BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 2570 (Hill)
As Introduced
Hearing Date: July 3, 2012
Fiscal: Yes
Urgency: No
LSF/SK
SUBJECT
Licenses: Settlement Agreements
DESCRIPTION
This bill would prohibit a licensee who is regulated under the
Department of Consumer Affairs (DCA) from including in a civil
settlement agreement a provision precluding the plaintiff from
contacting or cooperating with the relevant DCA regulatory body
(board, bureau, commission, or program). This bill would
subject a licensee in violation of this provision to
disciplinary action.
This bill would also prohibit a DCA regulatory body from
requiring its licensees in a disciplinary action based on a
complaint or report that has been settled in a civil action to
pay additional monies to the plaintiff in the civil action.
BACKGROUND
According to the 2011 Department of Consumer Affairs Referral
Guide, DCA licenses and regulates more than 2.5 million
Californians in 255 professions and occupations under almost 40
regulatory bodies. These regulated occupations and professions
range from health care professionals, to barbers, contractors,
engineers, architects, funeral directors, security guards,
accountants, pharmacists, manicurists, and many more.
The regulatory bodies within DCA are generally responsible for
setting the standards of practice of the licensed professionals.
These standards are enforced through licensing and enforcement
programs administered by the regulatory bodies. Complaints
against license holders are investigated and, when warranted,
(more)
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may result in disciplinary action against a licensee who
violates state laws or regulations. Discipline may include
fines, revocation or suspension of licenses, probation, and/or
restitution. In 2002, AB 269 (Correa, Chapter 107, Statutes of
2002) clarified that for all DCA agencies, public protection
shall be the highest priority in carrying out their licensing,
regulatory, and disciplinary functions.
Sometimes, as part of the settlement of a civil dispute between
a plaintiff/consumer and defendant/licensee, a nondisclosure
clause will be included prohibiting the plaintiff from
contacting or cooperating with the defendant's regulator, or
requiring the plaintiff to withdraw a pending complaint before
the regulator. This type of clause in a settlement is commonly
referred to as a "regulatory gag clause."
The Legislature has previously approved prohibitions on
regulatory gag orders. In 1996, AB 2789 (Kuehl, Chapter 1104,
Statutes of 1996) prohibited attorneys from agreeing to or
seeking a settlement, whether before or after the commencement
of a civil action regarding the attorney's professional
misconduct, that includes a regulatory gag clause. AB 2789
provided that an attorney would be subject to discipline,
including suspension and disbarment, for seeking or agreeing to
such a settlement.
Likewise, AB 2260 (Negrete McLeod, Chapter 565, Statutes of
2006) prohibited a doctor or surgeon from including a regulatory
gag clause in settlements of civil disputes arising from their
practice, whether before or after the commencement of a civil
action. AB 2260 specified that such provisions are void as
against public policy and subjects a doctor or surgeon to
discipline for violation of this law. AB 2410 (Shelley, Chapter
1063, Statutes of 1998) similarly prohibited gag orders
regarding problems with a motor vehicle in transfer or sale
contracts, in an effort to bolster lemon laws.
AB 320 (Correa, 2004) and AB 446 (Negrete McLeod, 2005), bills
substantially similar to AB 2570, would have prohibited
regulatory gag clauses in civil settlements for all licensees
regulated under DCA were passed by the Legislature but vetoed by
Governor Schwarzenegger. A very similar bill, AB 249 (Eng,
2007), which would have prohibited regulatory gag clauses in
settlement agreements by licensees under DCA healing arts
boards, was also passed by the Legislature and vetoed by
Governor Schwarzenegger.
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This bill would extend prohibitions on regulatory gag clauses to
all DCA licensees.
CHANGES TO EXISTING LAW
Existing law establishes the Department of Consumer Affairs and
details the various boards, bureaus, commissions, and committees
that make up the department. (Bus. & Prof. Code Sec. 100, 101.)
Existing law states that the boards, bureaus, and commissions in
DCA are established for the purpose of ensuring adequate
regulation of private businesses and professions to protect the
people of California. (Bus. & Prof. Code Sec. 101.6.)
Existing law specifies that in carrying out this regulatory
function, boards, bureaus, and commissions establish minimum
qualifications and competencies for licensing, provide a means
for redress of grievances for the public, institute disciplinary
action against licensed or registered persons, and conduct
periodic checks of licensees and registrants to ensure
compliance with relevant code. (Bus. & Prof. Code Sec. 101.6.)
