On October 10, 2021, Governor Gavin Newsom signed Assembly Bill 51 (AB 51) into law. AB 51 adds Section 432.6 to the Labor Code, which prohibits waiver of any right, forum, or procedure, including the right to file and pursue a civil action or complaint, for a violation of the California Fair Employment and Housing Act (FEHA) or the Labor Code as a condition of employment, continued employment, or the receipt of any employment-related benefit. Section 432.6 similarly prohibits an agreement that requires an employee to opt-out of a waiver or takes any affirmative action in order to preserve their rights. Due to its position in the Labor Code, violations of Section 432.6 may result in a misdemeanor and punishment of up to six months in county jail and/or a fine of up to one thousand dollars. AB 51 also adds Section 12953 to the Government Code, making violations an “unlawful employment practices” under the purview of the Department of Fair Employment and Housing.
On December 9, 2019, before AB 51 was to take effect on January 1, 2020, the United States Chamber of Commerce (US Chamber) filed a complaint for declaratory and injunctive relief, seeking a declaration that AB 51 was preempted by the Federal Arbitration Act (FAA) and asking the court to preliminarily and permanently enjoin California from enforcing the statute. The same day, the US Chamber also filed a motion for a preliminary injunction and then filed a motion for a temporary restraining order. The motion for a temporary restraining order was granted on December 30, 2019.
A hearing on the US Chamber’s motion for a preliminary injunction was held on January 10, 2020, and on February 7, 2020, the court issued the preliminary injunction, which prevented California from enforcing AB 51 as to arbitration agreements covered by the FAA. California appealed, and the Ninth Circuit Court of Appeals granted review.
On appeal, the Ninth Circuit first explained the concept of preemption and under what circumstances AB 51 may be preempted by the FAA.
The Ninth Circuit explained that the Supremacy Clause essentially provides that if a state law confers rights or imposes restrictions that conflict with federal law, then the federal law takes precedence and the state law is preempted. Preemption by the FAA can arise in two ways: (1) through impossibility, where “it is impossible … to comply with both state and federal requirements”; or (2) through an obstacle, where a “state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Nevertheless, the FAA contains a “saving clause” that permits agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, but does not permit invalidation based upon defenses that apply only to arbitration or that derive their meaning from the fact than an agreement to arbitrate is at issue.
To fall within the saving clause and avoid preemption by the FAA, AB 51 must “put arbitration agreements on an equal plane with other contracts.” To put it differently, if AB 51 treats arbitration agreements less favorably than any other contract and allows for an agreement to arbitrate to be invalidated or not enforced in circumstances where another contract would be enforced or deemed valid, then AB 51 would be preempted by the FAA.
AB 51 may also be preempted by the FAA if it “stands as an obstacle to the accomplishment and execution of the full purpose and objectives of Congress,” which, with regard to the FAA, is to “ensure that private arbitration agreements are enforced according to their terms.
The Ninth Circuit first held that the FAA does not preempt Section 432.6 because it focuses on pre-agreement employer behavior and the FAA does not take effect until after an agreement is executed. The Ninth Circuit also held that Section 432.6 is not an obstacle to the FAA because the FAA is intended to promote enforcement of consensual arbitration agreements, and Section 432.6 only bans non-voluntary arbitration agreements.
The Ninth Circuit further held that Section 432.6 does not affect the enforceability of existing arbitration agreements that are otherwise enforceable under the FAA, and reasoned that Section 432.6 makes it unlawful for employers to mandate arbitration agreements as a condition of employment, but does not affect the enforceability of those agreements.
However, the Ninth Circuit concluded that the civil and criminal penalties imposed by AB 51 and Government Code Section 12953 were preempted by the FAA because they effectively punished employers for entering into arbitration agreements and were an obstacle to the purposes of the FAA.
A divided panel of the Ninth Circuit vacated the preliminary injunction granted by the district court, which paved the way for California to begin enforcing the elements of the AB 51 not preempted by the FAA. Judge Sandra Degal Ikuta wrote a dissent to the opinion, calling AB 51 a “too-clever-by-half workaround” meant to block the formation of arbitration agreements, which is preempted by the FAA. Judge Ikuta also noted California’s previous attempts to pass laws disfavoring arbitration, which have not withstood the challenge.
Chamber of Commerce of United States v. Bonta (9th Cir. 2021) 2021 WL 4187860.
NOTE:
The U.S. Chamber has filed a petition for rehearing en banc, which if granted, means that the case will be reheard before eleven of the twenty-nine judges of the Ninth Circuit instead of the typical panel of three judges.