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Ninth Circuit reverses itself, strikes down California ban on ‘forced arbitration’ clauses

The Ninth Circuit had OK'd part of the ban in 2019, but a decision by the U.S. Supreme Court made one circuit judge change his mind.

(CN) — In a major reversal, the Ninth Circuit Court of Appeals now says a California law banning "forced arbitration" clauses is preempted by federal law and therefore unenforceable.

The California Legislature has tried for nearly a decade to ban companies from adding "forced arbitration" clauses into their workers' contracts. The clauses prevent employees from suing in the event of a dispute and instead funnel them into an arbitration process, which is often secret. The first two efforts at such a ban were vetoed by then-Governor Jerry Brown, who said the laws “plainly” violated the Federal Arbitration Act.

A third version of the bill was signed by Governor Gavin Newsom, only to be struck down by a federal judge, though that ruling was partially overturned by the Ninth Circuit in 2021. The U.S. Chamber of Commerce filed a petition for rehearing en banc. In the meantime, the U.S. Supreme Court ruled in Viking River Cruises, Inc. v. Moriana, which found that parts of another law, the state's Private Attorneys General Act, was preempted by the Federal Arbitration Act. In the wake of that ruling, the Ninth Circuit took the unusual step of withdrawing its own opinion and granting a rehearing.

Passed in 2019, Assembly Bill 51 attempted to sidestep the question of federal preemption by making it a criminal offense for an employer to require an employee or job applicant to agree to an arbitration clause, rather than saying those clauses are unenforceable.

"AB 51 does not expressly bar arbitration agreements," U.S. Circuit Judge Sandra Ikuta, a George W. Bush appointee, wrote in a majority opinion published Wednesday. "There is no doubt, though, that AB 51 disfavors the formation of agreements that have the essential terms of an arbitration agreement. Because a person who agrees to arbitrate disputes must necessarily waive the right to bring civil actions regarding those disputes in any other forum, AB 51 burdens the defining feature of arbitration agreements."

She added: "Because the FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 was therefore preempted."

U.S. Circuit Judge Carlos Lucero, a Bill Clinton appointee sitting by designation from the Tenth Circuit, dissented and said the Supreme Court and the authors of the Federal Arbitration Act had always intended for arbitration clauses to be "voluntary and consensual."

"At the end of the last century, mandatory arbitration was utilized to resolve employer-employee disputes for approximately 2% of nonunion employers," Lucero wrote. "By 2018, that number had grown to approximately 56%. My colleagues’ misinterpretation leaves state legislatures powerless to ensure that arbitration clauses in these employment agreements are freely and openly negotiated."

He added the ruling would "give employers unmitigated power to mandate the arbitration of all employer-employee disputes as a condition of employment."

Lucero wrote the majority opinion in 2021 and was against the three-judge panel granting a rehearing. Ikuta had dissented in 2021 and voted for the rehearing. U.S. Circuit Judge William Fletcher, a Bill Clinton appointee, was apparently the swing vote: he voted with Lucero in 2021 but later reversed himself, voting for the rehearing and siding with Ikuta this year.

“We are pleased that the Ninth Circuit vindicated the strong federal policy favoring arbitration," said Jennifer Dickey, a lawyer for the U.S. Chamber of Commerce. "California’s law sought to evade that policy and, in doing so, would have denied employers and employees alike of the benefits of arbitration.”

A spokesperson for California Attorney General Rob Bonta said the office was "reviewing the decision and assessing next steps."

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