The Ninth Circuit upheld the District Court’s injunction against enforcement of California Assembly Bill 51 (“AB 51”), a law that prohibited employers from requiring mandatory arbitration agreements as a condition of employment or employment-related benefits for claims arising under California’s Labor Code or Fair Employment Housing Act (“FEHA”). The Ninth Circuit held that AB 51 was an obstacle to “Congress’s policy of encouraging arbitration” and was therefore preempted by the Federal Arbitration Act (“FAA”), reversing its prior opinion.
AB 51 was enacted in October 2019 and prohibited employers from requiring mandatory arbitration agreements as a condition of employment, continued employment, or receipt of employment-related benefits for claims arising under California’s Labor Code or FEHA.
On December 9, 2019, a coalition of business groups sued the California Attorney General, the California Labor Commissioner, the Secretary of the California Labor and Workforce Development Agency, and the Director of the California Department of Fair Employment and Housing. Plaintiffs argued that they were likely to succeed on the merits of their challenge to AB 51 because Supreme Court precedent makes clear that the FAA preempts laws like AB 51. A previous blog post on the lawsuit is available here. In February 2020, Judge Mueller of the Eastern District of California issued a preliminary injunction barring AB 51 from taking effect. Following the District Court’s order, the State appealed to the Ninth Circuit Court of Appeals.
On September 15, 2021, the Ninth Circuit panel issued an opinion authored by Judge Lucero, which held that AB 51’s restrictions are valid but cannot be enforced if an unlawful agreement is entered into. This holding had puzzling practical implications, which were the subject of a dissenting opinion by Judge Ikuta. As Judge Ikuta explained, the “holding mean[t] that an employer’s attempt to enter into an arbitration agreement with employees is unlawful, but a completed attempt is lawful,” and is similar to “a statute [that] can make it unlawful for a dealer to attempt to sell illegal drugs, but if the dealer succeeds in completing the drug transaction, the dealer cannot be prosecuted.” A previous publication on the now withdrawn September 15, 2021 opinion and additional background is available here.
On August 22, 2022, the Ninth Circuit voted sua sponte to grant a panel rehearing and the District Court’s preliminary injunction blocking enforcement of AB 51 was reinstituted. In its new decision, issued on February 15, 2023, the Ninth Circuit held that the FAA preempts AB 51 and affirmed the District Court’s injunction against enforcement of AB 51 in its entirety.
In reaching this conclusion, the Court relied on Kindred Nursing Centers Limited Partnership v. Clark, 137 S. Ct. 1421 (2017), and Doctor’s Associates, 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,” and explained that allowing a state to criminalize “the conduct of entering into an arbitration agreement” would allow the state to “entirely defeat the FAA’s purpose.”
Applying these principles to AB 51, the Ninth Circuit found that, even though AB 51 did not “expressly bar arbitration agreements,” AB 51 did impose a severe burden on their formation through the threat of criminal and civil penalties that were clearly “intended to have a deterrent effect.” The Ninth Circuit also found AB 51 discriminated against arbitration provisions as California law does allow employers to include other non-negotiable terms as conditions of employment such as compensation requirements and drug usage requirements.
The Ninth Circuit rejected arguments that AB 51 was merely a prohibition against forced arbitration and thus should be allowed, explaining that a contract is not invalid under California law “even if the contract was a product of unequal bargaining power” so long as the terms are not unconscionable and conform to other general contract principles. The Court also rejected the argument that it could sever portions of the California Labor Code in order to “uphold the balance of AB 51.” “Because all provisions of AB 51 work together to burden the formation of arbitration agreements, we conclude that the FAA preempts AB 51 as a whole to the extent it applies to arbitration agreements.”
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