A WLF-digested dissent from The Honorable Sandra S. Ikuta
U.S. Court of Appeals for the Ninth Circuit | No. 20-15291 | Decided September 15, 2021
Opinion Topic: Federal Arbitration Act preemption of state law
Judge Ikuta had no role in WLF’s selecting or editing this opinion for our Circulating Opinion feature. The full opinion is available HERE.
Introduction: A coalition of trade associations sued to enjoin enforcement of California Assembly Bill 51, which prohibits employers from requiring employees, as a condition of employment, to agree to arbitrate any disputes with their employer. The district court held that the plaintiffs would likely succeed on their claim that the Federal Arbitration Act (FAA) preempted AB 51. The Ninth Circuit reversed in part, vacated the lower court’s injunction, and remanded the case. The court reasons that the FAA does not preempt state laws that prohibit an employee’s acceptance of arbitration as a condition of employment. “The FAA took as a given,” the court writes, that “arbitration is a matter of contract and agreements to arbitrate must be voluntary.”
In her dissent, Judge Ikuta concludes that AB 51 obstructs the purpose of the FAA and upbraids the majority for “abet[ting] California’s attempt to evade the FAA and the Supreme Court’s caselaw.” Her opinion conducts an eye-opening tour through California’s repeated legal and legislative schemes to abolish arbitration and explains why the court’s decision conflicts with decisions of the Supreme Court and two other federal circuits that have considered an identical question.
IKUTA, Circuit Judge, dissenting:
Like a classic clown bop bag, no matter how many times California is smacked down for violating the Federal Arbitration Act (FAA), the state bounces back with even more creative methods to sidestep the FAA. 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. Cal. Lab. Code §§ 432.6(a)–(c), 433; Cal. Gov’t Code § 12953. And today the majority abets California’s attempt to evade the FAA and the Supreme Court’s caselaw by upholding this anti-arbitration law on the pretext that it bars only nonconsensual agreements. The majority’s ruling conflicts with the Supreme Court’s clear guidance in Kindred Nursing Centers Ltd. Partnership v. Clark, ––– U.S. ––––, 137 S. Ct. 1421 (2017), and creates a circuit split with the First and Fourth Circuits. Because AB 51 is a blatant attack on arbitration agreements, contrary to both the FAA and longstanding Supreme Court precedent, I dissent.|
By its terms, the FAA ensures that an arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The FAA preempts any state law that stands “as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Hines v. Davidowitz, 312 U.S. 52 (1941). The Supreme Court has long recognized the FAA’s broad purpose: it declares “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, 24 (1983), and embodies a “national policy favoring arbitration,” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 346 (2011) (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006)). 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. Perry v. Thomas, 482 U.S. 483, 492 n. 9 (1987). And even when a state law generally applies to a range of agreements, the FAA preempts the law if it “interferes with fundamental attributes of arbitration” and obstructs the purpose of the FAA. Concepcion, 563 U.S. at 344. As the Supreme Court has explained, “[a]lthough § 2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” Id. at 343.
AB 51 is just such a state law that obstructs the purpose of the FAA. The history of AB 51 reveals it was the culmination of a many-year effort by the California legislature to prevent employers from requiring an arbitration provision as a condition of employment. California has long known that the FAA preempted laws that made arbitration agreements unenforceable, because the Supreme Court has so often struck down its anti-arbitration legislation or judge-made rules. ***
In light of these rulings, the California legislature took a different approach to anti-arbitration legislation. In 2015, it passed Assembly Bill 465, which banned employers from requiring arbitration agreements as a condition of employment and rendered unenforceable any offending contract. Text of AB 465, 2015–16 Cal. Leg., Reg. Sess. (2015). *** California Governor Jerry Brown vetoed this bill on the ground that such a “blanket ban” had been “consistently struck down in other states as violating the Federal Arbitration Act” and noted that the California Supreme Court and United States Supreme Court had invalidated similar legislation. Governor’s Veto Message for AB 465, 2015–16 Cal. Leg., Reg. Sess. (2015). *** That same year, the Supreme Court overruled a California court’s interpretation of an arbitration agreement, because it did not place arbitration contracts “on equal footing with all other contracts.” DIRECTV, Inc. v. Imburgia, 577 U.S. 47, 58–59 (2015) (quoting Buckeye, 546 U.S. at 443). This decision was followed by yet another defeat of state anti-arbitration legislation when a California court held that the FAA preempted another California statute, which had made agreements to arbitrate certain state civil rights claims unenforceable. See Saheli v. White Mem’l Med. Ctr., 21 Cal. App. 5th 308, 323 (2018).
