California’s Job Arbitration Law Wiped Out by Ninth Cir. (2)

California employers can force their workers to sign arbitration agreements as a condition of employment now that a federal appeals court has struck down a unique state law that limited the use of such workplace contracts.

A divided US Court of Appeals for the Ninth Circuit panel ruled Wednesday that the Federal Arbitration Act preempts Assembly Bill 51, a 2019 measure that prohibits employers from requiring job applicants or workers to sign arbitration pacts.

“Because the FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 is therefore preempted,” the majority panel said.

The three-judge panel had partially upheld AB 51 in a 2021 ruling, but it decided about a year later to consider the legality of the law.

The decision signals that state legislatures may be powerless to prevent companies from conditioning employment on giving up the right to go to court over workplace disputes.

Business advocates say private arbitration is a faster, cheaper alternative to court that benefits employers and workers. But critics counter that requiring vulnerable, low-wage workers to agree to arbitration pacts—especially those that waive the right to bring class claims—prevent them from seeking justice for employment law violations.

Congress created an exception for sexual harassment and assault, after the #MeToo movement exposed how mandatory arbitration agreements can shield repeat offenders by keeping allegations out of the public eye. President Joe Biden last year signed a bill into law voiding contracts that require arbitration of workplace sexual harassment or assault claims.

California could attempt to revive AB 51 by asking the full Ninth Circuit or the US Supreme Court to review Wednesday’s decision. The California Attorney General’s Office said in a statement that it’s “reviewing the decision and assessing the next steps.”

The US Chamber of Commerce, which led the industry group challenge to AB 51, applauded the ruling.

“We are pleased that the Ninth Circuit vindicated the strong federal policy favoring arbitration,” Jennifer Dickey, deputy chief counsel of the US Chamber Litigation Center, said in a statement. “California’s law sought to evade that policy and, in doing so, would have denied employers and employees alike the benefits of arbitration.”

Faulty Design

Courts have been invoking the FAA to block state laws regulating arbitration for decades. But California designed AB 51 to avoid federal preemption.

Rather than invalidating agreements to arbitrate certain types of claims, the state regulated employer conduct—prohibiting them from requiring employees to sign—as a way to ensure that the agreement to arbitrate was consensual.

But a pair of Ninth Circuit judges rejected California’s reasoning in Wednesday’s ruling, holding that the FAA still trumps the state’s law despite its design.

Rules that impede entering into agreements to arbitrate are as vulnerable to preemption as those that undermine the enforcement of already-existing contracts, the panel majority said.

Moreover, California’s attempt to guarantee that arbitration contracts are consensual misunderstood contract law, Supreme Court precedent, and AB 51 itself, the judges said.

For example, courts generally view contracts as consensual even if they’re the product of unequal bargaining power or one party didn’t read what they signed, the panel majority said.

Judges Sandra Ikuta, a George W. Bush appointee who dissented from the panel’s 2021 ruling, authored the court’s ruling.

The Ninth Circuit apparently struck down AB 51 because Judge William Fletcher, a Clinton appointee, changed his mind about the legality of the law. Fletcher joined Ikuta and left Judge Carlos Lucero, a Clinton appointee to the Tenth Circuit sitting by designation, who had penned the panel’s earlier decision.

In dissent, Lucero said the majority applied an mistaken, overly expansive version of the Supreme Court’s FAA jurisprudence.

“My colleagues’ misinterpretation leaves state legislatures powerless to ensure that arbitration clauses in these employment agreements are freely and openly negotiated,” he said. “Moreover, courts are potentially left with an increasingly diminished role, or no role at all, in employer-employee disputes.”

The case is US Chamber of Commerce v. Bonta, 9th Circ., No. 20-15291, 2/15/23.

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