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Existing law states protection of the public shall be the
highest priority for all DCA agencies in exercising their
licensing, regulatory, and disciplinary functions. Existing law
further provides that whenever the protection of the public is
inconsistent with other interests sought to be promoted, the
protection of the public shall be paramount. (Bus. & Prof. Code
Secs. 472.4, 1601.2, 1742.1, 2001.1, 2450.1, 2460.1, 2531.02,
2570.25, 2602.1, 2708.1, 2841.1, 2920.1, 3010.1, 3320.1, 3504.1,
3710.1, 4001.1, 4501.1, 4800.1, 4928.1, 4990.125, 4999, 5000.1,
5510.15, 5620.1, 6710.1, 7000.6, 7200.1, 7303.1, 7501.05,
7601.1, 7810.1, 8005.1, 8520.1, 9810.1, 9880.3, 18602.1,
19004.1; Ed. Code Sec. 94770.1.)
Existing law states that protection of the public shall be the
highest priority for the Medical Board of California in
exercising its licensing, regulatory, and disciplinary
functions. (Bus. & Prof. Code Sec. 2001.1.)
Existing law prohibits a physician or surgeon from including in
an agreement to settle a civil dispute arising from his or her
practice any provision that prohibits another party from
contacting or cooperating with the Medical Board of California,
from filing a complaint with the board, or that requires another
party to withdraw a complaint from the board. Existing law
states that such provisions are void as against public policy,
and subjects a physician or surgeon who violates this section to
disciplinary action by the board. This provision applies to all
relevant settlements, whether before or after the commencement
of a civil action. (Bus. & Prof. Code Sec. 2220.7.)
Existing law states that protection of the public shall be the
highest priority for the State Bar of California and the board
of trustees in exercising their licensing, regulatory, and
disciplinary functions. (Bus. & Prof. Code Sec. 6001.1.)
Existing law makes it cause for suspension, disbarment, or other
discipline for an attorney to agree to or seek a settlement that
prohibits the report of professional misconduct or the terms of
a settlement of professional misconduct to the State Bar,
requires the plaintiff to withdraw a disciplinary complaint or
not cooperate with investigation or prosecution by the State
Bar, or seals the record of any action for professional
misconduct from State Bar review. This provision applies to all
settlements, whether before or after the commencement of a civil
action. (Bus. & Prof. Code Sec. 6090.5.)
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Existing law prohibits any dealer or lienholder who reacquires a
motor vehicle from requiring as a condition of the reacquisition
that a buyer or lessee agree not to disclose problems with the
vehicle or any nonfinancial terms of the reacquisition. It also
prohibits the inclusion in any release, whether prepared by the
dealer or lienholder, of a confidentiality clause, gag clause,
or similar clause that prohibits the buyer or lessee from
disclosing information to anyone about the problems with the
vehicle, or the nonfinancial terms of the reacquisition of the
vehicle. (Civ. Code Sec. 1793.26.)
This bill would prohibit a licensee, or an authorized agent of a
licensee, who is regulated by a board, bureau, or program within
DCA from including or permitting to be included a provision in
an agreement to settle a civil dispute that prohibits the other
party from contacting, filing a complaint with, or cooperating
with the regulatory body, or that requires the other party to
withdraw a complaint from the regulatory body.
This bill would subject a licensee in violation of these
provisions to disciplinary action by the regulatory body.
This bill would prohibit a regulatory body from requiring its
licensees in a disciplinary action based on a complaint or
report that has been settled in a civil action to pay additional
monies to the benefit of any plaintiff in the civil action.
COMMENT
1.Stated need for the bill
The author writes:
Regulatory gag clauses inhibit the ability of regulatory
agencies to comprehensively and conscientiously perform their
oversight function. The regulatory boards of the Department
of Consumer Affairs cannot adequately "protect consumers from
unscrupulous and unqualified individuals" (quote from
Department's website) if they are unable to communicate with
individuals filing complaints or who have been victimized.
Furthermore, pressuring aggrieved consumers and injured
parties into agreeing to such clauses enables potentially
dangerous licensees to continue operating.
Settlement agreements are an important and valuable mechanism
for parties to willingly resolve differences. However, the
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inclusion of gag clauses into settlement agreements allows a
perilous veil of secrecy to envelop licensees. Denying
regulators the ability to exercise their disciplinary
discretion not only allows this conduct to continue, but
potentially endangers future consumers.
2.Judicial precedence, gag orders as against public policy
There are several California Appellate Court decisions that have
invalidated regulatory gag clauses as contrary to public policy.
In one such case, Picton v. Anderson Union High School
District, 50 Cal.App.4th 726 (1996), a teacher, Mr. Picton, sued
his previous employer for breach of contract after the district
sent details of the circumstances surrounding Mr. Picton's
resignation to the Commission and Committee on Teacher
Credentialing, the body that regulates teaching credentials.
