By Kevin A. Adams & Keian Vahedy
On September 15, 2021, the United States Court of Appeals for the Ninth Circuit – in a hotly contested 2-1 decision – reversed, in part, a district court’s finding that the California legislature’s newest attack on employers’ use of arbitration agreements with employees was preempted by the Federal Arbitration Act (FAA).
The underlying law – California Assembly Bill 51 (codified at Labor Code §§ 432.6 and 433, and Government Code § 12953) – makes it a crime for employers to require arbitration provisions in employment contracts. The law was signed by Governor Gavin Newsom on October 10, 2019, with an effective date of January 1, 2020. Two days before it went into effect, a litany of pro-business groups – including the U.S. Chamber of Commerce, California Chamber of Commerce, and National Retail Federation, among others – obtained a temporary and, later, preliminary injunction from a California district court enjoining the enforcement of the law.
The district court found that the new law placed agreements to arbitrate on unequal footing with other contracts and stood as an obstacle to the purposes and objectives of the FAA. According to the district court, this resulted in the FAA’s preemption of the new anti-arbitration law.
On appeal to the Ninth Circuit, the California Attorney General argued that the new law was not preempted by the federal law because the FAA only covers post-contract formation, and the new California law expressly covers only pre-contract formation.
Ninth Circuit Judges Carlos F. Lucero (sitting by designation from the Tenth Circuit) and William A. Fletcher wrote the majority opinion.
The court first addressed the portion of the new California law codified at Labor Code § 432.6. This provides that California employers can be liable for including an agreement to arbitrate “as a condition of employment, continued employment, the receipt of any employment-related benefit, or as a condition of entering into a contractual agreement” with any applicant for employment or current employee. The court found that “it is not ‘impossible’ for § 432.6 and the FAA to coexist” as the law neither conflicts with the FAA nor creates a defense by which executed arbitration agreements may be invalidated or not enforced. The new law “does not make invalid or unenforceable any agreement to arbitrate, even if such agreement is consummated in violation of the statute.” Without this conflict, there is no FAA preemption.
On the other hand, the court found that the changes to the law reflected in Labor Code § 433 and Government Code § 12953 – imposing civil and criminal sanctions for the act of executing an arbitration agreement – directly conflicted with the FAA and are preempted by it.
Stated differently, the court upheld the California anti-arbitration law so long as the agreement to arbitrate had not been signed by the employee. Under this scenario, the pre-contractual dealings of the parties were ƒin conflict with the FAA (applicable to only enforceable agreements). However, to the extent the sanctions imposed by Labor Code § 433 and Government Code § 12953 applied after arbitration agreements had been executed, the court found those laws were preempted by the FAA.
The majority’s opinion is difficult to swallow as, to some degree, it rewards employers that get the arbitration agreement signed with FAA immunity, and punishes, with civil and criminal sanctions, those employers that do not.
As highlighted in the colorful dissent by Judge Sandra S. Ikuta, the majority’s ruling leads to an absurd result. According to Judge Ikuta, the majority’s decision “abets” California’s newest attempt to obstruct the purpose of the FAA. “Like a classic pop bag, no matter how many times California is smacked down for violating the [FAA], the state bounces back with even more creative methods to sidestep the FAA.” Even with its creativity, this newest attempt by California continues to have “a disproportionate impact on arbitration agreements by making it a crime for employers to require arbitration provisions in employment contracts.” Judge Ikuta found this to be both contrary to the FAA and longstanding Supreme Court precedent.
Judge Ikuta’s arguments are sound and, in this author’s view, should lead to an en banc review by the full circuit. For the time being, however, this anti-arbitration law is in play and exposes employers to both criminal and civil penalties for using arbitration agreements with employees.
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This article was prepared by Kevin A. Adams (email@example.com) and Keian Vahedy (firstname.lastname@example.org) of Mortenson Taggart LLP. Mortenson Taggart LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of employment, trademark, trade secret, unfair competition, franchise, and distribution laws.
Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.