Federal Court Strikes Down AB 51

In 2019, Governor Newsom signed Assembly Bill 51 by then-Assemblywoman Lorena Gonzalez (D-San Diego) as Chapter 711. The bill added Government Code Section 12953 and Labor Code Section 432.6. The bill, as enacted, prohibited a person from requiring any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provision of the California Fair Employment and Housing Act (FEHA) or other specific statutes governing employment as a condition of employment, continued employment, or the receipt of any employment-related benefit.

In addition, AB 51 made violations of the prohibitions described above, relating to the waiver of rights, forums, or procedures, unlawful employment practices under FEHA. AB 51 has never gone into effect because the federal courts have precluded its implantation. After a federal district court judge declared AB 51 invalid, the 9^th Circuit Court of Appeals initially overturned the trial court, but later affirmed on a 2-1 decision.

AB 51 was enacted over the strong objections of the California business community, primarily based upon likely federal preemption. Governor Brown vetoed an earlier version (AB 3080), but Governor Newsom signed the bill the following year. The 9^th Circuit decision made clear that AB 51 was preempted by the Federal Arbitration Act (FAA), found at 9 US Code Sec 1.

According to the 9^th Circuit, this appeal raised 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. The court concluded, “We hold that such a rule is preempted by the FAA.”

The federal appeals court explained that the history and purpose of AB 51 must be understood in the context of California’s legislative efforts to impose limits on parties’ agreements to arbitrate certain disputes. The appeals court noted that the FAA embodies a “national policy favoring arbitration,” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006), 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 and judge-made rules relating to arbitration as preempted by the FAA.

The 9^th Circuit decision discussed legislative committee reports that incorrectly described AB 51 as not being preempted by the FAA/ “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. S. JUDICIARY COMM. REPORT, Reg. Sess., at 8 (Cal. 2019); see also ASSEMBLY COMM. ON LAB. & EMP. REPORT, Reg. Sess., at 3 (Cal. 2019) (same).

As the federal appeals court described, “In other words, the legislature was persuaded by the legal theory that the FAA did not preempt a state rule that inhibits the formation of an arbitration agreement, but does not render such an agreement unenforceable once executed.” However, the 9^th Circuit went on to explain why that characterization was not correct.

As explained by the federal appeals court, “the Supreme Court’s cases ‘place it beyond dispute that the FAA was designed to promote arbitration.’ Concepcion, 563 U.S. at 345. The Court has ‘repeatedly described the Act as ‘embod[ying] [a] national policy favoring arbitration,’ and ‘a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.’” Id.

In addition, the US Supreme Court’s line of cases have also “made clear that the FAA’s preemptive scope is not limited to state rules affecting the enforceability of arbitration agreements, but also extends to state rules that discriminate against the formation of arbitration agreements.” Kindred Nursing, 137 S. Ct. at 1428. The Court has recognized that it would be “trivially easy for States to undermine the Act—indeed, to wholly defeat it”—by fashioning a rule that would make the formation of any arbitration agreement invalid. Id. “The FAA would then mean nothing at all.”

In addition, the 9^th Circuit stated, “As the Supreme Court has indicated, if a state could criminalize the conduct of entering into an arbitration agreement, it could entirely defeat the FAA’s purpose. Kindred Nursing, 137 S. Ct. at 1428.” Therefore, the “FAA does not allow a state legislature to circumvent Congressional intent by enacting special rules to discourage or prohibit the formation of agreements to arbitrate.” Id.

Accordingly, “arbitration agreements may not be burdened with conditions on (their) formation and execution . . . which are not part of the generally applicable contract law.” As the federal appeals court explained, “We agree with our sister circuits that the FAA preempts a state rule that discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement. See Saturn, 905 F.2d at 723; Connolly, 883 F.2d at 1123–24. A law that “inhibit[s] a party’s willingness to create an arbitration contract” stands as an obstacle to the purposes of the FAA. Connolly, 883 F.2d at 1123.”

Thereafter, the federal appeals court stated, “The central question is whether AB 51 stands as an ‘unacceptable obstacle to the accomplishment and execution of the full purposes and objectives of Congress’ in enacting the FAA. Wyeth, 555 U.S. at 563–64. AB 51 does not expressly bar arbitration agreements. There is no doubt, though, that AB 51 disfavors the formation of agreements that have the essential terms of an arbitration agreement.”

In fact, the 9^th Circuit explained, “the burden imposed on the formation of arbitration agreements is severe. AB 51 deters an employer from including non-negotiable arbitration requirements in employment contracts by imposing civil and criminal sanctions on any employer who does so. It is clear that the penalties imposed by AB 51 inhibit an employer’s willingness to create an arbitration contract with employees.”

As a result, the federal appeals court ruled that, “AB 51’s deterrence of an employer’s willingness to enter into an arbitration agreement is antithetical to the FAA’s ‘liberal federal policy favoring arbitration agreements.’ 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 is therefore preempted.”