Court Will Rehear Case on California Arbitration Agreements

​The 9th U.S. Circuit Court of Appeals made an unusual move on Aug. 22, deciding to rehear a case dealing with arbitration agreements in California called U.S. Chamber of Commerce v. Bonta.

In that decision, the court upheld a California law, AB 51, which prohibited employers from requiring workers to sign arbitration agreements. Judge William Fletcher and Judge Sandra Ikuta voted to withdraw the decision and rehear the case, while Judge Carlos Lucero voted against rehearing.

"I think it's pretty unusual" to rehear a case, said Gary McLaughlin, an attorney with Mitchell Silberberg & Knupp in Los Angeles.

"If [one judge] were to flip, then you'd have a majority opinion going the other way," he added. "It's possible they could come to the same conclusion they did before. It seems unlikely that they would rehear the case and come to the same conclusion. It's likely going to shift in some way. It's unclear to what extent. We just have to wait and see."

It's uncertain when the new opinion will be released. "We're in a state of limbo," said Adam Karr, an attorney with O'Melveny & Myers in Los Angeles. "We're cautiously optimistic that this is good news from the employer's perspective. The original opinion from an employer's perspective was not particularly favorable, and Judge Ikuta stated the view very clearly as to why this [state] law was pre-empted by the Federal Arbitration Act (FAA)."

As things stand now, California employers can still mandate arbitration agreements with their employees. Under the FAA, courts must still enforce signed arbitration agreements.

"At this point, enforcement of AB 51 remains stayed," said Jack S. Sholkoff, an attorney with Ogletree Deakins in Los Angeles. "This creates continuing uncertainty for employers. The decision to rehear the challenge should not cause employers to change their present practices with regard to arbitration agreements."

"Presumably, employers now can continue to require employees to sign arbitration agreements as a condition of employment until there's a new decision by the 9th Circuit that says otherwise," McLaughlin said. "It seems to provide a safe harbor for employers for the time being to continue" that practice.

"As one of the latest attempts to stop the statutory outlawing of employment arbitration in California, this is a very hot case with potentially far-reaching impacts for companies," noted Antwoin Wall, an attorney with Pearlman, Brown & Wax in Los Angeles.

Background

It's fairly common for employers to ask workers to sign an arbitration agreement as a condition of employment. Employees waive their right to a judicial forum and agree to bring any legal claims in arbitration, which is a private and confidential proceeding, unlike public court proceedings.

In 2019, the California Legislature passed AB 51. Business groups led by the U.S. Chamber of Commerce filed a lawsuit seeking to block AB 51 from taking effect. 

In 2021, the 9th Circuit ruled that the FAA does not pre-empt the state law. "Congress was focused on the enforcement and validity of consensual written agreements to arbitrate and did not intend to pre-empt state laws requiring that agreements to arbitrate be voluntary," the court stated.

However, the court confirmed that the civil and criminal penalties associated with AB 51 were pre-empted.

On June 15, the U.S. Supreme Court clarified that companies can compel arbitration of an employee's individual claims regarding labor code violations. In its ruling on Viking River Cruises v. Moriana, the Supreme Court pre-empted a California rule that allowed workers to go to trial with their claims under California's Labor Code Private Attorneys General Act of 2004 (PAGA). In PAGA claims, individuals can sue a former employer as an agent or proxy of the state. They can bring representative claims, or nonindividual claims, which involve violations that happened to someone other than the plaintiffs.

The U.S. Supreme Court held that the FAA pre-empts the California Supreme Court's ruling in Iskanian v. CLS Transp., which invalidated contracts that waive an individual's right to file lawsuits alleging PAGA claims.

Because of the U.S. Supreme Court's decision, the 9th Circuit determined it should rehear U.S. Chamber of Commerce v. Bonta.

"The Supreme Court's decision in Viking River Cruises, because of its continuing support for arbitration, may make it more likely that the 9th Circuit will decided that AB 51 is pre-empted by the FAA," Sholkoff said.

As we wait for a final decision, "now's a really good time for employers to take a fresh look at their arbitration agreements to see if they should be updated," McLaughlin recommended.