On February 15, 2023, the Ninth Circuit Court of Appeals blocked a 2020 California law that attempted to prohibit employers from requiring employees and job applicants to agree to arbitration as a condition of employment. The Court’s 2-1 panel decision in Chamber of Chamber of Commerce of the United States of America v. Bonta resolved ambiguity regarding the enforceability of California Assembly Bill (AB) 51. The court held that the Federal Arbitration Act (FAA) preempts AB 51 because the law discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement. The decision is good news for California employers as it is now clear that California law cannot prohibit employers from requiring employees and applicants to agree to arbitrate their disputes as a condition of their employment, provided the FAA applies to the arbitration agreement.

Background

In October, 2019, the California legislature passed AB 51 in an effort to ban mandatory employment arbitration. California’s governor, Gavin Newsom, signed the bill into law, with an effective date of January 1, 2020. The law, which among other things created California Labor Code Section 432.6, prevented employers from requiring employees or job applicants “as a condition of employment, continued employment, or the receipt of any employment-related benefit” to “waive any right, forum, or procedure” for discrimination and labor claims, including “the right to file and pursue a civil action or complaint.” The law further sought to impose criminal and civil sanctions against employers who retaliated, discriminated against, threatened, or discharged employees who refused to consent to such a waiver.  In sum, AB 51 effectively precluded employers from mandating arbitration as a condition of employment for their applicants and employees.

On December 9, 2019, a collection of trade associations and business groups collectively, filed a complaint for declaratory and injunctive relief against various California officials. The trial court granted a preliminary injunction prohibiting California officials from enforcing AB 51, finding it preempted by the FAA. The Ninth Circuit partially overturned that ruling, but the panel later withdrew the decision to reconsider the issue.

The Court’s Decision

In a majority decision by Judge Sandra Ikuta, the Ninth Circuit affirmed the district court’s ruling. The majority held that prior rulings by the Supreme Court of the United States make clear that state laws that burden the formation of arbitration agreements, conflict with the FAA. The court stated that even though “AB 51 does not expressly bar arbitration agreements,” it “disfavors the formation of agreements that have the essential terms of an arbitration agreement.” Moreover, the Ninth Circuit found AB 51 imposed a “severe” burden on formation of arbitration agreements by imposing civil and criminal sanctions on any employer who violate its terms.

The majority rejected California’s argument that the FAA is not implicated because AB 51 only regulates the conduct of employers prior to the formation of an arbitration agreement, and not the enforceability of an executed agreement. It stated “rules that impede parties’ ability to form arbitration agreements hinder the broad ‘national policy favoring arbitration.’”

The majority also rejected California’s contention that the law is a simply an effort to stop “forced arbitration” in the employment context, noting that this misunderstands contract law principles. A contract may be “consensual,” “even if one party accepts unfavorable terms due to some degree of unequal bargaining power” and even if it is a contract of adhesion, the majority stated. This is true unless the provisions are “procedurally or substantively unconscionable, or otherwise unenforceable under generally applicable contract rules.”

However, Tenth Circuit Court of Appeals Judge Carlos Lucero, sitting by designation on the case, dissented. He argued the Supreme Court “has never held nor implied that employers may require arbitration as a condition of employment.” The judge claimed the Ninth Circuit majority’s ruling nullified the idea that “arbitration is a matter of contract and agreements to arbitrate must be voluntary and consensual.”

Practical Implications

The Ninth Circuit held AB 51 is preempted by the FAA, thereby removing uncertainty surrounding the use of arbitration agreements in the employment context. But there is a caveat. Though not directly addressed by the Ninth Circuit, the decision appears to be limited to arbitration agreements where the FAA applies. Section 1 of the FAA excludes arbitration agreements with any “class of workers engaged in foreign or interstate commerce.” This means the FAA does not cover arbitration agreements with certain types of “transportation workers” who engage in foreign or interstate commerce. However, it is important to note that the term “transportation worker” is not settled for purposes of the FAA. Opponents of employment arbitration are pushing to expand the Section 1 exemption as broadly as possible. Thus, employers who employ “transportation workers” in California need to consider how AB 51 might apply to them.

Key Takeaways

In sum, the Bonta decision is great news for employers, with the qualification noted above. The FAA generally permits employers to mandate employment arbitration with their employees and applicants, provided their agreements constitute enforceable agreements under general contract principles, and AB 51 is preempted by the FAA. The state may still seek a rehearing en banc, or seek review of this decision by the Supreme Court of the United States.