labor California Law Against Forced Arbitration Invalidated
The Ninth Circuit granted a preliminary injunction against the California legislature’s latest attempt to protect workers’ ability to enforce their rights in court in the case Chamber of Commerce v. Bonta. Tuesday’s decision joins a long line of Supreme Court and Circuit Court precedent that upholds arbitration agreements as “consensual,” regardless of their coercive nature, particularly in employment agreements.
Arbitration agreements prohibit employees from vindicating their legal rights in courtrooms, and instead require them to pursue claims in private, confidential forums. Over the past fifty years, the Supreme Court has interpreted the Federal Arbitration Act broadly to mandate enforcement of arbitration agreements, including for employment discrimination claims, and even when agreements forbid collective or class proceedings, thereby rendering the pursuit of low-value wage-and-hour claims economically irrational.
State legislatures and courts – including California’s – have attempted to avoid the deleterious effects of arbitration and ensure that employers are held accountable for violating the law. In December 2018, the California legislature enacted Assembly Bill 51, which prohibits employers from requiring employees to waive any right, forum, or procedure as a condition of employment, and prevents employers from terminating or otherwise retaliating against an applicant or employee for refusing to consent to such a waiver. However, if the employee does consent to signing the arbitration agreement, it can be fairly enforced – a provision the California legislature took care to include in the statute in an attempt to avoid FAA preemption.
Business groups challenged the law, pre-enforcement, as preempted by the FAA and successfully won a temporary restraining order at the district court level. While the Ninth Circuit panel initially reversed the district court’s decision in 2021 and upheld AB 51, it later withdrew the decision in August 2022 and re-heard the case.
Writing for the majority in Tuesday’s decision, Judge Ikuta summarized the primary issue in the case as “whether the FAA preempts a state rule that discriminates against the formation of an arbitration agreement, even if that agreement is ultimately enforceable.” Answering the question in the affirmative, the majority held that AB 51 was preempted by the FAA because it limited the ability of parties to enter into arbitration agreements. Judge Ikuta pointed to Doctor’s Associates, Inc. v. Casarotto and Kindred Nursing Centers, L.P. v. Clark, which struck down state rules placing special requirements for arbitration agreements to be enforced, as evidence that state rules that burden even the formation of arbitration agreements are preempted by the FAA. Additionally, AB 51 unfairly “single[d] out” arbitration provisions, rather than other provisions in employment contracts that are typically non-negotiable, such as compensation, against the Supreme Court’s “equal-footing principle,” which requires arbitration agreements be treated like all other contracts.
Turning to other circuits’ decisions, Judge Ikuta also pointed to First Circuit and Fourth Circuit precedent that invalidated analogous state laws purporting to prohibit certain types of non-negotiable arbitration provisions. Finally, the majority rejected California’s argument that AB 51 was necessary to ensure greater equity in employment relationships and ensure that arbitration is a matter of consent, since under California law, absent unconscionability or other generally applicable contract principles, adhesion contracts are nonetheless consensual.
Judge Lucero, in dissent, wrote that the majority’s argument unnecessarily aggrandized Supreme Court precedent, which dealt with enforcement of an existing arbitration clause, rather than conduct that takes place prior to the existence of an agreement. Judge Lucero highlighted some of the policy reasons against arbitration as well, noting that with the rapid growth of mandatory arbitration clauses in employment agreements, “courts are potentially left with an increasingly diminished role . . . in employer-employee disputes,” “effectively freez[ing] the evolution of precedent for employment principles and law.”
Notably, the legislation represented California’s third attempt since 2015 to enact worker-protective legislation against arbitration; its first two attempts were vetoed by Governor Jerry Brown for violating federal law established by the Supreme Court. It remains to be seen if the legislature will try once more to craft legislation aiming to limit forced arbitration in employment.