Ninth Circuit: FAA Preempts California’s Prohibition on Mandatory Arbitration
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APPLIES TO All Employers with CA Employees |
EFFECTIVE February 15, 2023
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QUESTIONS? Contact HR On-Call |
Quick Look
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Discussion
In Chamber of Commerce v. Bonta, the Ninth Circuit Court of Appeals, on rehearing, ruled AB 51 is preempted by the Federal Arbitration Act (FAA). In 2020, AB 51 prohibited employers from requiring employees to enter into arbitration agreements as a condition of employment in which employees waived the right to litigate claims under the Fair Employment and Housing Act (FEHA) and the California Labor Code. As a result of a legal challenge, the Ninth Circuit previously upheld AB 51 indicating that AB 51 applied before an arbitration agreement was entered into but not after, an “oddity that an employer subject to criminal prosecution for requiring an employee to enter into an arbitration agreement could nevertheless enforce that agreement once it was executed.” Subsequently, after a request for rehearing en banc, and following the U.S. Supreme Court ruling in Viking River Cruises v. Moriana also involving FAA preemption over California arbitration agreements, a Ninth Circuit panel reviewed this case again and came out with a different result.
Specifically, state rules that burden or invalidate the formation of arbitration agreements hinder the FAA. The FAA not only governs applicable arbitration agreements but also encourages them as an alternative to litigation. The court’s ruling was based on conflict preemption which means a state law either creates an unacceptable obstacle to the accomplishment and execution of the full purposes and objectives of Congress or makes it impossible to comply with both state and federal requirements. Following this rationale, the court found AB 51 made the formation of an arbitration agreement invalid and gave no purpose or meaning to the FAA. Although AB 51 did not expressly ban arbitration agreements, it did place a severe burden on contract formation through civil and criminal penalties imposed on employers. The court stated that the threat of penalties is intended to have a deterrent effect and inhibits an employer’s willingness to create an arbitration contract with employees.
Additionally, Congress intended to place arbitration agreements on the same footing as other contracts, and AB 51 defeated that purpose. The court noted AB 51 singled out arbitration agreements as unlawful contracts although employers are able to enter into nonnegotiable contracts, for example, relating to compensation or drug usage. Under this ruling, employers can continue to use mandatory arbitration agreements, absent additional appeals.
Action Items
- Review arbitration agreements with legal counsel for compliance.
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