The battle over arbitration in California continues, with a divided panel of the Ninth U.S. Circuit Court of Appeals ruling that the Federal Arbitration Act (FAA) preempts the state’s Assembly Bill 51, a law that prohibits employers from requiring employees to execute an arbitration agreement as a condition of employment.
In 2019, Governor Gavin Newsom signed AB 51 into law. The law invalidated all agreements requiring the waiver of any right to forum or procedure as a condition of employment, continued employment or the receipt of any employment-related benefit, with the potential for criminal penalties for violations.
A collection of trade associations and business groups led by the Chamber of Commerce filed a complaint for declaratory and injunctive relief, asserting that AB 51 was preempted by the FAA and asking for a temporary restraining order against its enforcement. A district court judge granted the motion.
The Ninth Circuit affirmed in a 2-1 decision. The FAA preempts a state rule that discriminates against the formation of an arbitration agreement even if that agreement is ultimately enforceable, the court held.
In an effort to avoid U.S. Supreme Court precedent, California lawmakers drafted AB 51 to criminalize only contract formation—an arbitration agreement executed in violation of the law remains enforceable, the panel explained.
But the law still ran afoul of the Supreme Court’s stance on arbitration, as the justices have made clear that the FAA’s preemptive scope is not limited to state rules affecting the enforceability of arbitration agreements, but also extends to state rules that discriminate against the formation of arbitration agreements.
“A law that ‘inhibit[s] a party’s willingness to create an arbitration contract’ stands as an obstacle to the purposes of the FAA,” the court wrote. “Moreover, a state rule discriminates against arbitration even if it does not expressly refer to arbitration, but instead targets its defining characteristics. Because the FAA’s purpose is to further Congress’s policy of encouraging arbitration, a state law that also applies to other provisions (such as forum-selection clauses) unrelated to arbitration may be preempted if its focus is on arbitration.”
Applying these principles, the panel had little difficulty finding that the FAA preempts AB 51.
“AB 51 does not expressly bar arbitration agreements,” the court acknowledged. “There is no doubt, though, that AB 51 disfavors the formation of agreements that have the essential terms of an arbitration agreement.”
The law prevents an employer from entering into a contract that includes non-negotiable terms requiring an employee to waive “any right, forum, or procedure for a violation of any provision of the Fair Employment and Housing Act or the California Labor Code,” including “the right to file and pursue a civil action.”
“The burden imposed on the formation of arbitration agreements is severe,” the panel said. “AB 51 deters an employer from including non-negotiable arbitration requirements in employment contracts by imposing civil and criminal sanctions on any employer who does so. The threat of criminal and civil liabilities is intended to have a deterrent effect, and so it is clear that the penalties imposed by AB 51 inhibit an employer’s willingness to create an arbitration contract with employees.”
Further, AB 51 singles out arbitration provisions as an exception to generally applicable law, the court said, violating the “equal-treatment principle” inherent in the FAA.
“Because AB 51 is preempted by the FAA, the district court correctly held that the Chamber of Commerce is likely to succeed on the merits of its claim for declaratory and injunctive relief,” the panel wrote, affirming the preliminary injunction.
To read the opinion in Chamber of Commerce v. Bonta, click here.
Why it matters: The employer-friendly decision is only the latest skirmish in the ongoing battle over arbitration in California. While employers may impose mandatory arbitration as a condition of employment as AB 51 remains temporarily on hold, the case now returns to the district court for consideration of the merits of the trade associations and business groups’ claims.