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California enacted Assembly Bill 51 (AB 51) in October 2019, to protect employees from what it called “forced arbitration” by making it a criminal offense for an employer to require an existing employee or an applicant for employment to consent to arbitrate specified claims as a condition of employment.

But AB 51 criminalizes only contract formation; an arbitration agreement executed in violation of this law is enforceable. California took this approach to avoid conflict with Supreme Court precedent, which holds that a state rule that discriminates against arbitration is preempted by the Federal Arbitration Act (FAA).

The Federal Arbitration Act (FAA)  embodies a “national policy favoring arbitration,” and the Supreme Court has interpreted its scope broadly, see Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 274 (1995). Over the years, the Supreme Court has struck down a number of California laws or judge-made rules relating to arbitration as preempted by the FAA.

Mindful of this history, the California legislature engaged in a prolonged effort to craft legislation that would prevent employers from requiring employees to enter into arbitration agreements as a condition of employment, while avoiding conflict with the FAA.

Governor Brown vetoed Assembly Bill 465 in 2015 on the ground that such a “blanket ban” had been consistently struck down in other states as violating the Federal Arbitration Act.” Three years later, the state legislature passed AB 3080 and Governor Brown exercised his veto power again, explaining that AB 3080 “plainly violates federal law.”

After Governor Brown left office, the California Assembly tried again, introducing AB 51 in December 2018. AB 51 added Section 432.6 to Article 3 of the California Labor Code. Section 432.6(a) prohibits employers from requiring employees to waive, as a condition of employment, the right to litigate certain claims. California’s new governor, Gavin Newsom, signed the bill into law, even though AB 51 was identical in many respects to the vetoed AB 3080. (Cal. Lab. Code §§ 432.6(a)-(c), 433; Cal. Gov’t Code § 12953)

The California Senate Judiciary Committee report on AB 51 asserted that AB 51 “successfully navigates around” Supreme Court precedent and avoids preemption by applying only to the condition in which an arbitration agreement is made, as opposed to banning arbitration itself.

However, the 9th Circuit Court of Appeals in the published case of Chamber of Commerce v Bonta -20-15291 (February 2023) disagreed with the Judiciary Committee. The panel held that AB 51’s penalty-based scheme to inhibit arbitration agreements before they are formed violates the “equal-treatment principle” inherent in the Federal Arbitration Act and is the type of device or formula evincing hostility towards arbitration that the FAA was enacted to overcome.

On December 9, 2019, a collection of trade associations and business groups filed a complaint for declaratory and injunctive relief against various California officials. The Chamber of Commerce sought a declaration that AB 51 was preempted by the FAA, a permanent injunction prohibiting California officials from enforcing AB 51, and a temporary restraining order. The district court granted the motion for a temporary restraining order, and after a hearing, issued a minute order granting the motion for a preliminary injunction.

This appeal raises the question whether the FAA preempts a state rule that discriminates against the formation of an arbitration agreement, even if that agreement is ultimately enforceable.

On September 15, 2021, the 9th Circuit published an opinion in this same case concluding that it was not preempted by the FAA, and reversed the district court. In the 2021 decision U.S. Circuit Judge Sandra Segal Ikuta, wrote a dissenting opinion. She commenced her dissent by claiming “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.”

However, the 9th U.S. Circuit Court of Appeals made an unusual move on Aug. 22, 2022, deciding to rehear this case. “The opinion and dissent filed on September 15, 2021, Dkt. 38, are withdrawn, and the case is resubmitted. The petition for rehearing en banc, Dkt. 41, is DENIED as moot.” After resubmission, the 9th Circuit reversed , and in the new February 15, 2023 opinion, concluded that AB 51 was indeed preempted by the FAA.

Because all provisions of AB 51 work together to burden the formation of arbitration agreements, the panel in the February 2023 decision rejected California’s argument that the court could sever Section 433 of the California Labor Code under the severability clause in Section 432.6(i), and then uphold the balance of AB 51.

It reasoned that “AB 51 provides no authority to delete Section 433, because the severability clause in Section 432.6(i) applies only to Section 432.6.” In any event, the panel could not presume that the California legislature would want to invalidate a generally applicable provision such as Section 433.

The 9th Circuit panel concluded in the February 2023 opinion that “the district court did not abuse its discretion when it granted the Chamber of Commerce’s motion for a preliminary injunction” with Circuit Judge Lucero dissenting.

It held that such a rule is preempted by the FAA. “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 was therefore preempted.”

U.S. Circuit Judge Carlos Lucero, sitting by designation from the Tenth Circuit, dissented and said the Supreme Court and the authors of the Federal Arbitration Act had always intended for arbitration clauses to be “voluntary and consensual.”

“My colleagues’ misinterpretation leaves state legislatures powerless to ensure that arbitration clauses in these employment agreements are freely and openly negotiated.”