The Ninth Circuit recently held in Chamber of Commerce v. Bonta that the Federal Arbitration Act preempts a California law that criminalizes employer conduct that requires employees to consent to arbitrate claims arising under the California Fair Employment and Housing Act.  This ruling came after the same panel previously held that the law, Assembly Bill 51, was not preempted because it focused on “pre-agreement” behavior and not the arbitration agreement itself.  In 2021, the panel sua sponte decided to rehear the case, apparently after Judge Fletcher (who was in the majority in both decisions) changed his mind on the law’s validity.  In doing so, the panel eliminated a circuit split it had previously created between itself and the First and Fourth Circuits.

Assembly Bill 51 was the result of an attempt by the California Legislature to navigate around Supreme Court precedent on preemption and arbitration.  While the bill prohibited employers from requiring a waiver of the right to file and pursue a civil action, and considered it a misdemeanor to do so, it explicitly stated that the arbitration agreement in such a case would still be enforceable.  By structuring the bill this way, California argued that it was not regulating arbitration agreements themselves but was instead only restricting the conditions under which arbitration agreements can be made.  As the Ninth Circuit observed, this resulted in the “oddity” that an employer could be prosecuted for requiring an arbitration provision yet could nevertheless enforce the same provision.

In its new decision, the Ninth Circuit rejected the Legislature’s attempted distinction.  The panel relied heavily on two Supreme Court cases: Kindred Nursing Centers Ltd. P’ship v. Clark, 581 U.S. 246 (2017) and Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 683 (1996), in concluding that state rules that burden the formation of arbitration agreements are preempted by the FAA even if the resulting arbitration agreement is enforceable.  In this case, the panel held that Assembly Bill 51 ran afoul of the FAA in two ways.  First, by subjecting employers to criminal prosecution, the bill had a “severe” deterrent effect on forming arbitration agreements.  Second, the bill singled out arbitration as an exception to California’s generally applicable law that employment contracts may contain non-negotiable terms, rejecting California’s argument that it only sought to correct for unequal bargaining power.  As a result, the bill ran afoul of the FAA’s liberal federal policy favoring arbitration agreements by evincing hostility to their formation.            

This decision is a significant victory for businesses who prefer the cost-effectiveness of arbitration over the court process.  By clearly stating that the FAA preempts attempts to single out the conditions in which arbitration agreements are made, the Ninth Circuit foreclosed one of a dwindling number of options for states seeking to circumvent the FAA.  The California Attorney General Office announced that it is currently reviewing the decision and assessing next steps, suggesting the possibility of a petition to the en banc court and/or the Supreme Court.