Any time of year, you can find a battle in California about the enforceability of arbitration agreements. California Assembly Bill 51, which was enacted in late 2019, attempted to regulate or limit arbitration in the workplace, but AB 51 did not go so far as to invalidate arbitration agreements. The FAA would easily preempt such a law. In fact, AB 51 explicitly states that nothing in the act is intended to invalidate an arbitration agreement enforceable under the FAA. Instead, AB 51 imposes civil and criminal penalties on employers who threaten, retaliate, discriminate against, or terminate an applicant or employee who refuses to sign an arbitration agreement. (AB 51 sort of reminds me of the Hotel California – “You can check-out any time you like, but you can never leave!” – you can enter into arbitration agreements, which are still valid, at any time you like, but you may not leave jail for possibly six months – “We are all just prisoners here, of our own device.”)
Earlier this week, the Ninth Circuit addressed arguments that the FAA preempts AB 51. Chamber of Commerce v. Bonta, No. 20-15291 (9th Cir. Sept. 15, 2021) (click here for a copy of the decision). In a 2-to-1 decision, the Ninth Circuit reasoned that AB 51 can co-exist with the FAA since AB 51 does not invalidate an arbitration agreement, and instead, AB 51 focuses on pre-contractual activity and helps encourage meaningful consent. Thus, under one preemption framework, which examines whether a state law singles out and invalidates arbitration agreements, AB 51 is valid. According to the court, AB 51’s “regulation of pre-agreement employer behavior . . . does not afoul of the FAA.” However, the court found that imposing civil and criminal penalties for entering into an arbitration agreement does directly conflict with the FAA. Thus, the FAA preempts the imposition of such penalties to the extent they apply to “executed arbitration agreements.”
Note that this preemption holding is limited, and there still seems to be room for the imposition of penalties as long as a worker does not execute an arbitration agreement. Thus, the potential for criminal penalties may still chill California employers from forcing workers to sign arbitration agreements. (“What a nice surprise!,” to quote the Eagles again.)
AB 51 is consistent with the original intent of the FAA. The FAA was never intended to apply to any workplace disputes to begin with, and the FAA was never intended to apply to take-it-or-leave-it agreements. But those ships have long sailed. (“We haven’t had that spirit here since [nineteen eighty-four],” when the Supreme Court arguably began transforming the FAA.) Under modern Supreme Court FAA preemption doctrines, the Supreme Court would likely hold that the FAA preempts AB 51. The Supreme Court’s preemption language in AT&T v. Concepcion is so broad as to cover any state law that has a “disproportionate impact” on arbitration, or is applied in a manner that “disfavors arbitration.” The scope of the FAA’s preemption doctrine has grown to be so expansive (and somewhat vague) that if the Supreme Court wants to, there is “plenty of room at the Hotel California” for the FAA to preempt AB 51 as applied to any arbitration context, including pre-contractual negotiations regarding an arbitration agreement.
In sum, under the 9th Circuit’s decision, AB 51 for the time being continues “to livin’ it up at the Hotel California, . . . such a lovely place” (sorry, I’m an Eagles fan!), until the Supreme Court possibly hears this case and finds preemption.