In a 2-1 decision, the US Court of Appeals for the Ninth Circuit on September 15 reversed a district court’s order enjoining the enforcement of California Assembly Bill 51 (AB 51) codified as Labor Code Section 432.6. Chamber of Commerce v. Bonta, Case No. 20-15291 (9th Cir. Sept. 15, 2021). AB 51 prohibits requiring arbitration of California Fair Employment and Housing Act (FEHA) and Labor Code claims as a condition of employment or continued employment and prohibits threatened or actual retaliation, discrimination, or termination against an applicant or employee for refusing to consent to such an agreement.
The Ninth Circuit held that the Federal Arbitration Act (FAA) did not preempt Section 432.6 as to these provisions but did preempt any attempt to impose criminal or civil penalties for violation of the law. The Ninth Circuit reasoned that Section 432.6 regulates only pre-agreement conduct and does not establish a contract defense to enforcement of an executed arbitration agreement, even if it violates the statute.
Labor Code Section 432.6 was to go into effect on January 1, 2020, applying to contracts entered into, modified, or extended on or after that date. It prohibits employers from requiring arbitration of claims for violation of FEHA or the Labor Code as a condition of employment or continued employment, even if the employee can opt out of the agreement or receives a benefit by accepting the agreement. Cal. Lab. Code § 432.6(a). In addition, it prohibits an employer from threatening, retaliating, or discriminating against or terminating an applicant or employee because of a refusal to agree to arbitration. Labor Code Section 433 made violation of Section 432.6 a misdemeanor. However, the law also states that it is not intended to invalidate a written arbitration agreement that is enforceable under the FAA.
The Chamber of Commerce challenged the law in federal court, and the district court temporarily enjoined enforcement of the law on December 30, 2019, before it went into effect. On February 7, 2020, the district court issued a preliminary injunction finding it likely that the Chamber of Commerce would prevail in its argument that the FAA preempts Section 432.6. The State of California appealed, and on September 15, 2021, the Ninth Circuit vacated the preliminary injunction and ordered the district court to issue a narrower preliminary injunction that enjoins only enforcement of civil and criminal sanctions for violation of Section 432.6.
The majority found that the FAA does not preempt Section 432.6 because it merely regulates pre-agreement employer behavior and does not invalidate or render unenforceable executed arbitration agreements governed by the FAA. However, the court did find that the civil and criminal penalties prescribed by Sections 433 and 12953 were preempted by the FAA because they punished employers for the act of executing arbitration agreements.
The court asserted that Section 432.6 does not conflict with the FAA because it does not establish a contract defense that renders executed arbitration agreements invalid or unenforceable. Rather, Section 432.6 regulates what constitutes a voluntary arbitration agreement’s formation. According to the majority, voluntary formation—that is, conduct that takes place before an arbitration agreement is created—does not fall within the scope of FAA preemption. The court sought to distinguish two key US Supreme Court preemption decisions—Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S. Ct. 1421(2017) and Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996). The court concluded that Kindred Nursing and Casarotto were not applicable because they invalidated state laws that hindered the enforceability of executed arbitration agreements. The dissenting judge believed those decisions were applicable and compelled preemption of the entire anti-arbitration law.
The court ruled that the FAA does preempt any civil and criminal sanctions for violation of Section 432.6. The court reasoned that a violation of the law would necessarily extend to the execution of an arbitration agreement governed by the FAA. Therefore, the civil and criminal sanctions associated with AB 51 were in direct conflict with and FAA.
As the Ninth Circuit has yet to issue a formal mandate, the district court’s injunction is still in effect. The Chamber of Commerce likely will seek review of this decision either en banc in the Ninth Circuit and/or by filing a writ of certiorari to the US Supreme Court. If review is sought in the Supreme Court, the Chamber of Commerce likely will seek a stay of the Ninth Circuit’s ruling, further delaying the law’s enforcement. The Ninth Circuit has a history of ruling against FAA preemption, and a number of those decisions have been overturned by the Supreme Court.
If the injunction is lifted, Section 432.6 will take effect. Until further developments, the impact of Section 432.6 on enforceability of arbitration agreements required as a condition of employment or continued employment after January 1, 2020 remains unclear. Given the uncertainty of the decision’s impact, including if it will be reviewed by the full Ninth Circuit and/or Supreme Court, employers who have mandatory arbitration programs should be aware of the decision and consult with counsel about the potential impact.
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 Though not mentioned in the opinion, the court’s preemption ruling would necessarily extend to civil penalties under the Private Attorneys General Act (PAGA).