Ninth Circuit holds that AB 51 is preempted by federal law

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On February 15, 2023, the Ninth Circuit Court of Appeals issued its opinion holding that AB 51 is preempted by the Federal Arbitration Act (“FAA”) and, therefore, unenforceable. The opinion is the most recent legal step in a fairly complicated history of the federal court’s rulings on AB 51.

How did we get here?

As we reported here and here, Assembly Bill 51 (“AB 51”), which was signed into law on October 10, 2019, invalidated attempts to form employer/employee arbitration agreements. Worse, AB 51 imposed civil and criminal penalties on employers who violate the bill. Amazingly, AB 51 made it a criminal offense for an employer to require, as a condition of employment, that an existing employee or a job applicant sign an agreement to arbitrate claims under the California Fair Employment Housing Act or California Labor Code. AB 51 also precluded an employer from refusing to hire any applicant or discharging any employee for declining to sign an arbitration agreement, even where the agreement would have been governed by the Federal Arbitration Act (FAA) and, thus, technically outside the purview of California law.

Almost immediately after AB 51 went into effect, business and trade organizations filed a lawsuit in the United States District Court for the Eastern District of California (Chamber of Commerce v. Bonta (“Bonta”) challenging AB 51 on the grounds that it is preempted by the FAA and, thus, invalid. The plaintiffs also sought to enjoin the State from enforcing it. In February 2020, the District Court granted a preliminary injunction against enforcement of AB 51 after it concluded the Plaintiffs were likely to succeed on their claim of FAA preemption. The State appealed to the Ninth Circuit and, in September 2021, a Ninth Circuit panel, by a vote of 2-1, reversed the District Court’s injunction, and held that the FAA does not preempt AB 51. In October of 2021, Plaintiffs filed a petition for rehearing requesting that the entire Ninth Circuit en banc revisit the panel’s opinion.

In the interim, on December 15, 2021, the United States Supreme Court granted the petition for review of the matter in Viking River Cruises, Inc. v. Moriana (“Viking River”). Since Viking River would resolve a related issue (i.e., FAA preemption of the California law dealing with arbitration of PAGA claims), in February of 2022, the Ninth Circuit issued an order deferring consideration of the rehearing petition until the Supreme Court decides Viking River.

Viking River was ultimately decided by the United States Supreme Court in June of 2022. Amongst other important rulings – specifically those relating to arbitration of PAGA claims discuss here– the Supreme Court held that the FAA preempts the California Supreme Court’s decision in Ishkanian relating to waiver of PAGA claims. In August of 2022, based in part on Viking River, the Ninth Circuit granted the petition for rehearing in Bonta, and ordered the previous opinion by the panel to be withdrawn.

As set forth above, on February 15, 2023, the Ninth Circuit issued its full, en banc opinion in Bonta, affirming the preliminary injunction on the grounds that the FAA preempts AB 51 which would have essentially prohibited arbitration agreements in the employment context.

The Ninth Circuit’s opinion

In affirming the District Court’s grant of a preliminary injunction, a majority of the Ninth Circuit panel relied on Supreme Court precedent which make clear that state rules or statutes which impose a burden on the formation of arbitration agreements are an obstacle to the legislative intent of, and thus preempted by, the FAA. The majority also noted other federal circuit courts (notably the First and Fourth Circuits) reached similar conclusions when confronted with state laws that attempted to prevent parties from entering arbitration agreements.

The Ninth Circuit panel majority also rejected arguments from the State of California that it should sever clauses that were deemed preempted by the FAA and leave the remainder of the law intact. The majority explained that AB 51 could not be dissected and salvaged because the statute’s provisions all work together to burden the formation of arbitration agreements and, in any event, there was no authority in the legislation to sever the penalty portions of the law.

What this means for employers

In light of the Ninth Circuit’s opinion in Bonta, the preliminary injunction as to AB 51 is still in place. Thus, California employers may continue to require their employees and job applicants to sign arbitration agreements as a condition of employment. However, there is one crucial caveat. The Bonta opinion and the preliminary injunction apply only to arbitration agreements governed by the FAA. Thus, employers who wish to obtain new arbitration agreements, either for new hires or existing employees, should first ensure that the FAA applies. Notably, the FAA does not apply: (1) to certain transportation workers, to whom the FAA by its terms does not apply, and, more importantly (2) to arbitration agreements that specifically provide that they are governed by state arbitration law, as opposed to the FAA.

When crafting arbitration agreements, employers should make sure that the agreement specifies that it is governed by the FAA. Although doing so does not ensure that the FAA applies – one most be engaged in work affecting interstate commerce – the failure to specify FAA coverage may result in a court finding the agreement in violation of California law.

Now what?

In light of the Ninth Circuit’s opinion, the preliminary injunction barring enforcement of AB 51 with respect to arbitration agreements governed by the FAA will remain in effect. The State could request a rehearing by the Ninth Circuit (as Plaintiffs did previously in Bonta) or file a petition for review with the. Supreme Court. In either case, the injunction will remain in effect until a decision in the matter.

If the State does not pursue a further appeal or rehearing, the matter will return to the District Court which will then make a determination as to the legality of AB 51. Regardless of the outcome by the District Court, we foresee further appeals. As such, the final status on the legality of AB 51 may not be known for 2-3 years.

AB 51 is California’s third attempt since 2015 to enact worker-protective legislation against arbitration; its first two attempts were vetoed by Governor Jerry Brown for violating federal law established by the Supreme Court. It remains to be seen if the legislature will try once more to craft legislation aiming to limit forced arbitration in employment. Regardless, the Ninth Circuit’s decision in Bonta is a significant win for proponents of arbitration and could help proponents of arbitration outside California. States such as Illinois, Maryland, New Jersey, New York, Vermont, and Washington have enacted state laws that purport to restrict an employer’s ability to enter predispute arbitration agreements with its employees. The Ninth Circuit’s decision provides further support that such state laws may be preempted by and invalidated under the FAA.