State ban on mandatory arbitration not preempted, split panel says

A California law barring mandatory arbitration clauses is not preempted by the Federal Arbitration Act, a 9th U.S. Circuit Court of Appeals panel ruled Wednesday.

The panel vacated a preliminary injunction blocking AB 51 granted by Chief U.S. District Judge Kimberly J. Mueller of the Eastern District of California.

Daryl Joseffer, senior vice president and chief counsel of the U.S. Chamber of Commerce, which is challenging the 2019 state law, said in a statement the business group will "pursue further review of this flawed decision."

Legal observers on both sides expect the case to ultimately be decided on appeal.

"I would expect this [case] will be in the U.S. Supreme Court in short order," said Damien P. DeLaney, a partner with Akerman LLP who represents employers but is not involved in this case. Chamber of Commerce of the United States of America v. Bonta, 2021 DJDAR 9599 (9th Cir., filed Feb. 24, 2020).

Judge Carlos F. Lucero of the 10th U.S. Circuit Court of Appeals, an appointee of President Bill Clinton sitting by designation, concluded arbitration agreements must be "mutually consensual" and that "compelling an unwilling party to arbitrate is an unfair labor practice" under California law.

The decision affirms AB 51, which was signed into law by Gov. Gavin Newsom. Previous versions of the law had been vetoed by former Gov. Jerry Brown.

Lucero ruled the new Labor Code section "is not preempted by the FAA because it is solely concerned with pre-agreement employer behavior," but he struck down another provision that would impose civil or criminal penalties of up to six months because it runs afoul of the Federal Arbitration Act.

9th Circuit Judge Sandra S. Ikuta, an appointee of President George W. Bush, dissented. She wrote the state law was a "blatant attack" on federal arbitration law.

"This time, California has enacted AB 51, which has a disproportionate impact on arbitration agreements by making it a crime for employers to require arbitration provisions in employment contracts," she wrote.

"And today the majority abets California's attempt to evade the FAA and the Supreme Court's case law by upholding this anti-arbitration law on the pretext that it bars only nonconsensual agreements," Ikuta added.

The law is unusual, legal observers said, because it does not invalidate arbitration agreements that workers sign even though it bars the waiver of those rights as a condition of employment.

"If they go ahead and sign [an arbitration agreement], there is nothing in this [state] law that protects them," said Cliff M. Palefsky, an attorney with McGuinn Hillsman & Palefsky who wrote an amicus brief for the California Employment Lawyers Association.

Citing protections under the First, Fifth and Seventh amendments, Palefsky wrote in his brief that no law passed by Congress supersedes constitutional rights.

"Because the U.S. Constitution is the supreme law of the land, no statute, whether state or federal, even the Federal Arbitration Act ("FAA"), can be interpreted to contradict or prohibit the exercise of those fundamental constitutional guarantees," he wrote.

Ikuta criticized the majority, which included 9th Circuit Judge William A. Fletcher, a Clinton appointee, claiming it ignored both the federal arbitration act and a 2017 U.S. Supreme Court precedent. Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S. Ct. 1421, 1428-29 (2017).

"The majority also silently splits from our sister circuits, which have held that 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," she added.

Lucero, however, wrote that nothing in the federal law or Kindred Nursing preempts the rule outlined in California's statute.