The court affirmed a district court's demurrer to Mr. Picton's
breach of contract action, despite a nondisclosure agreement
between the parties. In support of the judgment, the court
wrote:
Anderson had to provide the Committee with all of the facts on
which Picton's resignation was based, and let the Committee
investigate the matter. Providing anything less would have
made a mockery of one of the principal reasons for the
existence of the Commission and Committee: the job related
oversight of those holding teaching credentials. There would
be no genuine oversight by the Commission and the Committee if
the credential holder could contractually dictate what the
Commission and the Committee could see. (Id. at 735.)
In Cariveau v. Halferty, 83 Cal.App.4th 126 (2000), the court
held that a securities broker cannot prohibit a client from
reporting misconduct to regulatory authorities by including a
confidentiality clause in a civil settlement agreement that
prohibits the client from contacting the broker's regulator. In
affirming the trial court's finding that the confidentiality
clause was void and unenforceable as a violation of public
policy, the court wrote:
The only interest appellant identifies in support of the
contract term is the general policy in favor of promoting the
settlement of disputes. Refusing to enforce the
confidentiality clause does not affect the settlement of the
dispute Ýbetween the parties] but merely declines assistance
to Ýthe broker's] concealment of her wrongdoing. No
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forfeiture is involved, no special interest supports allowing
a wrongdoer to hide his or her wrongful acts and continue to
take advantage of the malefactor's unsuspecting customers and
employer. The inclusion of a restrictive confidentiality
clause in the Forbearance Agreement is not only directly
connected to Ýthe broker's] misconduct, but is an instance of
misconduct in itself. The public policy express and implied
from the securities laws and regulations outweighs the general
interest in settling disputes without litigation. To permit
Ýthe broker's] violations of rules and shield them from
administrative review in an agreement to silence wrongdoing
would undermine the public's confidence in the integrity of
securities oversight. This type of secret settlement should
not be left in some dark oubliette, leaving investors
unprotected. To countenance this agreement would encourage
future Ýnational association standards and principles]
violators to hide their misdeeds in a secret arrangement free
from the light of regulatory scrutiny. (Id. at 136-137.)
In Mary R. vs. B. & R. Corporation, 149 Cal.App.3rd 308 (1983),
the court ruled that the Division of Medical Quality of the
Board of Medical Quality Assurance (now the Medical Board of
California) had standing to attack a gag order in a dismissed
lawsuit brought by a patient against a physician for allegedly
molesting her. The court struck down the gag order as contrary
to public policy. The court wrote:
Division's statutory obligation to the medical profession and
the public to investigate all complaints of physician
misconduct in this state has been effectively blocked by the
gag order, by interjecting the court's contempt powers, thus
giving a judicial stamp of approval to a ploy obviously
designed by the physician to aid him to avoid professional
regulation inherent in his securing and keeping his
professional license Ý?]
The stipulated order of confidentiality is contrary to public
policy, contrary to the ideal that full and impartial justice
shall be secured in every matter and designated to secrete the
evidence in the case from the very public agency charged with
the responsibility of policing the medical profession. We
believe it clearly improper, even on stipulation of the
parties, for the court to issue an order designed to not
preserve the integrity and efficiency of the administration of
justice but to subvert public policy by shielding the doctor
from governmental investigation designed to protect the public
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from misconduct within the medical profession Ý?] Such a
stipulation is against public policy, similar to an agreement
to conceal judicial proceedings and to obstruct justice. (Id.
at 316.)
These cases suggest that regulatory gag clauses prohibiting the
public from contacting and cooperating with regulators are
contrary to public policy and likely to be struck down by
courts. The Center for Public Interest Law (CPIL) writes in
support of this bill that the lack of broad legislation on this
issue has led to piecemeal and duplicative legislation to
invalidate these clauses. In an "oppose unless amended" letter,
the California Chamber of Commerce, American Council of
Engineering Companies and Civil Justice Association of
California write that the courts have discretion to strike down
these provisions when they believe those provisions shield
important information from regulators. They argue that the
case-by-case approach should not be disturbed, as it balances
the public interests of finality of disputes and regulation of
licensees.
While courts do currently have discretion to strike down such
provisions, most settlements between licensees and consumers are
not heard or challenged in court. Under existing law, the only
way to strike down these regulatory gag clauses is to petition
the courts. As a practical concern, given the current budget
realities facing the courts and regulatory agencies, it seems
arguably overly burdensome to require consumers and regulators
to go to the courts for review of each settlement on a
case-by-case basis to reaffirm precedent that such regulatory
gag clauses violate public policy. In addition, the regulatory
body could take such an action only if it finds out about the
settlement or potential licensee misconduct from a third party.
