For many years, state and federal courts in California have opposed arbitration and have manufactured frameworks under which they become unenforceable despite the clear directives of the Federal Arbitration Act (FAA) and countless Supreme Court cases. While a string of Supreme Court cases over the past decade gave employers some respite, the Ninth Circuit has now issued a split decision in which it has devised yet another means of trying to evade the FAA’s mandate.
Just two years ago, California enacted AB 51 to discourage the use of mandatory arbitration agreements in the employment setting, establishing both civil and even criminal penalties for doing so. These provisions were in obvious violation of the FAA, and a California district court swiftly enjoined them for that reason. We previously wrote about the district court’s lengthy and solid opinion and its grant of the injunction here.
On Sept. 15, 2021, the Ninth Circuit issued its decision in the case, but the 2:1 majority opinion is, to put it charitably, a mess. You can access the Court’s ruling here. The opinion was authored by a visiting Tenth Circuit judge, and the scathing dissent reflects both that the majority is wrong and that the analytical framework it creates is simply untenable.
The district court enjoined the entire law on the ground that it was preempted by the FAA. As the Supreme Court has held, the FAA will preempt a state law regulating arbitration agreements if (1) the state law creates a defense to enforcement of the arbitration agreement that is not generally applicable to any other, non-arbitration contract or (2) the state law creates an obstacle to the accomplishment and execution of the FAA.
The Ninth Circuit majority sidestepped the analysis and fabricated a distinction found nowhere in the FAA or in controlling Supreme Court authority. Instead of looking to whether the California law treats arbitration agreements differently from other contracts or created obstacles to the accomplishment of the FAA’s purposes, it found that the FAA did not apply to contract formation. More specifically, it found that AB 51 did not create a defense to enforcement of arbitration agreements that was not generally applicable to any other, non-arbitration contracts. Instead, it said, even though AB 51 imposes civil and criminal liability for requiring an employee to enter into an arbitration agreement as a condition of employment, it was still lawful because it did not provide the employee a ground to avoid enforcement of the arbitration agreement. This is, of course, a fool’s trap, as any such agreement would likely be voided for illegality, but the majority sees no need to address this point.
As to the second ground for preemption, the majority concluded that AB 51 did not create an obstacle to the accomplishment and execution of the FAA, because AB 51 governs “pre-agreement behavior.” By extension, it concluded that FAA preemption somehow only applies to pre-agreement behavior to the extent that such behavior provides a basis for invalidating already executed contracts. As AB 51 does not implicate the enforcement of arbitration agreements, the majority reasoned, the FAA did not preempt it.
The dissent did not mince words. Referencing California’s past illegal efforts to limit arbitration in violation of the FAA, its opinion began:
“Like a classic clown bop bag, no matter how many times California is smacked down for violating the Federal Arbitration Act (FAA), the state bounces back with even more creative methods to sidestep the FAA.”
After going through the history of the California legislature’s prior unsuccessful attempts to regulate arbitration agreements, the dissent explained the obvious – that AB 51 does burden the formation of arbitration agreements, as it “is intentionally designed to burden and penalize an employer’s formation, or attempted formation, of an arbitration agreement with employees.” Indeed, it was just another misguided attempt by California to disregard the FAA’s strong policy and straightforward requirements:
“The history of AB 51 reveals it was the culmination of a many-year effort by the California legislature to prevent employers from requiring an arbitration provision as a condition of employment. California has long known that the FAA preempted laws that made arbitration agreements unenforceable, because the Supreme Court has so often struck down its anti-arbitration legislation or judge-made rules.”
It pointed out that in addition to being out of step with Supreme Court precedent, the majority opinion creates a split with the First and Fourth Circuit Courts of Appeal. It aptly noted that the attempt was “too clever by half” and preempted.
There was no dispute among the three judges that the FAA prohibits the enforcement of civil and criminal penalties, but the dissent noted that the FAA would only apply to prevent these penalties if the arbitration agreement were executed. If, on the other hand, the employee did not sign the arbitration agreement, then the FAA would not apply to preempt the civil and criminal penalties. So, the dissent noted, the majority’s conclusion created the seemingly nonsensical result “that if the employer successfully ‘forced’ employees into arbitration against their will, . . . the employer is safe, but if the employer’s efforts fail, the employer is a criminal.”
The majority’s ruling created an uncertain environment for employers, but there are some procedural steps that must pass before the ruling takes effect. The dissent called out for this ruling to be reviewed by others, and there are two options as to how. The first is by an en banc panel of the Ninth Circuit, consisting of the chief judge and 10 additional judges. The Ninth Circuit may take a few weeks to a few months to determine whether to rehear a case en banc. The second option is review by the Supreme Court. While it is always a long shot to obtain rehearing en banc or review by the Supreme Court, this case may have a higher chance than others given the precedent it would set under the FAA and its general disregard for decades of Supreme Court precedent.
Bottom line: The Ninth Circuit decision is awkward and wrong, but it leaves employers once again in a bind about whether and how to exercise their rights under the FAA to require arbitration. Stay tuned for future opinions in the case.