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

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 violations (in certain circumstances). However, there was a very strongly worded dissent by Justice Sandra Ikuta, which called the majority opinion a “bifurcated, half-hearted, and circuit-splitting” opinion aimed at “abetting California in disfavoring arbitration.”

Employers are hopeful that this recent decision is challenged in front of the US Supreme Court and the opinions set forth in Justice Ikuta's dissent prevail. Given the issues, the circuit split, and the surprise result on this appeal, it is likely the case will be reviewed by the U.S. Supreme Court.

Does the Federal Arbitration Act Preempt California Labor Code § 432.6?

The trial court had found that § 432.6 improperly treated agreements to arbitrate differently than other contracts, and the purpose and intent of the FAA was therefore violated by this inequality. However, the 9th Circuit panel found that § 432.6 is not preempted by the FAA, except as to civil and criminal liabilities imposed under the law. It held that § 432.6 applied only to the formation of such agreements, but expressly provided for the validity and enforceability of agreements to arbitrate – an important distinction to the majority. The majority further went on to hold that § 432.6 does require that arbitration between the parties be voluntary, however, it does not create a contract defense that allows for the invalidation or nonenforcement of an agreement to arbitrate. In sum, the court found that § 432.6 “does not make invalid or unenforceable any agreement to arbitrate even if such an agreement is consummated on violation of statue.”

This decision also creates a split among the federal courts of appeal with the First Circuit (Sec. Indus. Ass'n. v. Connolly (1st Cir. 1989) 883 F.2d 1114,1117, 1125) and the Fourth Circuit (Saturn Distrib. Corp. v. Williams (4th Cir. 1990) 905 F.2d 719, 724), holding that similar laws were pre-empted by the FAA.

Civil and Criminal Penalties Imposed Under AB 51 Preempted by FAA

Despite its finding the law was not preempted by the FAA, the majority nevertheless went on to find that the penalties it imposed for violations were preempted in most circumstances. AB 51 imposes civil and criminal penalties on employers that violate § 432.6. Under California Labor Code § 433 an employer can also be found guilty of a criminal misdemeanor if it violates § 432.6, which is punishable by six months imprisonment and a fine up to $1,000, or both. Government Code §§ 12960-12965 also provide for civil sanctions, including the recovery of damages such as lost wages and emotional distress, for a violation of Government Code § 12953/Labor Code § 432.6. Notably, Government Code § 12953 is within the umbrella of the FEHA, which provides a three year statute of limitations to file a complaint with the Department of Fair Employment and Housing.

In its reading of the law, the 9th Circuit ruled that the civil and criminal penalties called for did pose an obstacle to the purposes and objectives of the FAA. Therefore, these sections of the law are preempted by the FAA, however, only under specific circumstances. The majority's bifurcated finding thus, in effect, validated the law, but, in a material way, eliminated any consequences for its violation in most (but not all) circumstances, as discussed below.

Employer Takeaways

• By and large, employers may not require an employee or applicant to sign an arbitration agreement as a condition of employment or offering of benefits.
• Employers, however, may still validly offer arbitration agreements if done on a strictly voluntary basis. To avoid liability, employers must adopt methods of making the arbitration agreement explicitly voluntary, and make that “voluntary” nature clear and conspicuous. Employers should also ensure the offered agreement is governed by the FAA, by its own language.
• Under the ruling, the criminal and civil penalties imposed by § 432.6 of the California Labor Code are preempted by the FAA and therefore invalid, but only if (1) the arbitration agreement is governed by the FAA and (2) the conditioning of an arbitration agreement actually results in an executed arbitration agreement. If these two conditions are not met, then the penalties are not preempted, and an employer could face suit seeking these.
• Thus, under the majority's opinion, there remain multiple scenarios in which the civil and criminal penalties are not preempted. For instance, if arbitration is offered, but an employee refuses to enter that agreement, the penalties are not preempted, and an employee could file suit claiming arbitration was “required,” and seek the penalties. Emphasizing the voluntary nature of the agreement is thus, as mentioned, imperative.
• Employers must also ensure that, where an employee refuses to enter into the arbitration agreement, there is no retaliatory conduct against the employee. Retaliatory conduct is not preempted.
• Even where the criminal and civil penalties by AB51 are preempted, § 432.6 still opens employers up to potential claims on various fronts, simply by continuing to offer arbitration agreements. For instance, the law and ruling allow claims for purely injunctive relief which, if successful, would require an employer to pay an employee's attorneys' fees. Thus, potential class claims for injunctive relief with significant fee exposure remain.

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.

Originally published 27 September 2021

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.