Arbitration is part of modern American life—even reading this likely required agreeing to at least one arbitration agreement, whether for the electronic device, its software license, or its internet connection. This results from the Federal Arbitration Act (FAA) that has been in effect since 1926. The core of FAA is just two sentences, one containing 91 words and the other containing 131 words. One of those sentences permits arbitration agreements for every “transaction involving commerce,” and the other defines “commerce” as “commerce among the several States or with foreign nations” but excludes “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Recently, in 2019, California enacted AB 51, a law that pushes back on the proliferation of arbitration agreements by criminalizing the practice of requiring an arbitration agreement for employment. On February 15, 2023, the 9th Circuit found that AB 51 was preempted by the FAA, and therefore struck it down.
Perhaps no other law enacted by President Calvin Coolidge spurred such controversy and litigation. Even then, the litigation did not heat up for years after its passage. Until 1983, there were only 10 Supreme Court cases interpreting the FAA. Yet beginning in 1983, the past four decades have seen at least 58 such cases, including Circuit City Stores, Inc. v. Adams, which found that the FAA applied to employment contracts (except for transportation workers).
In finding that AB 51 was in fact preempted the court in Chamber of Commerce v. Bonta reviewed the history of AB 51. The court found that California has fought the Supreme Court over the FAA for decades, and that AB 51 was a continuation of that battle. The California Legislature attempted to avoid FAA preemption in the drafting of AB 51. The court in Chamber remarked that the attempt at avoiding preemption “[R]esulted in the oddity that 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.” According to the Supreme Court, the FAA effectively made arbitration agreements a protected class amongst its contractual peers—therefore states cannot discriminate against them. Indeed, Chamber reads like a civil rights case with searches through legislative history indicating hostility toward a protected class and how that protected class is affected by the statute’s burdens, whether on the law’s face or as applied. Finally, the court in Chamber concluded: “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 is therefore preempted.”
A federal appellate opinion usually ends a case—but not always. In addition to appealing to the Supreme Court, the defeated party may petition the court to vacate its opinion and try again in a rehearing. Chamber was a rehearing that superseded its 2021 opinion that nullified only the enforcement mechanism of AB 51. The dissenter of the 2021 opinion (Judge Ikuta) became the majority author of the 2023 opinion, and the majority author of the 2021 opinion (Judge Lucero) became the dissenter of the 2023 opinion. Thereby reversing the result of the original case decided two years ago, and reinstating the previously struck down AB 51.
Chamber held that technicalities do not defend a state’s attempts to frustrate a federal statute. Or rather, it would if it stands without another rehearing by a panel, a rehearing that may come in the form of an en banc hearing (with all 29 judges), or the Supreme Court’s writ of certiorari for this 3-year-old case.
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California has required employers to “indemnify” employees for “necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer” in substantially the same terms since 1937 under Labor Code § 2802.
