California Is in Good Company as State Arbitration Limits Fall

A federal circuit court’s rejection of California’s unusual take on banning mandatory workplace arbitration contracts adds to a streak of losses for state lawmakers trying to rein in employer use of arbitration and raises doubts about whether any such state policy could escape federal preemption.

A divided panel of the US Court of Appeals for the Ninth Circuit ruled against California’s 2019 law known as AB 51 on Feb. 15, finding it’s preempted by the Federal Arbitration Act and reversing the same panel’s prior ruling. State laws aiming to limit mandatory arbitration of workplace claims met similar fates in New Jersey, New York, and Washington state over the past five years.

“States are going to keep trying because that’s what I suppose the legislatures think is best,” said Shalom D. Stone, an attorney with Stone Conroy LLC in New Jersey who represented the business groups that challenged and defeated New Jersey’s ban. “They’re going to continue to have a tough time if courts perceive those laws to run counter to the Federal Arbitration Act.”

The Ninth Circuit decision follows a decades-long history of courts finding that federal law favors the use of arbitration and state legislatures’ efforts to limit its use generally aren’t allowed.

Illinois still has a law on the books limiting enforcement of mandatory arbitration for claims of workplace violations, but the Ninth Circuit decision reinforces the precedent that employers are likely to be safe in using properly written arbitration clauses, said Sonya Rosenberg, an employment lawyer at Neal, Gerber & Eisenberg LLP in Chicago.

“We’ve been seeing federal courts follow the same line of reasoning in these kinds of cases,” Rosenberg said. “Typically the determination is: If challenged, the FAA will prevail and will preempt.”

Action in Congress Limited

Businesses tend to prefer resolving claims against them via arbitration because they say it’s faster and cheaper than litigation, plus the process is kept out of the public view. Worker and consumer advocates counter that the widespread use of mandatory arbitration clauses deprives people of their rights to seek justice through the courts.

Inspired by the #MeToo movement, Congress took a rare step back from pro-arbitration federal policy in 2022, enacting a law to ban enforcement of contract provisions that mandate third-party arbitration of workplace sexual harassment or assault claims.

Congress has considered but didn’t enact broader restrictions on mandatory arbitration, such as the FAIR Act, which passed the US House in March 2022 but died without a vote in the Senate.

That’s “not for a lack of trying by the plaintiffs bar,” said Matt Webb, senior vice president of legal policy reform at the US Chamber of Commerce, which sued to block the California and New Jersey laws.

The Chamber tracked more than 60 bills in the 2021-22 session of Congress that included language aimed at limiting pre-dispute arbitration agreements, he said, although most of them were either defeated or had the arbitration portion removed.

“It’s become an article of faith for a number of members on the Hill that are close to the trial bar” to include anti-arbitration provisions in every bill they draft, Webb said.

States Keep Trying

In the near-absence of action by Congress, state lawmakers primarily in Democratic-majority legislatures continue to look for ways to limit mandatory arbitration.

A few states—including Maryland and Vermont—have banned mandatory arbitration in cases of workplace sexual harassment claims, similar to the federal law enacted last year.

New Jersey, New York, and Washington state had attempted to go further, restricting arbitration clauses for all forms of workplace discrimination claims, before federal courts found those laws to be preempted by the Federal Arbitration Act between 2019 and 2021.

California’s law took a slightly different approach that worker advocates had hoped might survive a legal challenge. Rather than declare mandatory arbitration clauses void and unenforceable in cases of workplace discrimination or harassment—as a few other states had tried—California banned employers from requiring job applicants or employees to sign the arbitration clauses.

Even that unique approach failed to win the Ninth Circuit’s approval on the court’s second hearing of the case.

“Because the FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 is therefore preempted,” the majority said in a split 2-1 decision.

In a prior 2021 ruling, the court had partly upheld the California law, but the panel of judges decided about a year later to reconsider it.

‘Still a Path’

Nonetheless, state legislatures have bills pending again this year that attempt to ban or limit mandatory arbitration for workplace disputes. Among them, a California bill (SB 365) would ensure litigation moves forward in trial court after a petition to compel arbitration is denied, even while an appeal of that denial is pending. In New York, state legislators are considering a measure (A683) to ban mandatory arbitration clauses in consumer and employment contracts, similar to the New York law that courts previously found to be preempted.

Another approach states are considering is to emulate California’s Private Attorney General Act, or PAGA, which lets workers sue their employer on behalf of the state to enforce certain employment laws. A Massachusetts bill (SD.1087) would target “wage theft” and other workplace violations through a similar public enforcement option.

A US Supreme Court ruling from 2022 limited the ways California workers can use PAGA to escape mandatory arbitration clauses, but the underlying case is still pending at the California Supreme Court and could preserve some of the law’s utility, said Shannon Liss-Riordan, a Boston employment lawyer who represents workers in suing businesses.

“There is still a path now for states to enact laws that will allow aggrieved employees to stand in the shoes of the states to enforce wage and hour laws,” she said.

But the most viable solution appears to still be federal legislation.

“The answer to this problem lies with Congress,” Liss-Riordan said. “The US Congress could reverse the Supreme Court’s draconian decisions over the last decade.”