The Ninth Circuit has issued its long-awaited ruling in Chamber of Commerce v. Bonta, perhaps putting a nail in the coffin of the controversial California law known as AB 51, which would have made it criminal conduct to require an applicant or employee to sign an arbitration agreement.
The history of AB 51 and the case challenging it is a tortuous one, to say the least, but the issue has always remained the same: was the California legislature too clever in its attempt to circumvent the Federal Arbitration Act (“FAA”) and the Supreme Court’s landmark decision in Epic Systems?
The Ninth Circuit has answered that question, concluding that AB 51 is preempted by the FAA despite the legislature’s efforts made to escape it. And it did so by looking at the entirety of the statute, rather than a single provision.
As written, AB 51 would not invalidate signed arbitration agreements that employers required employees to sign. However, it would impose criminal sanctions if employers required employees to sign arbitration agreements. To say that created a conundrum for employers would be an understatement. The statute would only allow an employer to obtain a lawful agreement if it engaged in unlawful conduct.
That is not all. The statute would also prohibit arbitration agreements that require individuals to take affirmative action to be excluded from arbitration, such as opting out. The law would also appear to extend to jury waivers and class action waivers.
The controversial law was set to go into effect in January 2020. However, as we wrote back in December 2019, at the eleventh hour a federal judge in the United States District Court of the Eastern District of California granted a temporary restraining order to enjoin enforcement of AB 51. A number of business groups, including the Chamber of Commerce, filed suit challenging the statute as being preempted by the FAA. Judge Kimberly Mueller concluded that it would be disruptive if the statute went into effect for a brief period of time, only to have it later determined to be preempted.
Following the issuance of a preliminary injunction, the case went to the Ninth Circuit.
In September 2021, the Ninth Circuit vacated the January 2020 preliminary injunction against AB 51, which we discussed here.
Then, on August 22, 2022, the Ninth Circuit unexpectedly withdrew its September 2021 opinion, granted a panel rehearing, and re-instituted the preliminary injunction blocking the enforcement of AB 51.
Nearly 18 months later, the Ninth Circuit Court issued its decision yesterday, reversing course and concluding that the FAA in fact preempts AB 51.
The Court did not just look at the provision that held that signed arbitration agreements remained valid. Instead, it looked at AB 51 as a whole. It noted that the cleverly worded statute “resulted in the oddity that an employer subject to criminal prosecution for requiring an employee to enter an arbitration agreement could nevertheless enforce the agreement once it was executed.” As a result, it concluded that the statute was an obstacle to the FAA as a whole.
The Ninth Circuit’s opinion relied on the Supreme Court’s decisions in Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421 (2017) and Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 683 (1996), which “make it clear that state rules that burden the formation of arbitration agreements stand as an obstacle to the FAA.” The panel concluded that rationales applied by the Supreme Court in Kindred Nursing and Casarotto, which invalidated state rules burdening the formation of arbitration agreements, was equally applicable to state rules that prevent parties from entering into arbitration agreements in the first place. The Court also agreed with the First and Fourth Circuits that the FAA preempts a state rule that discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement.
The Court ultimately held that AB 51’s penalty-based scheme to impede the formation of arbitration agreements violates the “equal treatment principle” inherent in the FAA and was a ploy to antagonize arbitration that the FAA was enacted to overcome. Because the FAA’s purpose was to further Congress’s policy to encourage arbitration – and because AB 51 was an obstacle to that purpose – AB 51 was preempted.
Whether the Ninth Circuit’s decision puts an end to AB51 remains to be seen. A petition for an en banc review or a certiorari petition to the United States Supreme Court seems possible, if not likely.
We will continue to monitor developments in this matter.
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