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Ninth Circuit:
Employer May Require Assent to Arbitration of Disputes
Panel, in 2-1 Decision, Affirms Preliminary Injunction Barring Implementation of California Statute That Forbids Mandating Arbitration As Condition of Employment, Imposes Criminal and Civil Penalties for Violations
By a MetNews Staff Writer
California businesses may require an agreement to arbitrate employment disputes as a condition of being hired or continued as an employee, the Ninth U.S. Circuit Court of Appeals held yesterday in a 2-1 decision, with the result being the opposite of that previously reached by the same panel.
Circuit Judge Sandra S. Ikuta wrote for the majority in affirming a preliminary injunction granted by Chief District Court Judge Kimberly J. Mueller of the Eastern District of California barring enforcement of AB 51.
That bill, authored by Assembly member Lorena Gonzalez, D-San Diego and signed into law by Gov. Gavin Newsom on Oct. 10, 2019, provides for civil and criminal penalties for employers that require assent to an arbitration clause but, in an effort to avoid preemption by the Assembly member Federal Arbitration Act (“FAA”), added that any such agreement would be enforceable.
Ikuta had penned a forceful dissent to the panel’s Sept. 15, 2021 decision vacating the preliminary injunction, asserting that “AB 51’s transparent effort to sidestep the FAA in order to disfavor arbitration agreements in employment contracts is meritless.” Senior Judge Carlos F. Lucero of the Tenth U.S. Circuit Court of Appeals, sitting by designation, wrote the majority opinion, in which Circuit Judge William A. Fletcher joined.
Opinion Vacated
However, when a rehearing en banc was requested by the plaintiffs—the Chamber of Commerce of the United States and others—the panel on Aug. 22, 2022, vacated its decision. Fletcher voted in favor of doing so, signaling his shift in position.
Lucero dissented from yesterday’s decision.
Ikuta, now joined by Fletcher, said that “the FAA preempts a state rule that discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement,” and declared:
“Because 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.”
Wording of Legislation
AB 51 added §432.6 to the Labor Code. It provides in subd. (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…or this code, including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation.”
Subd. (b) bars retaliation against employees who decline to agree to arbitration and, in an attempt to avoid preemption by the FAA, specifies in subd. (f): “Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act….”
Labor Code §433 renders it a misdemeanor to violate AB 51.
Ikuta’s Opinion
Ikuta wrote: “Given the evidence that AB 51’s unusual structure (criminalizing the act of entering into an agreement, while allowing the parties to enforce it once executed) was for the purpose of ‘navigating around’ Supreme Court precedent, it is hardly surprising that there is no Supreme Court precedent on point.”
But analogous U.S. Supreme Court precedents, she said, “make it clear that state rules that burden the formation of arbitration agreements stand as an obstacle to the FAA.”
The Supreme Court’s “rationale for invalidating state rules burdening the formation of arbitration agreements,” Ikuta declared, “is equally applicable to a state rule like AB 51, which discriminates against the formation of an arbitration agreement but does not make an improperly formed arbitration agreement unenforceable.”
Lucero’s Dissent
Lucero put forth this view:
“Each time the Supreme Court has clarified the preemptive scope of the FAA, it has done so by ruling on the enforceability or validity of executed agreements to arbitrate, explaining that the FAA does not preempt the entire field of arbitration….The Court has never held nor implied that employers may require arbitration as a condition of employment.
“Today my respected colleagues in the majority directly depart from the foregoing fundamental principles and nullify a California law codifying what the enactors of the FAA and the Supreme Court took as a given: arbitration is a matter of contract and agreements to arbitrate must be voluntary and consensual.”
He went on to say that “[s]ecuring the validity and enforceability of consensual arbitration agreements was precisely what Congress intended to achieve through the FAA,” adding:
“AB 51’s purpose matches the FAA’s purpose.”
Ikuta disputed the proposition that AB bars nonconsensual arbitration. She observed:
“[U]nder California law, an employee can ‘consent’ to an employment contract by entering into it, even if the contract was a product of unequal bargaining power and even if it contains terms (such as an arbitration provision) that the employee dislikes, so long as the terms are not invalid due to unconscionability or other generally applicable contract principles.”
The case is Chamber of Commerce v. Bonta, 20-15291.
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