On September 15, 2021, in a split decision, the Ninth Circuit held that AB 51, California’s latest anti-arbitration statute, was not preempted by the Federal Arbitration Act (FAA) because all it did was to make sure that arbitration agreements were “voluntary.” The dissent ridiculed the decision, stating that the majority was abetting California’s continuing and stubborn attempt to evade the FAA and Supreme Court precedent. Chamber of Commerce of the United States, et al. v. Rob Bonta, et al., No. 2015291 (9th Cir. September 15, 2021).
AB 51, which added § 432.6 to the California Labor Code, makes it unlawful for an employer to require an employee to sign an arbitration agreement. It provides in relevant part that:
(a) A person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provision of the California Fair Employment and Housing Act (Part 2.8 (commencing with Section 12900) of Division 3 of Title 2 of the Government Code) or this code, including the right to file and pursue a civil action. . . .
(b) An employer shall not threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee because of the refusal to consent to the waiver of any [such] right . . . including the right to file and pursue a civil action or a complaint . . .
In addition to being classified as an unlawful employment practice, violations of this article are misdemeanors punishable by up to six months of imprisonment and a fine. A California federal district court held that AB 51 was preempted by the FAA and preliminarily enjoined its enforcement. An appeal to the Ninth Circuit followed.
Ninth Circuit’s Decision
The Ninth Circuit held that AB 51 did not violate the FAA or Supreme Court precedent, because it regulated the behavior that occurred before an arbitration agreement was made and did not undermine the validity of arbitration agreements once they were executed:
§ 432.6 does not make invalid or unenforceable any agreement to arbitrate, even if such agreement is consummated in violation of the statute. Rather, while mandating that employer-employee arbitration agreements be consensual, it specifically provides that “[n]othing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.” Cal. Lab. Code § 432.6(f).
Placing a pre-agreement condition on the waiver of “any right, forum, or procedure” does not undermine the validity or enforceability of an arbitration agreement—its effects are aimed entirely at conduct that takes place prior to the existence of any such agreement.
Despite this ruling, the Ninth Circuit held that the criminal and civil punishments attached to a violation of AB 51 run afoul of the FAA, because they stand as an obstacle to the “liberal federal policy” favoring arbitration agreements. Accordingly, it struck down those provisions.
The dissent did not hold back in its criticism of California’s legislative actions or the majority’s decision:
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. This time, California has enacted AB 51, which has a disproportionate impact on arbitration agreements by making it a crime for employers to require arbitration provisions in employment contracts. Cal. Lab. Code §§ 432.6(a)–(c), 433; Cal. Gov’t Code § 12953. And today the majority abets California’s attempt to evade the FAA and the Supreme Court’s caselaw by upholding this anti-arbitration law on the pretext that it bars only nonconsensual agreements.
The discussion could continue, with subtle points of legal philosophy examined, but the basic point is clear: California does not want employers to require employees to sign arbitration agreements, and the Ninth Circuit, or at least this panel of it, continues to support that position, regardless of what the FAA or the Supreme Court have to say about it. Predicting future events is risky, but a reversal of the Ninth Circuit’s decision seems likely, either by way of a rehearing en banc or yet another trip to the Supreme Court’s woodshed.