Ninth Circuit Reverses Itself and Strikes Down California Law Targeting Mandatory Employment Arbitration Agreements

In a reversal of its prior ruling, the Ninth Circuit recently held that the Federal Arbitration Act (FAA) preempts California Assembly Bill 51 (AB 51), a 2019 measure that aimed to bar employers from entering into new agreements—or extending previous ones—requiring job applicants or workers to arbitrate claims under the California Labor Code or California Fair Employment and Housing Act (FEHA).

A Brief Refresher on AB 51

Signed into law on October 10, 2019, AB 51 purports to bar an employer from requiring a job applicant or employee, as a condition for being hired or keeping a job, to enter into an agreement to arbitrate claims arising under the California Labor Code or FEHA or from retaliating against an applicant or employee who refuses to do so.[1] AB 51 also creates a prohibition on employers requiring an employee to affirmatively opt out of an arbitration agreement.[2] Violating AB 51 is considered an unlawful labor practice under the statute and can be punished as a crime.[3] AB 51 purports to apply to any arbitration agreement entered into, modified, or extended on or after January 1, 2020.[4]

The Legal Challenge Against AB 51

Shortly after AB 51 took effect in 2020, a California federal district court granted the U.S. Chamber of Commerce’s request for a preliminary injunction, enjoining enforcement of AB 51 with respect to arbitration agreements governed by the FAA.[5] The district court ruled that the Chamber of Commerce was likely to succeed on the merits of its preemption claim because AB 51 “treats arbitration agreements differently from other contracts” and “conflicts with the purposes and objectives of the FAA.”[6] The State of California appealed the preliminary injunction ruling to the Ninth Circuit. In 2021, a divided three-judge panel held that the FAA does not completely preempt AB 51.[7] The Chamber of Commerce soon thereafter filed a petition for rehearing en banc. In August 2022, however, the Ninth Circuit decided sua sponte to withdraw its prior opinion and grant a panel rehearing instead.[8]

The Ninth Circuit Holds that the FAA Preempts AB 51

On rehearing, the same three-judge panel reconsidered whether the FAA preempts a state law which discriminates against the formation of an arbitration agreement, even if the resulting agreement is ultimately enforceable. A majority panel said yes, reasoning that “[b]ecause the FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 is therefore preempted.”[9]

AB 51 criminalizes only contract formation; an arbitration agreement in violation of this law is still enforceable. Notwithstanding this effort by the California Legislature to sidestep the FAA, the panel observed that, under Supreme Court precedent, “state rules that burden the formation of arbitration agreements stand as an obstacle to the FAA.”[10] The panel further agreed with two sister circuits holding that the FAA preempts state rules discriminating against arbitration by discouraging or prohibiting the formation of an arbitration agreement.[11]

The panel rejected California’s claim that AB 51 is not preempted because it regulates the conduct of employers before an arbitration agreement is formed and does not invalidate the executed arbitration agreement itself. To the contrary, the panel found that AB 51’s “penalty-based scheme to inhibit arbitration agreements before they are formed violates the ‘equal-treatment principle’ inherent in the FAA and is the type of device or formula evincing hostility towards arbitration that the FAA was enacted to overcome.”[12]

Nor could AB 51 be salvaged by severing the offending provisions, the panel held. This was “[b]ecause all provisions of AB 51 work together to burden the formation of arbitration agreements.”[13]

Therefore, the panel affirmed the district court’s ruling that the FAA preempts AB 51 and found that the district court did not abuse its discretion in preliminarily enjoining it.

The Bottom Line

Following the Ninth Circuit’s holding, AB 51 no longer bars California employers from requiring mandatory employment arbitration agreements. The decision signals that state legislatures may be powerless to prevent companies from conditioning employment or continued employment on agreeing to arbitrate rather than litigate workplace disputes.

California could attempt to revive AB 51 by asking for the full Ninth Circuit or the Supreme Court to review this decision.  We will continue to track news related to the appeal and will report on further developments.

[1] Cal. Lab. Code §§ 432.6(a)-(b).

[2] See id. § 432.6(c).

[3] See id. § 433; Cal. Gov’t Code § 12953.

[4] Cal. Lab. Code § 432.6(h).

[5] Chamber of Com. of the United States v. Becerra, 438 F. Supp. 3d 1078 (E.D. Cal. 2020).

[6] Ibid.

[7] Chamber of Com. of the United States v. Bonta, 13 F.4th 766 (9th Cir. 2021).

[8] Chamber of Com. of the United States v. Bonta, 45 F.4th 1113 (9th Cir. 2022).

[9] Chamber of Com. of the United States v. Bonta, No. 20-15291, 2023 WL 2013326 (9th Cir. Feb. 15, 2023).

[10] Chamber of Com. of the United States v. Bonta, No. 20-15291, 2023 WL 2013326, supra; see Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 683 (1996) and Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421 (2017).

[11] Chamber of Com. of the United States v. Bonta, No. 20-15291, 2023 WL 2013326, supra; see Saturn Distrib. Corp. v. Williams, 905 F.2d 719, 723 (4th Cir. 1990) and Sec. Indus. Ass’n v. Connolly, 883 F.2d 1114, 1123–24 (1st Cir. 1989).

[12] Chamber of Com. of the United States v. Bonta, No. 20-15291, 2023 WL 2013326, supra.

[13] Ibid.