Ninth Circuit Circumvents the FAA by Upholding Portions of CA Law Banning Mandatory Arbitration

Employment Law

On September 15, 2021, a split Ninth Circuit panel ruled that certain portions of California’s Assembly Bill 51 (2019) were not preempted by the Federal Arbitration Act (FAA), raising questions as to whether many employers’ current practices of implementing mandatory arbitration agreements are proper. In Chamber of Commerce of the United States of America v. Bonta, the 2-1 panel upheld the portion of AB 51 that prohibits employers from requiring employees to execute an arbitration agreement as a condition of employment and lifted a district court’s injunction that barred the law from taking effect. However, the panel affirmed the district court’s decision to enjoin the implementation of civil or criminal penalties against employers that violate the law and also found that its ruling does not invalidate arbitration agreements that are otherwise enforceable under the FAA or are already in effect, even if they violate AB 51.

AB 51, signed by Governor Gavin Newsom, adds Labor Code Section 432.6 to the Labor Code and was enacted to ensure that individuals are not retaliated against for refusing or consenting to the waiver of any right, forum or procedure for a violation of the California Fair Employment and Housing Act. AB 51 further adds Section 12953 to the Government Code, which makes it unlawful for an employer to violate Labor Code Section 432.6.

In determining whether the FAA preempts AB 51, the majority opined that AB 51 and the FAA do not conflict given that the California law does not allow for the invalidation or nonenforcement of an arbitration agreement and does not prohibit outright the arbitration of a particular claim. The court stated that because AB 51 regulates pre-agreement behavior, it does not run afoul of the FAA’s purpose because it does not undermine the validity or enforcement of an arbitration agreement as set forth under the FAA. According to the court, pre-agreement conduct is not subject to the FAA. The court further clarified that AB 51 bans only nonvoluntary arbitration agreements and thus does not interfere with the FAA. Adding to the uncertainty of the court’s ruling, the court upheld preemption of the imposition of criminal and civil penalties for the violation of AB 51 to the extent that they apply to executed arbitration agreements. The opinion drew a robust dissent.

Judge Sandra Ikuta began her dissent by stating, “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.” She argued that the scope of the FAA covers both the formation and enforcement of arbitration agreements, and California’s circumvention exemplifies the exact sort of hostility to arbitration that led to the FAA’s enactment. She pointed to an inherent shortcoming of the majority’s decision: While an employer may not require an employee to sign an arbitration agreement, if an employer successfully forces an employee to sign the agreement, AB 51 no longer applies given that the question turns to the enforceability of the agreement, which is governed under the purview of the FAA. In other words, if the employer successfully forces employees into arbitration against their will, the employer is safe, but if the employer’s efforts fail, the employer is in violation of the law.

Given the less-than-clear directive from the Ninth Circuit regarding an employer’s ability to implement mandatory arbitration agreements with its employees, it is likely that en banc review by the full Ninth Circuit and then certiorari to the Supreme Court will be sought.

Why it matters

Until employers are provided more clarity as to this issue, prudent employers should reexamine their current policies and practices regarding mandatory arbitration agreements as a condition of employment and consult with counsel to evaluate potential options to ensure compliance to the extent it is feasibly possible.

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