California Again Attempts to Outlaw the Mandatory Arbitration of Employment Disputes

By William R. Hayden

California has a long history of animosity towards the arbitration, rather than litigation, of disputes arising in both the employment and consumer context.  The most recent effort by the California State Legislature to prevent employers from including arbitration provisions as a condition of employment is referred to as “AB 51.”  This current legislative effort, however, is merely the continuation of an ongoing effort by the California State Legislature to outlaw mandatory arbitration of employment disputes.

In 2015, the California State Legislature passed a bill banning employers from requiring arbitration agreements as a condition of employment and rendered unenforceable any such arbitration provision.  That attempted legislation was vetoed by the then California Governor, who correctly noted that such a ban on mandatory arbitration had been “consistently struck down in other states as violating the Federal Arbitration Act” (“FAA”). 

Undeterred, the California State Legislature again enacted a bill in 2018 that would have had the same effect of prohibiting the mandatory arbitration of employment disputes.  Again, the then California Governor vetoed the proposed legislation citing “clear” direction from the U.S. Supreme Court that such a ban on mandatory arbitration is impermissible pursuant to the FAA.

Twice vetoed but still undeterred, the California State Legislature enacted AB 51 to be effective January 1, 2020.  Taking a slightly different approach, AB 51 requires that to be enforceable, any employment arbitration provision must be voluntarily agreed to by each impacted employee, as opposed to being unilaterally implemented as a term and condition of employment by the employer.  Prior to the effective date of AB 51, numerous industry groups in California commenced an action in federal court seeking to enjoin the enforcement of AB 51.  The federal district court granted the requested injunction, finding that AB 51 is preempted by the FAA. 

On appeal to the Ninth Circuit, (Chamber of Commerce v. Bonta, No. 20-15291) (9^th Cir. 2021), in a split decision, the majority rationalizes its way to concluding that AB 51 is not really an attempt to prohibit the mandatory arbitration of employment disputes, which it obviously is.  The well-reasoned dissenting opinion traces the long history of the U.S. Supreme Court reversing such state anti-arbitration efforts, many arising in the state of California.  For example:

• The FAA preempts any state law that stands “as an obstacle to the accomplishment and execution of the full purposes and objectives” of the FAA. Hines v. Davidowitz, 312 U.S. 52 (1941).
• The Supreme Court has long recognized “a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary”.  Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983).
• Courts must place arbitration agreements on an equal footing with other contracts and cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.  The FAA preempts state law if it “interferes with fundamental attributes of arbitration and obstructs the purpose of the FAA”.  AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).
• Preston v. Ferrer, 552 U.S. 346 (2008) (holding that the FAA preempted a California law invalidating agreements to arbitrate a certain class of disputes).
• Perry v. Thomas, 482 U.S. 483 (1987) (holding that the FAA preempted a state statute permitting litigation of wage collection actions despite the existence of any private agreement to arbitrate.  “When faced with a principle of state law, whether of legislative or judicial origin, that burdens arbitration and that takes its meaning precisely from the fact that a contract to arbitrate is at issue, we must strike it down as preempted by the FAA”).
• DIRECTV, Inc. v. Imburgia, 577 U.S. 47 (2015) (overruling the California court’s refusal to enforce an arbitration provision contained in a unilaterally promulgated consumer contract because it prohibited class arbitration.)

As correctly noted by the dissenting opinion in Bonta:

Like a classic clown bop bag, no matter how many times California is smacked down for violating the FAA, the state bounces back with even more creative methods to side-step the FAA.  This time, California has enacted AB 51, which has a disproportionate impact on arbitration agreements….  AB 51 is a blatant attack on arbitration agreements, contrary to both the FAA and long-standing Supreme Court precedent….

The pending issue, therefore, is whether the majority opinion or the dissenting opinion in Bonta is correct.  This author predicts that the dissenting opinion will ultimately prevail either through an en banc reversal at the Ninth Circuit, or more likely through a reversal by the U.S. Supreme Court (again). 

Not only is AB 51 a thinly disguised, renewed effort by the California State Legislature to outlaw mandatory arbitration of employment disputes, but it also contravenes the well-established legal principle that employers are entitled to unilaterally establish terms and conditions of employment, absent a requirement that such terms be bargained through a certified labor organization, pursuant to the National Labor Relations Act.  Here, by requiring that California employers secure their workers’ agreement to this particular condition of employment, the California State Legislature is acting in the capacity of a labor organization.  Pursuant to AB 51, California employers can continue to unilaterally establish all other terms and conditions of employment, but not a term and condition of mandatory arbitration. Thus, AB 51 clearly violates the U.S. Supreme Court directive that arbitration provisions be put on an “equal footing” with all other similar terms.  See DIRECTV, Inc., supra.

Notwithstanding the obvious rationalization and rhetoric contained in the majority opinion in Bonta, AB 51 is nothing more, and nothing less, than another transparent attempt by the State of California to circumvent well-established law under the Federal Arbitration Act. For this reason, the majority opinion in Bonta should be reversed.