BILL ANALYSIS
AB 2574
Page 1
Date of Hearing: April 23, 2002
ASSEMBLY COMMITTEE ON JUDICIARY
Ellen M. Corbett, Chair
AB 2574 (Harman) - As Amended: April 17, 2002
SUBJECT : CONSUMER ARBITRATION COMPANIES: CONFLICTS OF INTEREST
KEY ISSUES : SHOULD PRIVATE JUDGING COMPANIES BE TREATED
CONSISTENTLY WITH JUDGES, ARBITRATORS AND OTHER PERSONS
PERFORMING PUBLIC FUNCTIONS IN KEEPING AN ARM'S-LENGTH DISTANCE
FROM PARTIES TO CONSUMER ARBITRATIONS?
SYNOPSIS
Consistently with the other bills the Committee is hearing
regarding consumer arbitration, this bill would address
egregious conflict of interest problems in consumer arbitrations
by prohibiting private judging companies from administering the
consumer arbitrations of parties with whom they have significant
financial investments and other financial relationships.
SUMMARY : Prohibits financial conflicts of interest between
private judging companies and the parties they serve in consumer
arbitrations. Specifically, this bill prohibits private judging
companies and their owners and managers from maintaining
significant investments and other financial relationships in the
parties whose consumer arbitration cases they administer.
EXISTING LAW :
1)Generally enforces a pre-dispute agreement to submit a future
legal controversy to binding arbitration. (Code of Civil
Procedure 1281. All further statutory references are to this
code unless otherwise noted.)
2)Permits the parties to select a method for the appointment of
an arbitrator, or to petition the court for the appointment of
an arbitrator if they cannot agree. (Section 1281.6.)
3)Allows private arbitrators to issue binding decisions that are
legally enforceable but essentially unreviewable by a court;
there is no appeal from an arbitrator's decision to a public
court, even if the arbitration agreement expressly provides
for judicial review. (Crowell v. Downey Community Hospital
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Foundation, 95 Cal. App. 4th 730 (2002).)
4)Allows arbitrators to conduct arbitrations without allowing
for discovery, complying with the rules of evidence, or
explaining their decisions in written opinions. (Sections
1283.1; 1282.2; 1283.4)
5)Permits arbitrations to be conducted in private with no public
scrutiny. (Ting v. AT&T, 192 F. Supp. 2d 902 (N.D. Cal.
2002).)
6)Permits arbitrators to disregard the law and/or the evidence
in rendering their decisions. Awards may be enforced by the
court, even if they are legally and factually erroneous.
(Moncharsh v. Heily & Blas? et al, 3 Cal.4th 1 (1992).)
7)Allows arbitrators substantial if not absolute immunity from
civil liability for acts relating to their decisions, even in
the case of bias, fraud, corruption or other violation of law.
(Baar v. Tigerman, 140 Cal. App. 3d 979 (1983).)
8)The only relief that a court may grant to an arbitral party,
no matter what misconduct has taken place in the arbitration,
is to vacate the award and return the parties to further
arbitration, perhaps with the same arbitrator or arbitration
company. The grounds on which an arbitrator's decision may be
vacated are narrow and the standards are high. (Section
1282.6.)
FISCAL EFFECT : As currently in print, this bill is keyed
non-fiscal
COMMENTS : The author states that this is another important
piece of the Committee's package of bills, prompted by testimony
at the Committee's February 2002 information hearing. As with
the other bills focused on private judging companies, this bill
is designed to deter actual or perceived misconduct by private
judging companies, and promote independence and neutrality in
consumer arbitrations. As the author notes, private judging
companies perform a historically public function when they
administer legally binding arbitrations. Those firms that
choose to handle mandatory consumer arbitrations have a
particular obligation to be worthy of public confidence.
In support of the bill the author observes that President Bush
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has called on corporate leaders to follow the highest ethical
standards. "Business people must answer not just to the demands
of the market or self-interest, but to the demands of
conscience," the President said. This bill, the author states,
will help to advance business ethics by making sure that no
private judging company handles a consumer arbitration or
provides any other service to a consumer arbitration party with
whom it has or had a significant financial interest in or
financial relationship with, other than the provision of dispute
resolution services.
This bill establishes the fundamental ethical precept that these
firms should not administer consumer arbitrations involving
parties with whom they or their responsible managers have
financial interests or relationships. This principle already
exists in California law for arbitrators under the Judicial
Council's arbitrator ethics standards. It also exists in
California law for comparable functions requiring independence,
such as judges, members of the Public Utilities Commission,
other state officials and employees, engineers and land
surveyors who consult on governmental decisions, contractors who
conduct inspections, health care licensees who make referrals to
health care facilities, psychiatrists who evaluate psychiatric
patients, and others. Remarkably, however, despite their power,
prominence and need for independence, private judging companies
are not yet constrained against cozy relationships with the
parties before them.
