In a significant ruling for California employers, the Ninth Circuit found that California Assembly Bill 51, which contained criminal ramifications for employer use of arbitration agreements, is preempted by the Federal Arbitration Act (FAA). This decision came after a successful preliminary injunction that stopped California courts from enforcing AB 51, and the Ninth Circuit's initial ruling that AB 51 was not preempted by the FAA. In Chamber of Commerce v. Bonta, the Ninth Circuit granted a panel rehearing and emphasized the severe chilling effect that AB 51 imposed upon the purpose and underlying policy of the FAA. For this reason the court held that AB 51 was preempted by the FAA and affirmed the trial court's granting of the preliminary injunction.

The result is that California employers remain able to require employees to execute arbitration agreements without risk of potential criminal liability.

History of AB 51

Assembly Bill 51 (AB 51) was passed to protect employees from what the legislature termed "forced arbitration." The law imposed civil liability and criminal penalties on employers who require an existing employee or an applicant for employment to agree to arbitrate as a condition of employment. In effect, however, AB 51 only criminalizes the contract formation and does not make an arbitration agreement executed in violation of the law unenforceable.

The intention behind this legislation was an attempt to avoid conflict with precedent set by the Supreme Court, which provides that any state rule that attempts to thwart arbitration is preempted by the FAA. After AB 51 was passed, group of trade associations and business groups, including the California Chamber of Commerce, filed a claim for declaratory and injunctive relief against several different California officials. The Chamber of Commerce requested a declaration by the court that AB 51 was preempted by the FAA and a permanent injunction prohibiting its enforcement as well as a temporary restraining order. The district court granted the temporary restraining order as well as a motion for preliminary injunction because it found that the Chamber was likely to prevail on the merits of its action, given that AB 51 "conflicts with the purposes and objectives of the FAA." California filed an interlocutory appeal.

In September 2021, the Ninth Circuit Court of Appeals issued a divided decision finding that AB 51 was not preempted by the FAA, but the civil and criminal penalties associated with AB 51 were preempted by the FAA where an employer required an arbitration agreement, and the employee accepted. This ruling left room for multiple scenarios where civil and criminal penalties were not preempted, such as a circumstance where arbitration is offered, but rejected by an employee – the employee could then file suit alleging the arbitration was "required" and seek penalties.

The Chamber of Commerce petitioned for a rehearing en banc. On February 14, 2022, the Ninth Circuit Court of Appeals deferred the decision on the petition until the United States Supreme Court issued its ruling in Viking River Cruises, Inc. v. Moriana, 142 S. Ct. 734 (2021) addressing whether a pre-dispute arbitration agreement under the FAA purporting to require arbitration of Private Attorneys General Act (PAGA) claims is valid.

After the Supreme Court issued its decision in Viking River, which invalidated longstanding California law precluding the arbitration of any PAGA claims, the Ninth Circuit Court of Appeals sua sponte granted a panel rehearing, and denied the petition for rehearing en banc as moot.

Is AB 51 Preempted by the FAA?

Yes. The focal issue before the court was whether AB 51 "stands as an unacceptable obstacle to the accomplishment and execution of the full purpose and objectives of Congress in enacting the FAA." Wyeth v. Levine, 555 U.S. 555, 563-64 (2009). The first point of inquiry in this analysis was whether AB 51 discriminates against arbitration agreements, explicitly or implicitly. Although AB 51 does not expressly bar all arbitration agreements, it does include terms that clearly portray a disfavor of their use in certain situations. The prohibition of employers from using arbitration agreements as a condition for application or retention of employment necessarily chills the purpose and availability of arbitration agreements in employment relationships. The court reasoned that, "AB 51 deters an employer from including non-negotiable arbitration requirements in employment contracts by imposing civil and criminal sanctions on any employer who does so." Cal. Lab. Code §433. The possibility of both civil and criminal penalties against employers who violate AB 51 serves as a significant deterrent to engaging in arbitration agreements.

AB 51 also treats arbitration clauses differently than other non-negotiable terms or binding provisions that may be a condition of employment and included in a contract between applicant or employee and employer. "California law generally allows an employer to enter into a contract with an employee that includes terms as a condition of employment, including requirements related to compensation, prohibition of drug usage, etc." Koehl v. Verio, Inc., 142 Cal. App.4th 1313 (2006). Therefore, AB 51's deterrence tactics and singling out of arbitration agreements as being an unlawful non-negotiable term of employment contracts violates the equal treatment principle and exhibits a true "hostility towards arbitration" that is completely contrary to the purpose of the FAA.

The court concluded, "Because the FAA's purpose is to further Congress' policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 is therefore preempted," and affirmed the trial court's preliminary injunction.

Employer Takeaways

The preliminary injunction against AB 51 will remain in effect. The State of California may request a hearing en banc or appeal to the Supreme Court. The injunction will remain if either request is granted, pending any further decisions. Otherwise, the matter will return to the district court for final determinations consistent with the Ninth Circuit's ruling.

While this is a significant win for employers, this was not the legislature's first attempt to undermine the FAA, and, chances are, this is not the last. Employers should monitor developments relating to arbitration agreements.

The employment practice team at WSHB is available to answer any and all questions you may have regarding the implications of this decision on your business or employment practices. Please do not hesitate to reach out if we can be of service.

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