Undeterred, the state legislature tried again in 2018 and passed AB 3080, which prohibited an employer from requiring an employee to waive a judicial forum as a condition of employment. Text of AB 3080, 2017–18 Cal. Leg., Reg. Sess. (2018). Governor Brown exercised his veto power again, explaining that AB 3080 “plainly violates federal law.” Governor’s Veto Message for AB 3080, 2017–18 Cal. Leg., Reg. Sess. (2018). Governor Brown cited the “clear” direction from the United States Supreme Court in Imburgia, 136 S. Ct. at 468, and Kindred Nursing, 137 S. Ct. at 1428.
Twice-vetoed but still undeterred, the California Assembly introduced AB 51 in December 2018. This bill, now before us, took the same approach as the vetoed AB 3080: instead of barring enforcement of arbitration agreements offered as a condition of employment, it instead penalized the formation or attempted formation of such agreements. Text of AB 51, 2019–20 Cal. Leg., Reg. Sess. (2019); see also Cal. Lab. Code §§ 432.6(a)–(c), 433. While it prohibited an employer from requiring an applicant for employment to enter an arbitration agreement, it provided that an executed arbitration agreement was nevertheless enforceable. See Cal. Lab. Code § 432.6(a)–(b), (f). ***
California’s new governor, Gavin Newsom, signed the bill into law, even though AB 51 was identical in many respects to vetoed AB 3080. See id. at 9.
The California legislature developed AB 51 with the focused intent of opposing arbitration and sidestepping the FAA’s preemptive sweep by penalizing the formation, or attempted formation, of disfavored arbitration agreements but not interfering with the enforcement of such agreements.
Specifically, under Section 432.6 of the California Labor Code, an employer “shall not, as a condition of employment … require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of the California Fair Employment and Housing Act [(FEHA)]” or the California Labor Code, “including the right to file and pursue a civil action or a complaint with … any court.” Cal. Lab. Code § 432.6(a). Thus, employers may not require employees to sign a standard employment contract that includes an arbitration provision, even if the contract includes a voluntary opt-out clause. See Cal. Lab. Code § 432.6(c). Moreover, an employer cannot refuse to hire a prospective employee who declines to enter into an arbitration agreement or otherwise “threaten, retaliate or discriminate against” such an employee. Cal. Lab. Code § 432.6(b). Violating Section 432.6 amounts to an “unlawful employment practice” for which aggrieved employees and the state may bring civil suits against employers. See Cal. Gov’t Code §§ 12953, 12960. Violating Section 432.6 also constitutes a criminal offense. See Cal. Lab. Code § 433. Should the employee sign such an employment contract, however, the arbitration agreement it contains is perfectly enforceable because Section 432.6(f) provides that “[n]othing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.” Cal. Lab. Code § 432.6(f).
In short, AB 51 criminalizes offering employees an agreement to arbitrate, even though the arbitration provision itself is lawful and enforceable once the agreement is executed. The question is, does this too-clever-by-half workaround actually escape preemption? The majority says it does, but this is clearly wrong: under Supreme Court precedent, Section 432.6 is entirely preempted by the FAA.
Although the Supreme Court has not addressed California’s specific legislative gimmick—criminalizing contract formation if it includes an arbitration provision—this is not surprising, given that California designed the gimmick to sidestep any existing Supreme Court precedents. But even so, the Supreme Court has made it clear that the FAA preempts this type of workaround, which is but the latest of the “great variety of devices and formulas” disfavoring arbitration. See Concepcion, 563 U.S. at 342 (cleaned up).
As a threshold matter, California’s circumvention exemplifies the exact sort of “ ‘hostility to arbitration’ that led Congress to enact the FAA.” Kindred Nursing, 137 S. Ct. at 1428 (quoting Concepcion, 563 U.S. at 339); see also Buckeye, 546 U.S. at 443. The Supreme Court has made clear that the FAA displaces not only state laws that discriminate on their face against arbitration, but also those that “covertly accomplish[ ] the same objective,” Kindred Nursing, 137 S. Ct. at 1426. Indeed, even if state laws are “generally applicable,” the FAA preempts them where “in practice they have a ‘disproportionate impact’ on arbitration.” Mortensen v. Bresnan Commc’ns, LLC, 722 F.3d 1151, 1159 (9th Cir. 2013) (quoting Concepcion, 563 U.S. at 341–342). AB 51 is the poster child for covertly discriminating against arbitration agreements and enacting a scheme that disproportionately burdens arbitration.
