Court: FAA Preempts CA Arbitration Law

On February 15, the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit) ruled that arbitration provisions under the Federal Arbitration Act (FAA) preempt California arbitration law under Assembly Bill 51 (AB 51). In brief, AB 51 prohibits state employers from requiring employees to arbitrate claims and imposes criminal penalties for violating the AB. AB 51 was enacted in October 2019, effective January 1st, 2020. The Ninth Circuit’s decision confirms that California employers may continue to include arbitration agreements in employment contracts under the FAA. The U.S. Supreme Court made a similar decision in June 2022 when it held that the FAA allows employers to require mandatory arbitration of employee claims under California’s Private Attorneys General Act of 2004 (PAGA).

California Arbitration Law vs. the FAA

Enacted in 1925, the FAA is a federal law that provides for arbitration between employers and employees. The FAA’s core principle states that arbitration agreements involving interstate or foreign commerce are valid, irrevocable, and enforceable (except on legal or equitable grounds for the revocation of a contract). Meanwhile, since January 2020, AB 51 made it illegal for California employers to require mandatory arbitration as a condition of employment. Specifically, the California arbitration law covers disputes arising from violations of the California Fair Employment and Housing Act or California Labor Code. Employer violations of AB 51 can result in civil and criminal penalties, as an unlawful employment practice and misdemeanor. Since AB 51 was enacted, it has been challenged, either in whole or in part, by federal courts several times.

Litigation Background and the Ninth Circuit’s Decision

In an attempt to avoid preemption by the FAA, legislators had included a provision in AB 51 to ensure that arbitration agreements (even if entered into illegally under the California arbitration law) would still be enforceable. However, the remainder of the law would still prevent “forced arbitration” in employment contracts. A month after AB 51 took effect, the law was challenged, appealed, and finally re-challenged in the following federal court decisions:

• In Chamber of Commerce of the United States, et al. v. Becerra, et al., in January 2020, the U.S. District Court for the Eastern District of California enjoined the state from enforcing AB 51. The district court reasoned that the FAA preempted the state law.
• Next, in Chamber of Commerce of the U.S., et al. v. Bonta, et al. No. 20-15291, in September 2021, the Ninth Circuit reversed, in part, the previous decision and ended the preliminary injunction on AB 51. The Ninth Circuit reasoned that the FAA only preempts AB 51 to the extent that the California arbitration law seeks to impose civil or criminal penalties on employers that have executed arbitration agreements under the FAA.
• Finally, in Chamber of Commerce of the U.S., et al. v. Bonta, et al., on February 15th, 2023, the Ninth Circuit reversed its earlier decision, ruling that the FAA preempts AB 51 in its entirety. The majority held that provisions within AB 51 deter an employer from entering into arbitration agreements protected under the FAA, in opposition to the intent of the federal law.

Employer Takeaways

Employers may find the Ninth Circuit’s decision on AB 51 favorable. However, the California arbitration law may be open to further litigation. After all, the state may request further review in the Ninth Circuit or petition the U.S. Supreme Court. For now, employers in California may exercise their federal right under the FAA to include arbitration agreements in employee contracts. Furthermore, to help guard against costly litigation in the first place, employers should comply with federal and state labor laws. Employers may demonstrate good-faith compliance by displaying required labor posters in areas that employees frequent.