The US Supreme Court has repeatedly held that that the Federal Arbitration Act preempts efforts by state legislatures and state courts to invalidate arbitration agreements—in six separate rulings since the landmark decision in AT&T Mobility LLC v. Concepcion. But some states keep trying.
Decisions by lower federal courts indicate that the Supreme Court’s message finally is getting through. Most recently, a Ninth Circuit panel that initially upheld a California anti-arbitration law changed its mind and ruled that California officials may not enforce the law because it is preempted by the FAA.
Before then, a New Jersey law purporting to invalidate arbitration agreements was held preempted by a federal district court. The New Jersey attorney general’s office did not even appeal.
States hostile to arbitration are likely to keep trying. But the principles recognized in these rulings will make it easier to defeat future attacks on arbitration.
The California law, AB 51, would have imposed criminal and civil penalties on any business offering to enter into arbitration agreements as a condition of employment, or even on those offering arbitration but allowing employees to opt out.
California argued that the law wasn’t preempted because—in its view—the FAA only addresses the enforcement of arbitration agreements, and didn’t prevent states from discouraging parties from entering into such agreements.
The Ninth Circuit panel initially agreed, with Judge Sandra Segal Ikuta dissenting. But in the court’s new ruling, Judge William Fletcher, who had initially voted to uphold the law, switched sides.
The majority opinion, this time penned by Ikuta, explained that the FAA “applies to state rules that prevent parties from entering into arbitration agreements in the first place” and that the state law’s “penalty-based scheme to inhibit arbitration agreements before they are formed” reflected the type of hostility to arbitration “that the FAA was enacted to overcome.”
The New Jersey case involved a more direct attack on arbitration. The law declared “against public policy and unenforceable” contract provisions relating to specified employment-related claims that “waive[d] any … procedural right.” The New Jersey attorney general conceded that it was intended to invalidate agreements to arbitrate because they “waive[d]” the right to go to court.
Pointing out that New Jersey did not even attempt to argue that the law could survive a preemption challenge, the court said that it singled out arbitration agreements because invalidation was triggered by the “‘defining trait’ of arbitration agreements”—“waiver of the right to go to court.”
In addition, that “ ‘uncommon barrier’ fails to put [arbitration agreements] ‘on an equal plane with other contracts’” as the FAA requires. A New York law was invalidated on similar grounds.
These decisions make clear that states cannot avoid FAA preemption by artful wordsmithing to avoid targeting arbitration agreements by name. Neither law used the word “arbitration,” but the courts had little difficulty concluding that the state was still undermining arbitration agreements.
And the Ninth Circuit made clear that it is irrelevant for preemption purposes that prohibitions could also apply to “other sorts of contractual provisions,” because the statute still “impose[d] burdens on arbitration agreements that do not apply to contracts generally.”
Notably, the Ninth Circuit opinion dismantles the pejorative moniker of “forced arbitration” often used by opponents of arbitration, including by the state in that case. The decision details why the state’s use of that term “misunderstand[s] basic principles of California contract law” and “Supreme Court caselaw regarding consent in arbitration cases” about non-negotiable contracts presented on a take-it-or-leave-it basis.
As the court explained, “California law generally allows an employer to enter into a contract with an employee that includes non-negotiable terms as a condition of employment, including requirements relating to compensation and drug usage,” but “under AB 51, an employer cannot enter into a contract with non-negotiable terms essential to an arbitration agreement.”
Take-it-or-leave-it contracts are an “inevitable fact of life for all citizens,” and states may not impose heightened burdens on the formation of arbitration agreements that do not apply to other types of take-it-or-leave-it contract provisions.
Notwithstanding these developments, at least one state attack on arbitration has not yet been eliminated. California’s SB707 imposes harsh penalties on businesses that seek to resist payment of improperly assessed arbitration fees. No similar penalties apply to the drafters of other types of contractual provisions. But courts have thus far declined to hold that SB707 is preempted by the FAA—erroneously in our view.
Hostility to Arbitration
Why are some states so hostile to arbitration agreements?
Numerous empirical studies, including one sponsored by the US Chamber of Commerce’s Institute for Legal Reform, show that workers and consumers do as well or better in arbitration versus litigation—they prevail on their claims at the same rate or more frequently, and they recover as much or more when they prevail.
All parties benefit from reduced expense and complexity, allowing both workers and consumers to seek redress for claims that could not practically be brought in court.
But arbitration generally is less profitable for one group—lawyers. And it seems likely they will continue to come up with new ways to try to attack arbitration.
But, as the Supreme Court explained in Concepcion, “Just as judicial antagonism toward arbitration before the Arbitration Act’s enactment ‘manifested itself in a great variety of devices and formulas declaring arbitration against public policy,’” courts “must be alert to new devices and formulas that would achieve much the same result today.”
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Daniel Jones is a member of Mayer Brown’s consumer litigation and class actions and Supreme Court and appellate practices.
Archis Parasharami is a co-leader of Mayer Brown’s consumer litigation and class actions practice and a member of the firm’s Supreme Court and appellate practice.
Andrew Pincus focuses his appellate practice at Mayer Brown on briefing and arguing cases in the US Supreme Court and federal and state appellate courts and developing legal strategy for trial courts.
All three authors represented the plaintiffs in the successful lawsuits challenging the California and New Jersey laws.