February 23, 2023
Chamber of Commerce of the United States of America v. Bonta
The Federal Arbitration Act (FAA) requires courts to enforce arbitration agreements according to their terms. However, California’s Legislature enacted Assembly Bill 51, which prohibits employers from requiring employees to waive, as a condition of employment, the right to litigate certain claims. The bill set two methods for enforcing this prohibition. First, the bill added a section to the Government Code making it an unlawful employment practice for an employer to violate this prohibition. Second, any person violating this prohibition would be guilty of a misdemeanor.
The Ninth Circuit held that the FAA preempted Assembly Bill 51.
The court acknowledged that, in an effort to avoid FAA preemption, the California Legislature had included a provision ensuring that if parties did enter into an arbitration agreement, it would remain enforceable. As a consequence, an employer subject to criminal prosecution for requiring an employee to enter into an arbitration agreement could nevertheless enforce that agreement once it was executed.
The court nonetheless held that the FAA preempted the bill because the bill’s penalty-based scheme to inhibit arbitration agreements before they are formed violated the “equal-treatment principle” inherent in the FAA and was the type of device or formula evincing hostility towards arbitration that the FAA was enacted to overcome. In arriving at this conclusion, the court determined that the FAA’s preemptive scope was not limited to state rules affecting the enforceability of arbitration agreements, but also extended to state rules discriminating against the formation of arbitration agreements.
Finally, the court decided that because all provisions of Assembly Bill 51 worked together to burden the formation of arbitration agreements, the FAA preempted the bill as a whole to the extent it applied to arbitration agreements. The court rejected the assertions that certain provisions of the bill could be severed to enforce the remaining balance of the bill.