In reversal, appeals court OKs forced arbitration in California

Dive Brief:

The Ninth Circuit Court of Appeals this week struck down AB 51, a 2019 California law prohibiting forced arbitration agreements as a condition of employment, saying the Federal Arbitration Act (FAA) preempts. That’s a reversal of its ruling on the same law two years ago.
“The FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose,” the court ruled, with one judge on the three-judge panel dissenting.
AB 51 explicitly sought to get around federal preemption by making it clear arbitration contracts are fully enforceable; what’s illegal is employers making the agreements a condition of employment. In that way, the law steered clear of the FAA, which prohibits states from interfering in the enforceability of arbitration agreements.

Dive Insight:

When the Ninth Circuit ruled on the law previously, it took the position that the state had successfully threaded the needle by focusing enforcement on the formation of the agreement, not on the agreement itself.

“It is difficult to see how [AB 51], which in no way affects the validity and enforceability of [arbitration] agreements, could stand as an obstacle to the FAA,” the court, with one judge dissenting, ruled in 2021.

But after the U.S. Supreme Court last year ruled on another case that involved FAA preemption, the Ninth Circuit withdrew its ruling and granted a rehearing, leading to its reversal this week.

This time around, the court said that targeting the formation of the arbitration agreement rather than the agreement itself is effectively a distinction without a difference because it still goes against Congress’ intent to further the use of arbitration over lawsuits.

“Because the FAA’s purpose is to further Congress’s policy of encouraging arbitration, a state law that also applies to other provisions … may be preempted if its focus is on arbitration,” the court said.

With the decision, the lower court’s preliminary injunction against the law stands.

In his dissent, Judge Carlos Lucero, who wrote the 2020 majority opinion that was reversed, said AB 51 operates in a substantively different manner than other state rules struck down by the FAA.

Unlike those other state rules, he said, which directly invalidated arbitration agreements, AB 51 regulates conduct preceding arbitration agreements. Its intent is to ensure arbitration agreements are entered on fair terms and not forced on employees or job applicants.

“The [Supreme] Court has never held nor implied that employers may require arbitration as a condition of employment,” he said. “Today my respected colleagues in the majority … nullify a California law codifying what the enactors of the FAA and the Supreme Court took as a given: arbitration is a matter of contract and agreements to arbitrate must be voluntary and consensual.”

A spokesperson for California Attorney General Rob Bonta said the office was “reviewing the decision and assessing next steps,” Courthouse News reported.