The California legislature has expressed a steady animus toward arbitration agreements, particularly in the employment context. On multiple occasions, the legislature has passed laws restricting the use of arbitration agreements, only to see those laws overturned by federal courts, including the U.S. Supreme Court.
History has repeated itself.
On February 15, in the case of Chamber of Commerce v. Bonta, the U.S. Court of Appeals for the Ninth Circuit issued a decision affirming a lower court’s decision to enjoin (block) a California law that would have effectively barred the use of arbitration agreements in most employment contexts. The result is a hard-fought win for employers, federal preemption, and freedom of contract.
In 2015 and 2018, California’s legislature passed bills that would have prohibited employers from requiring employees to enter into arbitration agreements as a condition of employment. In both cases, then-Gov. Jerry Brown (D) vetoed the bills on the ground that they violated the Federal Arbitration Act.
Undeterred, in 2019, the California legislature passed another bill, known as AB 51, which was signed into law by new Gov. Gavin Newsom (D), with an intended effective date of January 1, 2020.
AB 51, as admitted by the accompanying legislative reports, works in creative ways to “sidestep” or “navigate around” the FAA. The law added Section 432.6 to the California Labor Code and contained two principal prohibitions:
- § 432.6(a) prohibits employers from requiring an employee to waive the right to pursue a civil or administrative action as a condition of employment.
- § 432.6(b) prohibits employees from retaliating or discriminating against employees who refuse to waive such rights.
Violations of these provisions would expose employers to both civil and criminal liability.
Despite its clear intent to restrict the use of arbitration agreements, § 432.6(f) stated that nothing in the law was “intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.” In a further effort to insulate the law from judicial scrutiny, § 432.6(i) provided that if any part of the law was held invalid, the remainder of the law should remain in place.
Business groups sue
In December 2019, before AB 51 took effect, a consortium of trade associations and business groups sued, seeking a judicial declaration that the law was preempted by the FAA. In February 2020, a federal district court agreed and enjoined enforcement of the law. The state appealed.
In September 2021, a three-judge panel of the Ninth Circuit reversed in part. According to the court, AB 51 was a permissible regulation of the pre-agreement behavior of employers. Nevertheless, the court did find that the civil and criminal penalties under AB 51 were preempted by the FAA because they created a substantial obstacle to the use of arbitration agreements. That seemed to be the end of the matter. The business groups did not seek review by the U.S. Supreme Court.
But then, in June 2022, the U.S. Supreme Court issued its decision in Viking River Cruises, Inc. v. Moriana. In that case, the Court effectively vacated a prior holding of the California Supreme Court that said employers could not require employees to arbitrate claims brought pursuant to California’s Private Attorney General Act. The issues in Chamber of Commerce and Viking River Cruises are not directly related. However, it seems that the Supreme Court decision in the latter case caused the Ninth Circuit panel to reconsider its decision in the former case. Two months after Viking River, the court announced that it had decided on its own to reconsider its 2021 decision in Chamber of Commerce.
Ninth Circuit panel strikes down AB 51
As the SCOTUS explained in Viking River Cruises and the Ninth Circuit panel majority explained in its 2023 Chamber of Commerce decision, “the FAA was designed to promote arbitration” and “embodies a national policy favoring arbitration and a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” The Ninth Circuit quoted with approval another federal appeals court, which said that the “FAA does not allow a state legislature to circumvent Congressional intent by enacting special rules to discourage or prohibit the formation of agreements to arbitrate.”
The Ninth Circuit majority held that the entirety of AB 51 was preempted by the FAA. The panel majority noted that, although “AB 51 does not expressly bar arbitration agreements[,] [t]here is no doubt… that AB 51 disfavors the formation of agreements that have the essential terms of an arbitration agreement” – in other words, agreements that require employees to waive their right to pursue claims in court. Further, the court held that the civil and criminal penalties associated with a law posed a “burden… on the formation of arbitration agreements” that was “severe.” In short, the law showed a hostility toward arbitration that the FAA was enacted to overcome. Because AB 51 was an obstacle to the FAA’s purpose of encouraging arbitration, AB 51 is preempted.
A dissent from Judge Carlos Lucero of the U.S. Court of Appeals for the Tenth Circuit (sitting on the panel by designation, and who was also on the panel that decided the 2021 case), argued that the law was intended to ensure that all parties to an arbitration freely entered into the agreement and was thus consistent with the FAA’s purpose. The majority rejected this contention, pointing out that an arbitration agreement is a contract and that if there is an issue with the formation of the contract, such as fraud or duress, then it is not enforceable in any event. Moreover, the majority said, California law is already exacting in its scrutiny of the formation of arbitration agreements.
The state may seek review of the Chamber of Commerce decision by all of the Ninth Circuit judges, or review by the U.S. Supreme Court. For now, the panel decision appears to be a win for employers who wish to mandate arbitration of claims as a condition of employment. However, even if the panel decision stands, employers will need to be careful in the drafting and implementation of arbitration agreements because California courts are likely to continue to be unfriendly toward them. It remains to be seen whether the legislature will again try to find new ways to circumvent the FAA’s purpose.