Chamber of Commerce v. Bonta: A Temporary Reprieve for California AB 51, Which Prohibits Conditioning Employment on the Waiver of the Right To Litigate?

Posted in: Employment Law

The Federal Arbitration Act (FAA), 9 U.S.C. §1 et seq., was enacted to counteract “judicial hostility” to arbitration. But what about thinly veiled state legislative hostility?

California’s AB 51 prohibits employers from conditioning employment on an applicant’s waiver of various rights, including the right to litigate. Although AB 51 does not single out agreements to arbitrate, it applies to them. And the penalties for employers who violate the provision are stiff: a fine of up to $1,000 and up to six months’ imprisonment, as well as the potential for civil litigation brought by the California Department of Justice or by an individual in a private suit.

A group of business associations, including the Chamber of Commerce of the United States of America, the California Chamber of Commerce, and the National Retail Federation, sued just weeks before AB 51 was to take effect. They argued AB 51 both conflicted with and undermined the objectives of the FAA. They promptly filed a motion for a preliminary injunction.

The district court granted the preliminary injunction, concluding that “AB 51 placed agreements to arbitrate on unequal footing with other contracts and also that AB 51 stood as an obstacle to the purposes and objectives of the [FAA].” The court therefore concluded that plaintiffs’ claim was likely to succeed and that the other relevant factors favored an injunction.

California appealed, and the Ninth Circuit recently issued its long-awaited decision. Judge Lucero, sitting by designation from the Tenth Circuit, wrote the 2-1 majority opinion (joined by Judge Fletcher). In reversing the district court’s analysis as to the substance of AB 51 but affirming as to the penalty provisions, the majority opinion walks a fine line.

The key distinction, in the majority’s view, is that the substance of AB 51 (embodied in California Labor Code §432.6) prohibits only nonconsensual agreements and regulates only pre-agreement conduct. As the majority put it, AB 51 was enacted “to assure that entry into an arbitration agreement by an employer and employee is mutually consensual and to declare that compelling an unwilling party to arbitrate is an unfair labor practice.” It thus regulates the parties’ pre-agreement behavior to prevent nonconsensual waiver of rights by the employee; it does not provide grounds for invalidating an executed agreement.

The majority concluded that the FAA, in turn, was intended only to ensure that consensual and executed arbitration agreements would be enforced. Section 432.6, in this view, does not directly conflict with the FAA. Indeed, AB 51 itself provides that “[n]othing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.” Thus, it is not impossible to comply with both laws.

Nor does AB 51 stand “as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” As the majority would have it, the FAA was focused solely on ensuring the validity and enforceability of executed, consensual agreements to arbitrate. Because the substance of AB 51 “in no way affects the validity and enforceability of such agreements,” it poses no obstacle to the FAA.

But the penalties are another matter, acknowledged the majority. The critical difference here is that the sanctions do not relate solely to pre-agreement conduct. Rather, they “necessarily include punishing employers for entering into an agreement to arbitrate.” And “[a]n arbitration agreement cannot simultaneously be ‘valid’ under federal law and grounds for a criminal conviction under state law.” The penalties (Labor Code §433) and the civil liability provision (Government Code §12953) thus “stand as an obstacle to the ‘liberal federal policy favoring arbitration agreements.’” They are therefore preempted “to the extent that they apply to executed arbitration agreements covered by the FAA.”

Judge Ikuta penned a lively dissent. “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.” In her view, AB 51 is a “blatant attack on arbitration agreements,” and in allowing it to take effect, the “majority abets California’s attempt to evade the FAA and Supreme Court’s caselaw.”

The dissent has no trouble concluding that AB 51 “obstructs the purpose of the FAA.” Its history reveals it to be the culmination of a many-year effort to prevent employers from requiring agreements to arbitrate. The decision to penalize formation of arbitration agreements while permitting their enforcement was an effort “to sidestep the preemption issue.”

As Judge Ikuta puts it, “the question is, does this too-clever-by-half workaround actually escape preemption?” Clearly not, she concludes.

“[T]he Supreme Court has made it clear that the FAA preempts this type of workaround, which is but the latest of the ‘great variety of devices and formulas’ disfavoring arbitration.” In particular, the Supreme Court’s decision in Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S. Ct. 1421 (2017), forecloses the argument that a state may sidestep FAA preemption by regulating contract formation rather than enforceability. In Kindred, the court considered Kentucky’s “clear-statement” rule, under which “an agent could deprive her principal of an ‘adjudication by judge or jury’ only if the power of attorney ‘expressly so provide[d].’” In arguing that the rule was not preempted by the FAA, respondents asserted that the rule affected only the formation of the contract, not its enforceability. The Supreme Court rejected that argument, concluding that the FAA “cares not only about the ‘enforce[ment]’ of arbitration agreements, but also about their initial ‘valid[ity]’—that is, about what it takes to enter into them.”

In the dissent’s view, the majority’s decision also conflicts with decisions from the First and Fourth Circuits, which have “prevented state efforts like California’s that attempted to sidestep the FAA while disfavoring arbitration.” Accordingly, “the majority silently creates a circuit split that will require en banc review or Supreme Court intervention to resolve[.]”

Thus, although the Ninth Circuit ruling resolves the appeal, it nonetheless leaves California law in limbo. The practical effect of the majority opinion is unclear, and the ultimate fate of that ruling is itself uncertain.

The court vacated the district court’s preliminary injunction. AB 51 is thus in effect, and it applies to employers as to arbitration agreements entered into, modified, or extended on or after Jan. 1, 2020. The sanctions provisions, however, have been struck down in certain applications, but it remains to be seen precisely how that will play out in practice.

And the fate of the Ninth Circuit’s ruling remains to be decided. As Judge Ikuta points out, the ruling creates a circuit split and is arguably in tension with recent Supreme Court caselaw. The Chamber of Commerce has now filed a petition for rehearing en banc that echoes those concerns. Given the important interests at stake and tension across jurisdictions, this case is likely far from over.

Reprinted with permission from the October 28 issue date of the “New York Law Journal” © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or

Posted in: Employment Law

Tags: Arbitration

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