California Law Limiting Arbitration Resurrected by Ninth Circuit (1)

Workers in California won’t be forced into arbitration as a condition of employment thanks to a federal appeals court ruling that revived a novel state law, threatening a common business practice and carving out a unique way to circumvent a federal law that controls these contracts.

A split U.S. Court of Appeals for the Ninth Circuit panel ruled Wednesday that the Federal Arbitration Act doesn’t preempt those portions of Assembly Bill 51 that prohibit employers from retaliating against workers who decline to sign arbitration pacts as a condition of employment.

The federal law also doesn’t nix sections that require workers to voluntarily consent to those agreements, the panel said, lifting a preliminary injunction against the law and remanding for further proceedings.

But civil sanctions and criminal penalties that would allow an employer to be incarcerated for up to 6 months for violating the law shouldn’t be enforced and would be preempted by the FAA, Circuit Judge Carlos Lucero wrote for the San Francisco-based court’s majority.

Arbitration has been targeted by state laws in recent years, particularly in the wake of the #MeToo movement, as workers’groups argue that the private dispute resolution process could prove a barrier to preventing harassment and discrimination.

Business advocates often tout private arbitration as a faster, cheaper alternative to court that benefits both worker and employer. But critics also say requiring vulnerable, low-wage workers to agree to binding, pre-dispute arbitration pacts prevents them from seeking justice for labor law violations.

Business groups have warned that if the California law proves resistant to FAA preemption, there could be implications on employment litigation in the country’s most populous state and determine whether other states will use it as a model to limit workplace arbitration.

Daryl Joseffer, senior vice president and chief counsel of the U.S. Chamber Litigation Center, called the ruling a “flawed decision” and said the group will review it further. The U.S. Chamber of Commerce and others had sued to block the law.

“The majority decision is clearly wrong, violates U.S. Supreme Court precedent, and runs contrary to decisions of many other courts,” Joseffer said in a statement.

‘Voluntary, Not Forced’

California lawmakers crafted the legislation at issue as the U.S. Supreme Court made it more difficult to regulate companies’ use of arbitration agreements. The law prohibits employers from forcing prospective and current employees to “waive any right, forum, or procedure” for a violation of the California Labor Code or its workplace anti-discrimination law.

California Labor Federation spokesman Steve Smith said the purpose of the law is “simply to make sure the decision to arbitrate is voluntary, not forced.”

“With this decision, workers now cannot be fired for refusing to sign a clause that invalidates their fundamental rights,” Smith said. “It’s hard to overstate the importance of that.”

The Chamber, along with six other industry groups, argued that the FAA preempts more than just state laws that say arbitration agreements are unenforceable.

“Research shows arbitration is more efficient and less costly for everyone. Workers and consumers win more money, more often and more quickly through arbitration than litigation. Expensive lawsuits can take years to resolve, and it can be nearly impossible to find a lawyer to take low-dollar claims,” the Chamber’s Joseffer said.

California countered that preemption shouldn’t even be considered because its law doesn’t fall under the umbrella of the FAA. The law doesn’t affect the enforcement of arbitration contracts, attorneys for the state said.

The Ninth Circuit judges bypassed a question about whether an employee may attempt to void an arbitration agreement that he was compelled to enter as a condition of employment on the basis that it wasn’t voluntary. The arbitration pact could be voided if a court were to find that the agreement wasn’t voluntary, but the court said the specific question wasn’t before them.

Dissenting, Circuit Judge Sandra Ikuta said the California Law has a disproportionate impact on arbitration agreements compared to other employment contracts, and the legislature was attempting to evade the FAA.

Judge William Fletcher joined Lucero in the majority.

Other States

Other states have attempted to limit arbitration in recent years, particularly related to sexual harassment, but often the laws were ineffective because of the power of the FAA.

At least 15 besides California proposed new laws related to arbitration in the wake of the #MeToo movement. Of those proposals, four measures meant to limit arbitration have been enacted, in states including New York, New Jersey, Vermont, and Maryland.

In New York, however, courts have ruled that the FAA should preempt any law that would limit arbitration. Attorneys there have said that Congress would need to change the law in order to overcome years of U.S. Supreme Court precedent that has bolstered the federal law.

Mandatory arbitration provisions are particularly widespread in California, where about two-thirds of private employers use them, compared with 54% nationwide, according to a 2018 study from the left-leaning Economic Policy Institute.

That high concentration is a consequence of companies reacting to the state’s protective employment laws, the study said. Arbitration agreements are often paired with clauses that waive a worker’s right to join class or collective actions.

Mayer Brown LLP represented the Chamber and business groups before the Ninth Circuit. The California Attorney General’s Office is defending the law. Attorneys didn’t immediately respond to requests for comment.

The case is U.S. Chamber of Commerce v. Bonta, 9th Cir., No. 20-15291, opinion 9/15/21.