Arbitrators under the Judicial Council's ethical rules will be
required to disclose, if they know, the financial interests
between parties and provider firms in consumer arbitrations.
This bill will ease the burden on arbitrators by preventing the
establishment of such relationships.
In support of the bill, Consumer's Union states that AB 2574
"addresses another important conflict of interest issue,
financial entanglements between private judging companies and
the companies whose disputes they administer. This was the
subject of extensive scrutiny by the San Francisco Chronicle in
its three part series, Private Justice, October 7-9, 2001. As
long as the law permits consumers to be relegated to a private
system of justice, these restrictions are needed to remove
financial conflicts of interest likely to tilt that system
against consumers." Likewise, the Congress of California
Seniors states that AB 2574 is "important to insure that there
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is no conflict of interest in the arbitration system and
consumers are getting a fair shake." The Consumer Attorneys of
California also "applaud[s] [this] effort to address the
improprieties within arbitration firms."
As with the other bills in the Committee's consumer arbitration
package, this bill does not prevent private judging companies
from investments or other business relationships, nor does it
prohibit private judging companies from administering consumer
arbitrations. Rather, this bill simply requires that private
judging companies keep an arm's-length distance from the parties
who bring consumer arbitration matters to the firm.
Some may contend that the financial interests and relationships
addressed in this bill may be harmless and no cause for public
concern. However, there is no bright line distinguishing
financial interests and relationships that may compromise one's
integrity and independence. Because the price at which an
unscrupulous firm may "sell out" cannot be predicted, there is
no level, the author notes, that is necessarily safe.
It might also be argued that disclosure and the potential for
disqualification, rather than prohibition, might be adequate to
protect consumers. However, this bill is drawn from and
consistent with existing rules for other professionals that
flatly prohibit financial interests and relationships, and there
is good basis for permitting private judging firms to operate
under looser standards. Indeed, the importance of the private
judging companies' function, and the need for public confidence
in their independence, argue for the highest levels of
protection. It should also be remembered that consumers
frequently are unable to retain a lawyer and would be at a
disadvantage if required to discern when and how to exercise
potential disqualification rights. Moreover, there is no
existing model for disclosure and disqualification of private
judging companies, and it may be difficult and cumbersome to
develop a sufficiently protective process.
Author's Clarifying Amendment . In order to make clear that
private judging companies are not prohibited from engaging in
consumer arbitration services, and to re-cast the language and
structure of the bill in more simply declarative terms, and to
make it consistent with the terms used in Assembly Member
Steinberg's AB 3029, the author prudently proposes to amend the
bill to read as follows:
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a) No private judging company may administer an a consumer
arbitration involving a consumer dispute , or provide any
other services related to that type of arbitration a
consumer arbitration, if it or any manager or owner of the
company or any immediate family member of that manager or
owner has, or within the preceding year has had, a
financial interest, as defined in Section 170.5, in any
party. or is or has been employed or engaged as a
consultant or independent contractor by any party .
b) No private judging company shall administer a consumer
arbitration, or provide any other services related to a
consumer arbitration, if it or any manager or owner or a
member of any manager or owner's immediate family is or
within the preceding year has been employed or engaged as a
consultant or an independent contractor by any party. For
the purpose of this subdivision, the provision of consumer
arbitration services shall not be considered employment or
engagement as a consultant or independent contractor.
c) No private judging company may administer an a consumer
arbitration involving a consumer dispute , or provide any
other services related to that type of arbitration a
consumer arbitration, if any party has, or within the
preceding year has had, any type of financial interest in,
or financial relationship in or with, the private judging
company, including an ownership interest, debt, loan or
lease in or with the private judging company.
Prior Related Legislation . SB 475 (Escutia), Ch. 362, Stats.
2001, established ethical obligations for private arbitrators.
Pending Related Legislation . AB 2504 (Jackson) regarding
judicial recruitment and employment by private judging
companies; AB 2656 (Corbett) regarding data collection; AB 3029
(Steinberg) regarding designated private judging companies,
consulting and solicitation; AB 3030 (Corbett) regarding
immunity of private judging companies.
REGISTERED SUPPORT / OPPOSITION :
Support
California Employment Lawyers Association
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Congress of California Seniors
Consumer Attorneys of California
Consumer's Union
Older Women's League of California
Opposition
None on file.
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334