The Ninth Circuit, Mandatory Arbitration Agreements, and “Clown Bop Bags”

September 20, 2021

Employers operating in California often ask employees to agree to arbitrate employment-related disputes as a term and condition of employment.  In its recent Chamber of Commerce v. Bonta decision, the Ninth Circuit took a significant step toward prohibiting such mandatory employment arbitration agreements.  However, the combination of a 2-1 panel decision (authored by a visiting judge from the Tenth Circuit), a scathing dissenting opinion, and a holding that splits with decisions from the First and Fourth Circuits all but ensures more litigation.  As a result, the case is far from over, so while employers eventually may have to consider changing their arbitration agreement practices, they very likely have some time to let the dust settle before doing so.

The Ninth Circuit’s Chamber of Commerce v. Bonta Decision.

In recent years, the California legislature has attempted to proscribe the use of mandatory employment-related arbitration agreements.  In both 2015 and 2018, then-Gov. Jerry Brown vetoed such legislative efforts, stating publicly that the proposed state laws conflicted and interfered with the Federal Arbitration Act (FAA).

Gov. Newsom did not share the same reservations.  He signed Assembly Bill 51 (AB 51) into law in October 2019, thereby prohibiting employers from requiring employees to “waive any right, forum or procedure” for an alleged violation of the California Fair Employment and Housing Act (FEHA) or Labor Code.  This prohibition applied to previously-permissible mandatory arbitration agreements, including those that would require employees to “opt-out” of a waiver or take any affirmative action to avoid losing the right to have their employment dispute heard in civil court.  Significantly, AB 51 provided for civil and criminal penalties for violating employers, and was set to become effective on January 1, 2020.

In December 2019, a consortium of employer groups filed suit in the Eastern District of California to block AB 51 from taking effect.  (Chamber of Commerce v. Becerra, Case No. 2:19-at-01142.)   The employer group sought a declaratory judgment that AB 51 was invalid with respect to arbitration agreements governed by the Federal Arbitration Act (FAA) and related injunctive relief.  Judge Mueller agreed, and preliminarily enjoined enforcement of the new law (codified as Lab. Code section 432.6(a) – (c)), based on findings that it placed agreements to arbitrate on unequal footing with other contracts, obstructed the purposes and objectives of the FAA, and was preempted by the FAA.  Predictably, the decision was appealed to the Ninth Circuit.

On September 15, 2021, a divided Ninth Circuit panel reversed, in part, the district court’s order and vacated the district court’s preliminary injunction. The majority, in an opinion authored the Honorable Carlos F. Lucero, United States Circuit Judge for the U.S. Court of Appeals for the Tenth Circuit (sitting by designation), concluded the FAA does not preempt AB 51 to the extent AB 51 seeks to regulate employer conduct prior to executing an arbitration agreement, but it does preempt AB 51 to the extent AB 51 imposes civil or criminal penalties on employers who obtained executed arbitration agreements governed by the FAA.

In a colorful, and oftentimes scathing dissent reminding readers of the California legislature’s many prior, unsuccessful attempts to limit the scope of arbitration agreements, Judge Sandra Ikuta likened California to a “clown bop bag” that responds to getting “smacked down for violating the Federal Arbitration Act” by “bouncing back with even more creative methods to sidestep the law.”  She then attacked the logic and effect of the majority’s decision:

In case the effect of this novel holding is not clear, it means that if the employer offers an arbitration agreement to the prospective employee as a condition of employment, and the prospective employee executes the agreement, the employer may not be held civilly or criminally liable. But if the prospective employee refuses to sign, then the FAA does not preempt civil and criminal liability for the employer under AB 51’s provisions.

This holding means that an employer’s attempt to enter into an arbitration agreement with employees is unlawful, but a completed attempt is lawful. This tortuous ruling is analogous to holding that a statute can make it unlawful for a dealer to attempt to sell illegal drugs, but if the dealer succeeds in completing the drug transaction, the dealer cannot be prosecuted.

By a 2-1 decision, the matter was reversed in part and remanded to the Eastern District for further proceedings to determine, in light of the Ninth Circuit’s opinion, whether plaintiff’s satisfied their showing for injunctive relief.

How does this impact California Employers?

Too early to tell at this time.  A key question being debated now among employment circles is whether employers should make changes to their arbitration agreement practices immediately.

We anticipate that employers will take a “wait and see” approach, noting that the Ninth Circuit’s September 15, 2021 panel decision is unlikely to be the final word on whether AB 51 passes or fails the preemption question.  Indeed, there are reports that the employer groups already are signaling their intention to challenge the panel decision.  Whether that challenge will be presented by a panel rehearing petition, en banc rehearing petition, or a Supreme Court petition for certiorari remains to be seen.  That noted, the combination of a 2-1 panel decision (authored by a visiting judge from the Tenth Circuit), a scathing dissenting opinion, a holding that splits with decisions from the First and Fourth Circuits, FAA subject matter, and a likely slew of amicus curia filings all but ensures more litigation.

Assuming either of the Ninth Circuit rehearing options are pursued, the issuance of the Ninth Circuit’s mandate to the district court would automatically be stayed until all matters on rehearing are resolved.  Any eventual attempt to secure Supreme Court review would require the filing of a motion to stay the mandate in the Ninth Circuit, the Supreme Court, or both.  And there are good reasons to think such a motion has a reasonable chance to be granted.

Accordingly, as a practical result, the case is far from over.  While employers eventually may have to consider changing their arbitration agreement practices, they very likely have some time to let the dust settle before doing so.  For information about how the Ninth Circuit’s decision may impact a particular dispute resolution program or arbitration agreement, employers should seek legal advice from an experienced employment lawyer.

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National Law Review, Volume XI, Number 263