rules creating obstacles to formation of arbitration agreements are contrary to and likely preempted by the FAA.
- Arbitration agreements are on an equal footing as other contracts and will be analyzed in the Ninth Circuit in accordance with FAA principles of “equal protection treatment.”
- California employers may continue to implement mandatory arbitration agreements for employees and new hires, absent any additional appeals, and should consult with their attorneys on the implementation process.
- Employers should review existing employee arbitration agreements due to this decision.
