Split Ninth Circuit Holds California’s AB-51 is Preempted by the FAA

This article was first published on the Securities Arbitration Alert blog, here.

A divided Ninth Circuit Panel holds that California’s AB-51 is preempted by the Federal Arbitration Act (“FAA”).

Enacted in 2019, AB-51 is a law that restricts predispute arbitration clauses (“PDAA”) in employment relationships. It provides:

“A person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provision of the California Fair Employment and Housing Act [FEHA] (Part 2.8 (commencing with Section 12900) of Division 3 of Title 2 of the Government Code) or this code, including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation…. An employer shall not threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee because of the refusal to consent to the waiver of any right, forum, or procedure….”

There are also criminal penalties for violations: “It is an unlawful employment practice for an employer to violate [the law]…. Any person violating this article is guilty of a misdemeanor.”

Basic Litigation History

As reported in SAA 2021-36 (Sep. 23), a split Ninth Circuit in Chamber of Commerce of the United States v. Bonta, 13 F.4th 766 (9th Cir. 2021), ruled on the validity of AB-51. The divided Court held that the mandatory PDAA use preclusions in the new law withstood FAA preemption scrutiny, but the criminal and civil penalties for mandatory PDAA use do not. In October 2021, the Chamber and the other challengers filed a Motion for En Banc Review. We later reported in SAA 2021-48 (Dec. 23) that the State and other Respondents filed their response in December 2021. The thrust of the argument, as expressed in their brief (ed: repeated essentially verbatim): 1) the Panel decision respects the FAA and Supreme Court precedent; 2) the Panel decision creates no intra- or inter-Circuit conflict; and 3) there is no special need to review this decision.

SCOTUS and Viking River

With the issue joined, as reported in SAA 2022-07 (Feb. 24), a majority of the Ninth Circuit Panel in February 2022 sua sponte issued an Order deferring consideration of the Petition until after the Supreme Court decided Viking River Cruises, Inc. v. Moriana, No. 20-1573, set for argument March 30, 2022. The question presented in the granted May 2021 Petition for Certiorari in Viking River was:

“Whether the Federal Arbitration Act requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under [California’s Private Attorney General Act] PAGA.”

As our readers know, the United States Supreme Court in June 2022 held 8-1 in Viking River that PAGA was in part preempted by the Federal Arbitration Act, insofar as PAGA allowed employees to evade bilateral predispute arbitration agreements. That would generally have been the end of the case as far as SCOTUS was concerned, but that was not the case here. In July 2022, Moriana filed a Petition for  Rehearing, suggesting:

“[T]he Court should grant rehearing solely for the purpose of modifying Part IV of its opinion to state that the Court does not decide the state-law issues of severability and standing and that its disposition is limited to reversal in part of the state court’s holding that the lskanian rule is not preempted by the FAA….”

A Bolt From the Blue

The reargument request was denied without comment by SCOTUS on August 22, 2022. As reported in SAA 2022-33 (Sep. 9), that same day the Ninth Circuit Panel issued a two-page Order sua sponte withdrawing the original decision and dissent and ordering a rehearing, stating:

“A majority of the panel has voted sua sponte to grant panel rehearing. Judge Fletcher and Judge Ikuta voted in favor of rehearing, and Judge Lucero voted against rehearing. The opinion and dissent filed on September 15, 2021 … are withdrawn, and the case is resubmitted. The petition for rehearing en banc … is DENIED as moot” (emphasis in original; internal citations omitted).

Upon Further Review, FAA Preempts AB-51

Upon reconsideration, a divided Court holds in Chamber of Commerce of the United States v. Bonta, No. 20-15291 (9th Cir. Feb. 15, 2023), that the FAA preempts AB-51:

“We therefore conclude that the approach adopted by the Supreme Court in Casarotto and Kindred Nursing for determining whether the FAA preempts a state rule limiting the ability of parties to form arbitration agreements applies to state rules that prevent parties from entering into arbitration agreements in the first place…. We 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 sum: “AB 51’s deterrence of an employer’s willingness to enter into an arbitration agreement is antithetical to the FAA’s ‘liberal federal policy favoring arbitration agreements.’… 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.”

Dissent: AB-51 Conforms to the FAA

Judge Lucero dissents, contending that the statute does not run afoul of the FAA:

“AB 51’s purpose matches the FAA’s purpose. The clear language of the FAA and those cases neither state nor imply that an employer may compel arbitration as a condition of employment, as the majority declares. Instead, the FAA’s history, legislative purpose, and caselaw all demonstrate its intention to honor agreements freely agreed to according to the terms voluntarily submitted to by both parties. AB 51 advances that purpose. AB 51 ensures contracts are “entered into as a matter of voluntary consent, not coercion.” … This does not form an obstacle to the FAA’s purpose of ensuring consensual agreements are honored.”

(ed: We are not surprised. Our editorial comment after the Court declared a “do-over” was: With Judge Fletcher joining [original] dissenter Ikuta, it seems to us that AB-51 may be standing on shaky legs.”)

George Friedman

George H. Friedman is the publisher and Editor-in-Chief of the Securities Arbitration Alert, a weekly online publication covering the latest developments in financial services arbitration and mediation. He is also the principal of George H. Friedman Consulting, LLC, providing expert advice on arbitration and mediation in general and the FINRA…