Prohibiting Mandatory Arbitration: Ninth Circuit Agrees to a Re-Do
The three-judge panel that decided AB 51 was (mostly) lawful, and that employers could not retaliate against employees who refused to sign arbitration agreements as a condition of employment, withdrew the decision and agreed to take another look. On August 22, 2022, two of three members of the panel that decided Chamber of Commerce of the U.S. v. Bonta voted to withdraw the ruling sua sponte and agreed to a rehearing in light of the U.S. Supreme Court’s ruling in Viking River Cruises v. Moriana.
The panel will again have to decide whether the Federal Arbitration Act (“FAA”) preempts AB 51’s attempt to prohibit employers from imposing arbitration agreements on employees as a condition of employment, even if the employee can opt out.
Under the October 2019 legislation, which was to become effective on January 1, 2020, employers could face misdemeanor criminal charges and civil penalties for requiring employees to sign arbitration agreements as a condition of employment. After its passage, the U.S. and California Chambers of Commerce quickly sought a preliminary injunction against several California agencies to stop their enforcement of the statute. The state argued that AB 51 was not preempted by the FAA because the legislation governed conduct which occurred prior to the formation of the agreement to arbitrate and thus the FAA did not apply.
In February 2020, the District Court for the Eastern District of California held that AB 51 was preempted by the FAA and granted a preliminary injunction, noting that AB 51 discriminated against arbitration agreements and interfered with the objectives of the FAA. The court enjoined the California attorney general and other state officials from enforcing AB 51 or imposing civil or criminal penalties.
On September 15, 2021, a divided Ninth Circuit partially reversed the district court’s order, holding the FAA did not preempt most of AB 51 and dismissing the injunction. Although the Court agreed that the imposition of criminal and civil penalties would create an obstacle to the purposes of the FAA, the Court found the penalties are not preempted if they apply only to conduct that occurs prior to an arbitration agreement being signed. Thus, according to the Court’s anomalous reasoning, employers would not face penalties if the employee agreed to sign the arbitration agreement, but employers could face both criminal and civil penalties if the employee refused. Further consideration of AB 51’s ruling was put on hold by the Ninth Circuit pending a decision by the U.S. Supreme Court in Viking River Cruises v. Moriana.
On June 15, 2022, the U.S. Supreme Court decided Viking River Cruises, in which the Court examined FAA preemption. The Court held that the FAA preempted the “Iskanian Rule,” named after a California Supreme Court case, and held that the FAA permits employers and employees to agree to arbitrate California Private Attorneys General Act claims on an individual basis. (See summary here.)
Whether Viking River Cruises’ preemption analysis will impact the decisionmakers in the Bonta case remains to be seen, but the withdrawal of its previous decision could be good news for employers. For now, the district court’s preliminary injunction prohibiting enforcement is back in place as the Ninth Circuit’s earlier 2-1 decision dismissing the injunction has been withdrawn. Employers may wish to revisit their current arbitration agreements in light of these decisions but should seek assistance from experienced employment counsel.