After nearly three years of legal challenges, the Ninth Circuit Court of Appeals, in Chamber of Commerce v. Bonta, affirmed a district court injunction striking down California Assembly Bill 51 (“AB 51”) because it is preempted by the Federal Arbitration Act (“FAA”). In a significant win, California employers may continue implementing mandatory employment arbitration agreements for employee claims for unpaid wages, discrimination, and numerous other causes of action under the Labor Code and the Fair Employment and Housing Act (“FEHA”).
The Federal Arbitration Act
Congress enacted the FAA to promote agreements to arbitrate and combat the longstanding “hostility towards arbitration.” The FAA has been described repeatedly as “embodying a national policy favoring arbitration and a liberal federal policy favoring arbitration agreements.” The U.S. Supreme Court has routinely found the FAA preempts state laws which would otherwise prevent the enforcement of arbitration agreements.
California AB 51
The California Assembly introduced AB 51 in late 2018 as another step in a prolonged effort to create legislation that would sidestep the FAA and prevent employers from requiring employees to enter into arbitration agreements as a condition of employment. This effort included multiple rounds of prior, creative legislation, all of which were ultimately vetoed because the bills would have likely violated the FAA.
However, in learning from their prior attempts, Governor Gavin Newsom finally signed AB 51 into law, with an effective date of January 1, 2020. AB 51 added a section to the California Labor Code that would prohibit employers from requiring employees to waive the right to litigate certain claims. These claims include those under the California Fair Employment and Housing Act (“FEHA”).
Practically, AB 51 would have prohibited employers from requiring employees to enter into arbitration agreements as a condition of employment for disputes arising under the FEHA. Violations could result in prosecution for a criminal misdemeanor offense and fines of up to $1,000. Under the provisions of AB 51, while employers could not force employees to sign arbitration agreements, they could ultimately enforce arbitration agreements that employees signed voluntarily.
After AB 51 was signed into law, trade and business challenged the law and succeeded in enjoining its enforcement. California successfully appealed when in 2021, the Ninth Circuit held that the FAA only partially preempts AB 51. However, following a 2022 decision from the US Supreme Court (Viking River Cruises, Inc. v. Moriana), the Ninth Circuit withdrew the prior opinion and permitted rehearing.
Chamber of Commerce v. Bonta, where the Ninth Circuit Decides the FAA Preempts AB 51
On February 15, 2023, the Ninth Circuit panel released its new opinion holding the FAA wholly preempts AB 51, and therefore, AB 51 is unenforceable.
The Ninth Circuit analyzed AB 51 under the principles of conflict preemption, which occurs when it is “impossible for a private party to comply with both state and federal requirements” or, where a state law “creates an unacceptable obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Noting the “equal treatment principal” as set forth by the U.S. Supreme Court requires courts to “place arbitration agreements on equal footing with all other contracts,” the Ninth Circuit found the FAA preempts a state law if it “interferes with the fundamental attributes of arbitration” or has a “disproportionate impact on arbitration.” Accordingly, if a state law either interferes with arbitration on its face or covertly, such a rule cannot stand in harmony with the purposes of the FAA. The Ninth Circuit ruled this principal applies to both formation and enforcement of arbitration agreements.
In its decision, the Ninth Circuit applied the rationale from prior Supreme Court cases where state laws were fashioned to make the formation of any arbitration agreement invalid and ultimately gave no purpose and meaning to the FAA. The Ninth Circuit also recognized AB 51, while not expressly barring arbitration agreements, disfavored the formation of arbitration agreements and therefore imposed a “severe” burden on contract formation. AB 51 also “singles out arbitration provisions as an exception to generally applicable law,” noting employers can mandate employees to enter contracts for compensation and drug usage, but not arbitration agreements. Further, the penalty-based scheme of AB 51 violated the “equal treatment principal” and was a device “evincing hostility toward arbitration.”
Finally, the Ninth Circuit also refused to sever AB 51, finding “all provisions of AB 51 work together to burden the formation of arbitration agreements.” As AB 51 would still include a civil penalty if severed, it still impedes the ability of employers to enter into arbitration agreements and “flouts the FAA’s command to place those agreements on an equal footing with all other contracts.” In reaching its decision, the Ninth Circuit joined two sister circuits, the First and Fourth Circuits, which previously had rejected state laws regulating the formation of arbitration agreements, finding such laws treated arbitration agreements “more harshly than other contracts” and was thus preempted.
Takeaways from the Decision
While the Ninth Circuit’s decision could be subject to further appeals, California employers may continue implementing mandatory arbitration agreements and are not restricted by AB 51. Additionally, here are a few key takeaways from the case:
- State statutes or judge-made rules creating obstacles to formation of arbitration agreements are contrary to and likely preempted by the FAA.
- California employers may continue to implement mandatory arbitration agreements for employees and new hires, absent any additional appeals, and should consult with their attorneys on the implementation process.
- Employers should review existing employee arbitration agreements in light of this decision.
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About Harrison Oldham
Harrison grew up in Mansfield, Texas. He attended Texas A&M University for his bachelor’s degree, where he met his wonderful wife, Kelsey. After graduating magna cum laude from Texas A&M, he attended SMU Dedman School of Law, graduating with honors in 2012. Today, Harrison and his wife live in Dallas, Texas with their son, Teddy.
Since graduating from SMU Law, Harrison has worked exclusively in the field of business law. He has spent time in private practice and in-house, working with clients of every size; from single person startups to Fortune 250 companies. Today his practice focuses on serving the diverse needs of businesses and individuals throughout Texas. You can learn more about Harrison by visiting his website, at: http://