FAA preempts California law criminalizing employment arbitration agreements

In a somewhat remarkable reversal Wednesday, the Ninth Circuit issued its highly anticipated opinion in Chamber of Commerce v. Bonta—holding that the Federal Arbitration Act (FAA) preempted California's law criminalizing the use of mandatory employee arbitration agreements. The decision came on the heels of the panel's surprising decision to withdraw its initial decision which arrived at the exact opposite conclusion.

The law, passed in 2020, was enacted to protect employees from "forced arbitration" by making it a criminal offense for an employer to require an existing employee or applicant to consent to arbitrate employment-related claims as a condition of employment. In its prior opinion (issued in 2021), the Ninth Circuit panel found that the FAA did not preempt California's law because it only criminalized contract formation; but allowed an arbitration agreement—even one violative of the law—to be enforced. In the wake of that decision, however, the US Supreme Court weighed in on another California law which prohibited arbitration of employment claims brought under the Private Attorney General Act (PAGA). In that case, Viking River Cruises, Inc. v. Moriana, the Supreme Court held that the law was preempted by the FAA. Given that decision, and the subsequent appeal from the US Chamber of Commerce for an en banc rehearing of this case, the Ninth Circuit made an about-face, withdrew its initial decision and granted a rehearing before the same panel.

Through Wednesday's opinion, the court reconciled the Ninth Circuit's approach with that set forth by its sister circuits and the US Supreme Court. Specifically, the court held that where a law limits the ability of parties to form arbitration agreements, as was the case here, it conflicts with the FAA and is therefore preempted by it.

The upshot of this ruling is straight forward—more California employers are likely to use mandatory binding arbitration to resolve employment disputes.

We expect that this decision will be appealed to either the entire Ninth Circuit en banc, the US Supreme Court or both. Meanwhile, the district court's injunction invalidating the law will remain in effect pending the outcome of those appeals.

If you have any questions concerning this decision and the current state of play for employment arbitration agreements, please reach out to Phillip Di Tullio.