Ninth Circuit Court of Appeals Upholds Employer’s Right to Require Employees to Arbitrate Their Employment-Related Claims
On February 15, 2023, the United States Court of Appeals for the Ninth Circuit ruled that employers in California may require their employees to sign mandatory arbitration agreements as a condition of employment or continued employment. In doing so, the Court ruled that California Assembly Bill 51 (“AB 51”) is preempted by the Federal Arbitration Act (“FAA”).
In 2019, Governor Newsom signed into law AB 51, which prohibited employers from requiring employees to sign arbitration agreements as a condition of employment or continued employment. AB 51 mandated criminal and civil penalties against any employer who violated its provisions. The law was supposed to take effect on January 1, 2020. However, in December, 2019, the Chamber of Commerce filed a lawsuit challenging the validity of AB 51, and moved for a preliminary injunction, prohibiting California from enforcing the law. The United States District Court for the Eastern District of California granted the preliminary injunction, finding that the Chamber of Commerce was likely to succeed on the merits of its claim because AB 51 “treats arbitration agreements differently from other contracts,” and “conflicts with the purposes and objectives of the FAA.” The State of California appealed this decision to the Ninth Circuit Court of Appeals.
The Ninth Circuit, in Chamber of Commerce of the United States of America v. Bonta (February 15, 2023) 2023 WL 2013326, affirmed the District Court’s ruling granting the injunction. In doing so, the Court ruled, “[w]e agree with our sister circuits that the FAA preempts a state rule that discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement.” In applying this rule to AB 51, the Court first found that the law severely burdens the formation of arbitration agreements because it “deters an employer from including non-negotiable arbitration requirements in employment contracts by imposing civil and criminal sanctions on any employer who does so.” Second, the Court held that AB 51 improperly “‘singles out arbitration provisions as an exception’ to generally applicable [contract] law.” Thus, the Court concluded that “AB 51’s penalty-based scheme to inhibit arbitration agreements before they are formed violates the “equal-treatment principle” inherent in the FAA, … and is the type of “device[ ]” or “formula[ ]” evincing “hostility towards arbitration” that the FAA was enacted to overcome…. 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 State of California argued that AB 51 should be upheld because it prohibits “forced arbitration,” which conflicts with the principle that the parties must consent to an arbitration agreement for it to be enforceable. However, the Court rejected this argument, emphasizing that “a contract may be ‘consensual,’ as that term is used in contract law, even if one party accepts unfavorable terms due to some degree of unequal bargaining power.” At the same time, the Court noted that its ruling “does not create a new ‘substantive right’ for employers to mandate unconscionable or illegal arbitration requirements.” The Court concluded in this regard, “[i]n short, under California law, an employee can “consent” to an employment contract by entering into it, even if the contract was a product of unequal bargaining power and even if it contains terms (such as an arbitration provision) that the employee dislikes, so long as the terms are not invalid due to unconscionability or other generally applicable contract principles.”
The Bonta decision is an important victory for employers who wish to avoid litigating disputes with their employers in court before a jury. However, the story may not end here. The State of California may seek en banc review of this decision by the Ninth Circuit and/or review by the United States Supreme Court. In a statement on Wednesday, the California Attorney General’s office stated in this regard that it is “evaluating its options.” It is also is important to note that the decision does not change the law signed by President Biden in March 2022 which prohibits employers from requiring employees to arbitrate claims based on sexual harassment or sexual assault.