More specifically, Supreme Court precedent makes clear that the FAA preempts laws like AB 51 that burden the formation of arbitration agreements. Long ago, the Supreme Court held that the FAA preempted a Montana law making an arbitration clause unenforceable unless it had a specific type of notification on the first page of the contract. See Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996). In Casarotto, the state supreme court reasoned—much like California here—that this notice requirement did not “undermine the goals and policies of the FAA” because the “notice requirement did not preclude arbitration agreements altogether” but instead ensured that arbitration agreements had to be entered “knowingly.” Id. at 685 (quoting Casarotto v. Lombardi, 268 Mont. 369 (1994)). The Court rejected this reasoning. Id. at 688.
Kindred Nursing has now confirmed the rule that the FAA invalidates state laws that impede the formation of arbitration agreements. In Kindred Nursing, the Court struck down the Kentucky Supreme Court’s “clear-statement rule” which provided that a person holding a power of attorney for a family member could not enter into an arbitration agreement for that family member, unless the power of attorney gave the person express authority to do so. 137 S. Ct. at 1425–26. The Supreme Court held that this clear-statement rule—which imposed a burden only on contract formation—violated the FAA, because it “singles out arbitration agreements for disfavored treatment.” Id. at 1425. ***
Kindred Nursing’s holding that the FAA preempts rules that burden the formation of an arbitration agreement, see 137 S. Ct. at 1428–29, applies equally to AB 51, which is intentionally designed to burden and penalize an employer’s formation, or attempted formation, of an arbitration agreement with employees. See Cal. Lab. Code § 432.6(a)–(c); see also Cal. Lab. Code § 433; Cal. Gov’t Code § 12953. In upholding AB 51, which “specially impede[s] the ability of [employers] to enter into arbitration agreements” and “thus flout[s] the FAA’s command to place those agreements on an equal footing with all other contracts,” Kindred Nursing, 137 S. Ct. at 1429, the majority directly conflicts with the rule stated in Kindred Nursing.
In addition to conflicting with Kindred Nursing, the majority’s ruling today creates a split with two of our sister circuits. Long before Kindred Nursing reached its common-sense conclusion, our sister circuits prevented state efforts like California’s that attempted to sidestep the FAA while disfavoring arbitration. The First Circuit held that the FAA preempted Massachusetts regulations that prohibited securities firms from requiring clients to agree to arbitration “as a nonnegotiable condition precedent to account relationships.” Sec. Indus. Ass’n v. Connolly, 883 F.2d 1114, 1117, 1125 (1st Cir. 1989). Even if this regulation did not invalidate the arbitration agreements themselves, the First Circuit rejected as “too clever by half” the state’s attempt to regulate parties’ conduct instead of the parties’ agreements. Id. at 1122–23. *** Applying well-established preemption principles, Connolly reasoned that “[s]tate law need not clash head on with a federal enactment in order to be preempted.” Id. Connolly explained that the threatened loss of a business license for offering clients a standard agreement including an arbitration provision was “an obstacle of greater proportions even than the chance that, in a given dispute, an arbitration agreement might be declared void.” Id. at 1124. Thus, the regulations were preempted as “at odds with the policy which infuses the FAA.” Id.
The Fourth Circuit similarly held that the FAA preempted a Virginia law that made it unlawful for automobile manufacturers and distributors to fail to include a particular clause in franchise agreements. Saturn Distrib. Corp. v. Williams, 905 F.2d 719, 724 (4th Cir. 1990). That clause would provide that any contract provision that “denies access to the procedures, forums, or remedies” provided by state law “shall be deemed to be modified to conform to such laws or regulations.” Id. (quoting Va. Code Ann. § 46.1-550.5:27). As interpreted by the court, the statute forbade “only nonnegotiable arbitration provisions and not negotiable arbitration agreements.” Id. Analogizing to Connolly, the Fourth Circuit held that the statute conflicted with the FAA because it “essentially prohibited nonnegotiable arbitration agreements.” Id.
In sum, AB 51’s transparent effort to sidestep the FAA in order to disfavor arbitration agreements in employment contracts is meritless. By upholding this maneuver, the majority conflicts with Kindred Nursing, which held that the FAA invalidates state laws that impede the formation of arbitration agreements. 137 S. Ct. at 1425. 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. So we don’t need to wait until the next Supreme Court reversal to know that we must apply those principles here. The majority’s bifurcated, half-hearted, and circuit-splitting approach to invalidating AB 51 makes little sense, except to the extent it aims at abetting California in disfavoring arbitration. Because the appellants here have demonstrated a likelihood of success on the merits and the district court correctly determined that the remaining preliminary injunction factors supported injunctive relief, I would affirm the district court. I therefore dissent.