Uncertain fate of AB 51 and PAGA arbitration prohibition

Judge William A. Fletcher, one of the judges in the original 2-1 panel majority upholding AB 51, switched sides on Appellant’s en bane rehearing petition and voted for a panel rehearing.

In a stunning act of backtracking, a panel of the Ninth Circuit Court of Appeals has vacated its earlier decision upholding the validity of California Assembly Bill 51 (AB 51) and its prohibition on employers requiring employees to arbitrate employment related disputes, throwing the future of the controversial statute into turmoil. Chamber of Com. of United States v. Bonta, 13 F.4th 766, 776 (9th Cir. 2021), reh’g granted, opinion withdrawn, 45 F.4th 1113 (9th Cir. 2022) (Bonta).

AB 51, signed into law in 2019 and scheduled to go into effect in 2020, is another attempt in California legislature’s long running effort to keep employers from requiring their employees to submit employment related disputes to arbitration. This effort has been thwarted time and again by, or based on, U.S. Supreme Court decisions. Shortly before its scheduled date of effect, a federal district court judge granted an injunction requested by the California Chamber of Commerce, precluding the law from taking effect. The court held that the law violated the Federal Arbitration Act (FAA) by failing to place arbitration agreements on equal footing as other contracts.

On appeal, the Ninth Circuit Court of Appeals reversed. In its 2-1 decision, the appeal panel in Bonita held that AB 51 did not violate the FM because it did not invalidate existing arbitration agreements, but rather only dealt with arbitration agreements at the pre­formation stage. The decision explained that AB 51 placed a pre-agreement condition, namely prohibition, on the waiver of California employment laws, but did not undermine validity or enforceability of arbitration agreements. In fact, AB 51 specifically recognized the validity and enforceability of executed arbitration agreements. While upholding the validity of the prohibition provision of AB 51, the Bonita panel struck down the portion penalizing employers for entering into arbitration agreements with their employees, as being in conflict with the FAA. As discussed below, AB 51 is likely to be struck down, either by the Ninth Circuit on the upcoming panel rehearing, on en-bane rehearing, or by the U.S. Supreme Court.

In upholding AB 51, the Ninth Circuit referenced a 2017 U.S. Supreme Court decision, Kindred Nursing Centers Ltd. P’ship v. Clark, 137 S. Ct. 1421 (2017) (Kindred Nursing), dealing with limitations or restrictions affecting contracts covered by the FAA, and found it to be distinguishable. In Kindred Nursing, the U.S. Supreme Court addressed a Kentucky state law which prohibited a person holding a power of attorney for a family member to enter into an arbitration agreement for that family member unless the power of attorney gave the person express authority to do so. The Supreme Court held that this law was inconsistent with the FAA because it did not place arbitration agreements on equal footing with other contracts, but rather singled out arbitration agreements for disfavored treatment.

The Bonita panel distinguished Kindred Nursing on the basis that it dealt with pre­agreement behavior to the extent that it invalidated already executed contracts. However, as noted by the Bonita dissent, Kindred Nursing faulted the Kentucky statute on that basis that impeded the ability of attorneys-in-fact to enter into arbitration agreements and thus ran afoul of FAA’s command to place those agreements on an equal footing with other contracts. Similarly, by forbidding California employers from entering into FAA. contracts with their existing or prospective employees, AB 51 also places an untenable restriction on such contracts that runs afoul of the FAA.

In response to the panel decision in Bonita, the U.S. Chamber of Commerce (appellant), petitioned the court of appeal for an en bane rehearing. The Ninth Circuit deferred ruling on the petition pending the U.S. Supreme Court’s decision in Viking River Cruises v. Mariana, 142 S. Ct. 1906, 1911-1:3 (2022) (“Viking”). The Viking decision was issued on June 15, 2022. However, instead of acting on the pending petition, the panel surprised everyone by voting to withdraw its prior opinion and granted a panel rehearing.

The panel’s deferment of its decision pending issuance of the Viking decision appears surprising at first glance since Viking does not deal directly with AB 51. Instead it addresses the intersection of the FAA and California’s Private Attorneys General Act, PAGA. Under PAGA an employee can bring a claim against his/her employer on behalf of all employees for any violation of California’s Labor Code. Plaintiff in Viking had entered into a mandatory arbitration agreement with its employees that included waiver of Class Actions or representative action provided under PAGA. In response to the lawsuit by plaintiff, defendant Viking moved to compel arbitration of plaintiff’s individual PAGA claim and to dismiss her other PAGA. claims. However, applying California Supreme Court’s 2014 precedent in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th :348 (2014) (“Iskanian”), the trial and appeal courts denied Viking’s motion. Those courts ruled that waiving PAGA standing was at odds with Iskanian’s holdings that PAGA claims could not be waived by arbitration and could not be split into arbitrable “individual” claims and non­arbitrable “representative” claims.

In Viking; the U.S. Supreme Court held that the FA/\. preempted Iskanian so far as it precluded division of PAGA actions into individual and non-individual claims through an agreement to arbitrate. The Supreme Court explained that Iskanian ran afoul of the FAA because it curtailed the freedom of parties to choose the subject matter of their arbitration agreement and the rules of the arbitration. The Viking decision is thus relevant to Bonita in that, as in Viking, AB 51 places a restriction on employment related arbitration agreements by forbidding employers from entering into such agreement as it related to PAGA claims.

Conclusion: With the future of AB 51 unknown, here are the plausible scenarios ahead. First, Judge William A. Fletcher, one of the judges in the original 2-1 panel majority upholding AB 51, switched sides on Appellant’s en banc rehearing petition and voted for a panel rehearing. This decision mooted, at least temporarily, a decision on the en bane rehearing request and has raised the potential for that panel to reverse its original holding and vote that the FAA. fully preempts AB 51. Another scenario is for the appeal panel to affirm its earlier decision with a revised explanation of its ruling. finally, the case could be headed to an en bane rehearing. In any event, the decision is likely to end up with the Supreme Court and likely to be struck down as being inconsistent with FAA.