Ninth Circuit Grants Rehearing on California Law Banning Mandatory Employment Arbitration Agreements

The Ninth Circuit Court of Appeals panel that originally decided Chamber of Commerce v. Bonta last fall recently issued an order withdrawing its prior opinion and granting a panel rehearing. The divided panel’s original decision upheld portions of Assembly Bill 51 (“AB 51”), a California law that prohibits employers from requiring that employees sign an arbitration agreement as a condition of employment. The panel’s decision to rehear the appeal is notable because it suggests that the panel may rule that the Federal Arbitration Act (“FAA”) preempts AB 51 in its entirety following the U.S. Supreme Court’s recent decision in Viking River Cruises, Inc. v. Moriana. The Supreme Court in Viking River Cruises held that California law precluding the division of PAGA actions into individual and non-individual claims through an agreement to arbitrate was preempted by the FAA.

Background

AB 51 applies to any arbitration agreement entered into or modified on or after January 1, 2020, the date the law became effective. Under AB 51, it is unlawful for employers to require that employees or applicants sign an agreement to arbitrate claims under the California Fair Employment and Housing Act (“FEHA”) and/or the Labor Code as a condition of employment, continued employment, or receipt of employment-related benefits. Significantly, rather than invalidate the arbitration agreement, AB 51 instead subjects an employer to civil and criminal penalties. 

Upon AB 51 taking effect in early 2020, the U.S. Chamber of Commerce, among others, immediately sought to enjoin the law’s enforcement. On January 31, 2020, the U.S. District Court for the Eastern District of California granted the request for a preliminary injunction, thereby enjoining enforcement of AB 51 on arbitration agreements governed by the FAA. The basis for the District Court’s ruling was that AB 51 (1) violates the FAA by putting arbitration agreements on an unequal footing with other contracts by specifically targeting arbitration agreements and imposing a higher consent requirement on them; and (2) interferes with the FAA’s goal of promoting arbitration by subjecting employers who seek to enter into arbitration agreements to civil and criminal penalties. The State of California appealed the preliminary injunction to the Ninth Circuit.

Ninth Circuit’s Original Ruling

As discussed previously by this blog, a divided Ninth Circuit panel reversed the District Court’s decision in part on the grounds that AB 51 is not entirely preempted by the FAA. The majority concluded that because AB 51 addresses only “pre-agreement employer behavior” (as opposed to the agreements themselves), the law does not invalidate or render unenforceable arbitration agreements covered by the FAA.” Therefore, the majority held that the FAA preempts AB 51 only with respect to its provisions that impose civil or criminal penalties on employers who execute arbitration agreements governed by the FAA. 

The majority’s decision was heavily criticized in the dissent issued by Judge Sandra Ikuta. The dissent noted that U.S. Supreme Court precedent clearly holds that the FAA invalidates state laws that impede the formation of arbitration agreements. Thus, despite California’s attempt to evade the FAA by focusing on pre-agreement employer behavior, “too-clever-by-half workarounds and covert efforts to block the formation of arbitration agreements are preempted by the FAA just as much as laws that block enforcement of such agreements.”

Decision on Request for Rehearing

The U.S. Chamber of Commerce (and others) immediately filed a petition for rehearing en banc. In February 2022, the original Ninth Circuit panel issued an order deferring consideration of the rehearing petition until after the Supreme Court’s decision in Viking River Cruises. On August 22, 2022, the panel issued an order withdrawing its prior opinion and granting a panel rehearing. That order also was divided, with Judges Ikuta and William Fletcher voting in favor of a rehearing and Judge Carlos Lucero, sitting by designation from the Tenth Circuit, voting against rehearing. The Ninth Circuit has yet to set a date for the rehearing.

Main Takeaways

Judge Fletcher’s decision to withdraw the opinion he previously supported suggests that he may now agree with Judge Ikuta that AB 51 is preempted in its entirety by the FAA. With the prior Ninth Circuit decision now withdrawn, the District Court’s preliminary injunction enjoining enforcement of AB 51 remains in place pending the rehearing decision. Employers who continue to require arbitration agreements as a condition of employment, or who are considering rolling out arbitration agreements following the Viking River Cruises decision, should closely monitor the appeal and consult with experienced employment counsel on how best to proceed.

This article is not an unequivocal statement of the law, but instead offers some potential issues to consider with counsel. This is provided for informational purposes only and does not constitute legal advice and is not intended to form an attorney client relationship. Please contact your Sheppard Mullin attorney contact for additional information.

Robert Foster

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