California Legislation Conditioning Employment On Arbitration Is Not Completely Preempted By The Federal Arbitration Act: Chamber Of Commerce v. Bonta (Sept. 15, 2021)

• Published date: 11 October 2021
• Subject Matter: Litigation, Mediation & Arbitration, Criminal Law, Arbitration & Dispute Resolution, Crime
• Law Firm: Wood, Smith, Henning & Berman LLP
• Author: Ms Dana C. Ring and Ahllam H. Berri

In a sharply divided decision, the 9th Circuit reversed a preliminary injunction that prohibited California from enforcing AB 51, which added California Labor Code ' 432.6 and Government Code ' 12953, a law that banned employers from conditioning a job on employees agreeing to arbitrate employment disputes. The court found that:

• AB 51 was not preempted by the Federal Arbitration Act (FAA) but,
• The civil and criminal penalties associated with AB 51 were preempted by the FAA in the event an employer required an arbitration agreement, and the employee accepted.

Why this Case is Important

The decision allows Labor Code ' 432.6 to take effect. That law precludes an employer from requiring an employee, after January 1, 2020, to enter an arbitration agreement as a condition of employment, and from retaliating against any employee or prospective employee for not doing so. The Court's ruling that ' 432.6 is not preempted, but the civil and criminal penalties somehow are, creates incredible uncertainty surrounding the potential liability employers face for violating AB 51, which, in practical effect, likely results in the law's full, continuing viability. As a result, employers should tread carefully in offering or entering into arbitration agreements with employees, and should make painstakingly clear such agreements are purely voluntarily.

The Court's decision does not immediately lift the preliminary injunction. The Court must issue its mandate and remand the case back to the trial court for a determination on the merits in line with the Court's decision. Further, if this ruling is challenged, whether through a request for rehearing en banc or a petition for certiorari with the U.S. Supreme Court, the mandate will be stayed pending the review.

Background

Assembly Bill 51 became effective January 1, 2020. In December 2019, the plaintiffs (US Chamber of Commerce and other business groups) filed a lawsuit for declaratory and injunctive relief, and asked the court to declare that AB 51 was preempted by the FAA. The plaintiffs filed a motion for preliminary injunction as well as a motion for a temporary restraining order, which was granted on December 30, 2019, two days before the new law was set to take effect.

Unfortunately, on September 15, 2021, a strongly divided three-judge panel of the Ninth Circuit reversed in part, and concluded that the law is largely not preempted by the FAA, with the exception of the provisions imposing criminal and civil liability for...