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Ninth Circuit Grants Rehearing On California Law Banning Mandatory Employment Arbitration Agreements – Employment Litigation/ Tribunals



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The Ninth Circuit Court of Appeals panel that originally decided
Chamber of Commerce v. Bonta last fall recently issued an
order withdrawing its prior opinion and
granting a panel rehearing. The divided panel’s original
decision upheld portions of Assembly Bill 51 (“AB 51”), a
California law that prohibits employers from requiring that
employees sign an arbitration agreement as a condition of
employment. The panel’s decision to rehear the appeal is
notable because it suggests that the panel may rule that the
Federal Arbitration Act (“FAA”) preempts AB 51 in its
entirety following the U.S. Supreme Court’s recent decision in
Viking River Cruises, Inc. v.
Moriana
. The Supreme Court in Viking River
Cruises
held that California law precluding the division of
PAGA actions into individual and non-individual claims through an
agreement to arbitrate was preempted by the FAA.

Background

AB 51 applies to any arbitration agreement entered into or
modified on or after January 1, 2020, the date the law became
effective. Under AB 51, it is unlawful for employers to require
that employees or applicants sign an agreement to arbitrate claims
under the California Fair Employment and Housing Act
(“FEHA”) and/or the Labor Code as a condition of
employment, continued employment, or receipt of employment-related
benefits. Significantly, rather than invalidate the arbitration
agreement, AB 51 instead subjects an employer to civil and criminal
penalties.

Upon AB 51 taking effect in early 2020, the U.S. Chamber of
Commerce, among others, immediately sought to enjoin the law’s
enforcement. On January 31, 2020, the U.S. District Court for the
Eastern District of California granted the request for a
preliminary injunction, thereby enjoining enforcement of AB 51 on
arbitration agreements governed by the FAA. The basis for the
District Court’s ruling was that AB 51 (1) violates the FAA by
putting arbitration agreements on an unequal footing with other
contracts by specifically targeting arbitration agreements and
imposing a higher consent requirement on them; and (2) interferes
with the FAA’s goal of promoting arbitration by subjecting
employers who seek to enter into arbitration agreements to civil
and criminal penalties. The State of California appealed the
preliminary injunction to the Ninth Circuit.

Ninth Circuit’s Original Ruling

As discussed previously by this blog, a divided Ninth Circuit panel reversed
the District Court’s decision in part on the grounds that AB 51
is not entirely preempted by the FAA. The majority concluded that
because AB 51 addresses only “pre-agreement employer
behavior” (as opposed to the agreements themselves), the law
does not invalidate or render unenforceable arbitration agreements
covered by the FAA.” Therefore, the majority held that the FAA
preempts AB 51 only with respect to its provisions that impose
civil or criminal penalties on employers who execute arbitration
agreements governed by the FAA.

The majority’s decision was heavily criticized in the
dissent issued by Judge Sandra Ikuta. The dissent noted that U.S.
Supreme Court precedent clearly holds that the FAA invalidates
state laws that impede the formation of arbitration agreements.
Thus, despite California’s attempt to evade the FAA by focusing
on pre-agreement employer behavior, “too-clever-by-half
workarounds and covert efforts to block the formation of
arbitration agreements are preempted by the FAA just as much as
laws that block enforcement of such agreements.”

Decision on Request for Rehearing

The U.S. Chamber of Commerce (and others) immediately filed a
petition for rehearing en banc. In February 2022, the
original Ninth Circuit panel issued an order deferring
consideration of the rehearing petition until after the Supreme
Court’s decision in Viking River Cruises. On August
22, 2022, the panel issued an order withdrawing its prior opinion
and granting a panel rehearing. That order also was divided, with
Judges Ikuta and William Fletcher voting in favor of a rehearing
and Judge Carlos Lucero, sitting by designation from the Tenth
Circuit, voting against rehearing. The Ninth Circuit has yet to set
a date for the rehearing.

Main Takeaways

Judge Fletcher’s decision to withdraw the opinion he
previously supported suggests that he may now agree with Judge
Ikuta that AB 51 is preempted in its entirety by the FAA. With the
prior Ninth Circuit decision now withdrawn, the District
Court’s preliminary injunction enjoining enforcement of AB 51
remains in place pending the rehearing decision. Employers who
continue to require arbitration agreements as a condition of
employment, or who are considering rolling out arbitration
agreements following the Viking River Cruises decision,
should closely monitor the appeal and consult with experienced
employment counsel on how best to proceed.

This article is not an unequivocal statement of the law, but
instead offers some potential issues to consider with counsel. This
is provided for informational purposes only and does not constitute
legal advice and is not intended to form an attorney client
relationship. Please contact your Sheppard Mullin attorney contact
for additional information.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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