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Tilting at Windmills: 9th Circuit’s Futile Foray Against the FAA

October 23, 2021 by in "Two Minute Takeaway"

On September 15, 2021, a divided panel of the 9th Circuit reversed the District Court and upheld much of California’s ban on compulsory employment arbitration.  See Chamber of Commerce v. Bonta.  The decision is a great read if you want a primer on either (1) FAA preemption or (2) increasingly desperate attempts by progressive states and courts to avoid what they regard as the injustice of private arbitration.

The Bonta decision flouts a tide of Supreme Court cases protecting the ability freely to enter enforceable arbitration agreements.  The iconoclastic decision will remind readers of the play Man of La Mancha.  The 9th Circuit panel here plays the role of sidekick Sancho Panza and California lawmakers star as Don Quixote: two wayward protagonists pursuing a futile quest on a fanciful battlefield.  But this production ends in a cliff-hanger: Who will reverse the Bonta decision and flunk the California law first??  A panel of the 9th Circuit on en banc review or the U.S. Supreme Court on direct appeal??

The California legislature started this quixotic adventure in 2018 when it passed what would become California Labor Code § 432.6.  Id. at 33.  The Statute was intended as a creative work-around (chorus: “…to dream the impossible dream…”) to thirty years of unfavorable Supreme Court decisions flunking state restraints on arbitration, including earlier California laws limiting arbitration.  Former Governor Jerry Brown vetoed a version of the Statute because it was likely preempted by the Federal Arbitration Act.  But Governor Gavin Newsome signaled he would take a more aggressive approach, the legislature then passed the bill again, and Governor Newsome signed the bill into law in 2019 (chorus: “…to right the unrightable wrong…”).  Id. at 34-35.

California designed § 432.6 to evade FAA preemption by focusing on pre-contract conduct.  Instead of invalidating executed arbitration agreements as prior laws had done, the Statute prohibits coercive conduct before arbitration agreements are entered, providing:

An employer shall not threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee because of the refusal to consent to the waiver of any right, forum, or procedure…including the right to file and pursue a civil action or a complaint with… any court or other governmental entity of any alleged violation.  § 432.6 (b). 

Consequently, § 432.6 regulates coercive pre-contract retaliation such as not hiring prospective employees who refuse to sign arbitration agreements.  To avoid preemption, the Statute emphasizes its deference to both executed arbitration agreements and the FAA, stating: “Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.”  § 432.6(f).

Preemption Analysis

The Bonta panel reviewed the two traditional components of FAA preemption: “impossibility” preemption and “obstacle” preemption.  Because § 432.6 focuses on pre-contract conduct, the Court blithely concluded there was neither “impossibility” nor “obstacle” preemption.  “California Labor Code § 432.6 neither conflicts with the language of § 2 of the FAA nor creates a contract defense by which executed arbitration agreements may be invalidated or not enforced. Under the ‘impossibility’ preemption framework, § 432.6 is not preempted by the FAA.”  Id. at 22.  Similarly, “in light of Congress’ clear purpose to ensure the validity and enforcement of consensual arbitration agreements according to their terms, it is difficult to see how § 432.6, which in no way affects the validity and enforceability of such agreements, could stand as an obstacle to the FAA.”  Id. at 25.

Partial Preemption

However, the Court concluded that a portion of the Statute was preempted by the FAA.  The Statute’s sanctions against employers who enter arbitration agreements (as opposed to employers who retaliate against prospective employees who refuse to enter arbitration agreements) are preempted.  The Court reasoned, the Statute “may not impose civil or criminal sanctions on individuals or entities for the act of executing an arbitration agreement. Therefore, we hold that Government Code § 12953 and Labor Code § 433 are preempted to the extent that they apply to executed arbitration agreements covered by the FAA” (emphasis added).  Id. at 28-29.  The Statue, however, apparently remains enforceable when no arbitration agreement is entered, for example, when employers retaliate by not hiring employees refusing to sign arbitration agreements.

The Dissent

Not surprisingly, the dissent in Bonta (by Hon. Sandra S. Ikuta) was compelling.  Judge Ikuta soundly criticized the majority’s facile conclusion that § 432.6 is neutral towards arbitration merely because it focuses on pre-contract conduct.  Rather, the Statute reflects the “hostility to arbitration” that is the hallmark of FAA preemption.  Id. at 36.

For example, the Statute significantly stigmatizes arbitration provisions, and only arbitration provisions.  Employers may permissibly terminate employment negotiations with prospective employees who do not agree to a myriad of typical employment terms, such the proposed rate of pay, the proposed job responsibilities, the amount of benefits, the defined hours, etc.  By contrast, employers terminating employment negotiations because prospective employees do not agree to arbitration provisions face potential charges of retaliation under the Statute.  Id. at 44-45.  The Statute therefore reflects a fundmaental hostility to arbitration provisions. 

The majority decision in Bonta ignored these obvious means by which the Statute discriminates against arbitration provisions.  We can therefore expect that an en banc panel of the 9th Circuit or the Supreme Court will soon reverse this decision.  The 9th Circuit’s Bonta decision and California Labor Code § 432.6 — like Sancho Panza and Don Quijote — likely will soon ride off into the sunset beaten but unbowed to wage similar fights another day.