CHAMBER OF COMMERCE OF THE US, ET AL V. ROB BONTA, ET AL, No. 20-15291 (9th Cir. 2023)
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The appeal raised the question of whether the Federal Arbitration Act (FAA) preempts a state rule that discriminates against the formation of an arbitration agreement, even if that agreement is ultimately enforceable.
The Ninth Circuit affirmed the district court’s grant of a preliminary injunction in favor of Plaintiffs, a collection of trade associations and business groups (collectively, the Chamber of Commerce); the panel held that the FAA preempted AB 51, which was enacted to protect employees from “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. 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 FAA and is the type of device or formula evincing hostility towards arbitration that the FAA was enacted to overcome. 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. Because all provisions of AB 51 work together to burden the formation of arbitration agreements, the panel 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.
Court Description: Civil Rights Affirming the district court’s grant of a preliminary injunction in favor of plaintiffs, a collection of trade association and business groups (collectively, the Chamber of Commerce), the panel held that the Federal Arbitration Act (FAA) preempted California’s Assembly Bill 51 (AB 51), which was enacted to protect employees from “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. The panel explained that Assembly Bill 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. Under Section 433 of the California Labor Code, an employer who violates AB 51 has committed a misdemeanor. See CAL. LAB. CODE § 433. But to avoid preemption by the FAA, the California legislature included a provision ensuring that if the parties did enter into an arbitration agreement, it would be enforceable. See Cal. Lab. Code § 432.6(f). This resulted in the oddity that an employer subject to criminal prosecution for requiring an 4 CHAMBER OF COMMERCE V. BONTA employee to enter into an arbitration agreement could nevertheless enforce that agreement once it was executed. The panel stated that Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 683 (1996), and Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421 (2017), make it clear that state rules that burden the formation of arbitration agreements stand as an obstacle to the FAA. Although the plaintiffs in Casarotto and Kindred Nursing were attempting to enforce an executed arbitration agreement, the Court’s rationale for invalidating state rules burdening the formation of arbitration agreements was equally applicable to a state rule like AB 51, which discriminates against the formation of an arbitration agreement but does not make an improperly formed arbitration agreement unenforceable. The panel concluded that the approach adopted by the Supreme Court in Casarotto and Kindred Nursing for determining whether the FAA preempts a state rule limiting the ability of parties to form arbitration agreements applies to state rules that prevent parties from entering into arbitration agreements in the first place. The panel further agreed with two 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 Distrib. Corp. v. Williams, 905 F.2d 719, 723 (4th Cir. 1990); Sec. Indus. Ass’n v. Connolly, 883 F.2d 1114, 1123–24 (1st Cir. 1989). Applying these principles to determine whether AB 51 was preempted by the FAA, 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 FAA and is the type of device or formula evincing hostility towards arbitration that the FAA was enacted to overcome. Because the FAA’s purpose is to CHAMBER OF COMMERCE V. BONTA 5 further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 was therefore preempted. Because all provisions of AB 51 work together to burden the formation of arbitration agreements, the panel 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. 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. Because AB 51 was preempted by the FAA, the district court correctly held that the Chamber of Commerce was likely to succeed on the merits of its claim for declaratory and injunctive relief. And because California did not challenge the district court’s holding that the remaining factors also weighed in favor of the Chamber of Commerce, the panel held that the district court did not abuse its discretion when it granted the Chamber of Commerce’s motion for a preliminary injunction. Dissenting, Judge Lucero stated that the majority nullified a California law codifying what the enactors of the FAA and the Supreme Court took as a given: arbitration is a matter of contract and agreements to arbitrate must be voluntary and consensual. Judge Lucero stated that AB 51 operates in a substantively different manner than state rules previously struck down as preempted by the FAA. Unlike the state statutes in Kindred Nursing and Casarotto, which directly invalidated arbitration agreements, AB 51 regulates conduct preceding arbitration agreements. AB 51 ensures 6 CHAMBER OF COMMERCE V. BONTA that arbitration agreements are entered on fair terms yet does not go so far as to invalidate arbitration agreements that are not. The majority’s application of Kindred Nursing and Casarotto to AB 51 improperly expanded prior jurisprudence.
This opinion or order relates to an opinion or order originally issued on September 15, 2021.
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