3.Finality of disputes
In opposition, the California Chamber of Commerce, American
Council of Engineering Companies and Civil Justice Association
of California assert that regulatory gag clauses are valuable
tools to ensure the finality of particular disputes. They
contend that if licensees under DCA believe they will likely
have to continue a dispute regardless of the terms of the
settlement agreement, the licensees will be less likely to
settle, and more cases will proceed to court.
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This bill would not prohibit settlements between licensees and
consumers generally, but would only prohibit regulatory gag
orders as part of such settlements. In effect, this bill would
make clearer the line between the civil court actions and
regulatory actions which are separate in scope and purpose.
The purpose of the civil court action is to make a particular
consumer whole financially or otherwise if harmed by past
misconduct of the licensee. The purpose of the regulatory
action is to protect the public at large from potential future
harm from misconduct of a licensee by giving the regulatory body
the opportunity to investigate, and discipline the licensee if
it sees fit. A settled civil dispute would still be final under
the provisions of this bill, but the regulatory body would not
be barred from receiving a complaint about licensee conduct as a
separate and distinct action.
Furthermore, complaints made to regulatory agencies are not
disclosed to the public, nor are they available by public
records request. The existence of a complaint against a
licensee is generally not made public. The existence of a
complaint against a licensee is generally only made public upon
the filing of an accusation by the regulatory body, which occurs
after a thorough investigation and review of the allegations.
Therefore, any unsubstantiated complaint would not impact a
licensee otherwise in good standing.
4.Changes to regulators' disciplinary discretion
This bill would prohibit a DCA regulatory body from requiring
its licensees in a disciplinary action based on a complaint or
report that has been settled in a civil action to pay additional
monies to the benefit of any plaintiff in the civil action.
Ultimately, this means that if a licensee has already paid a
plaintiff a settlement, the regulatory body cannot require the
licensee to pay the same plaintiff twice for any complaint
already settled between the parties. This allows a licensee to
settle financial claims with a plaintiff with certainty that he
or she will not be required by the regulatory body to pay that
plaintiff again or for more than agreed to by the parties, while
still allowing the regulatory body to hear complaints in
furtherance of its mission of public protection.
For DCA regulatory agencies that have the power to order
restitution for harmed consumers as part of their disciplinary
authority, regardless of prior civil action, this would change
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the scope of their disciplinary discretion. However, regulatory
agencies that currently have that authority would still be
allowed to order restitution in cases that are not based on a
complaint that resulted in a payment from the licensee to the
consumer, or to order restitution for consumers or complainants
who have not previously received a financial settlement from the
licensee. The California Board of Pharmacy and California Board
of Accountancy have expressed their opposition to this change to
the scope of their disciplinary discretion.
In response to this concern the author writes, "Once a financial
settlement has been reached to the satisfaction of the two
parties, it would be unfair for additional financial penalties
to be levied. The regulatory agencies have a wide range of other
disciplinary options at their disposal."
5.Applies only to regulatory gag orders, not to any other form
of confidentiality agreement between parties
The prohibition on regulatory gag clauses in this bill does not
apply to any other type of legal confidentiality or
nondisclosure agreement. For example, parties may still agree
to make certain kinds of information in a settlement agreement
confidential and preclude that information from being introduced
as evidence in a future court proceeding. This bill would only
prohibit clauses that require a plaintiff to not comply or
contact regulators or withdraw a complaint submitted to
regulators of licensees under DCA.
Support : Board of Behavioral Services; CALPIRG; Center for
Public Interest Law; Consumer Federation of California;
Consumers for Auto Reliability and Safety; Medical Board of
California
Opposition : American Council of Engineering Companies,
California (unless amended); Board of Pharmacy (unless amended);
California Board of Accountancy; California Chamber of Commerce
(unless amended); Civil Justice Association of California
(unless amended)
HISTORY
Source : Author
Related Pending Legislation : None Known
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Prior Legislation :
AB 2789 (Kuehl, Chapter 1104, Statutes of 1996) among other
things, prohibited attorneys from entering into settlements for
professional misconduct that include regulatory gag orders. The
bill made an attorney subject to discipline for violation of
this provision.
AB 2410 (Shelley, Chapter 1063, Statutes of 1998) prohibited any
dealer or lienholder who reacquires a motor vehicle from
requiring as a condition of the reacquisition that a buyer or
lessee agree not to disclose problems with the vehicle or
requiring a confidentiality clause, gag clause, or similar
clause that prohibits the buyer or lessee from disclosing
information to anyone about the problems with the vehicle.
AB 320 (Correa, 2004) was substantially similar to AB 2570 and
would have prohibited regulatory gag orders in civil cases with
DCA licensees. This bill was vetoed by Governor Schwarzenegger.
AB 2570 (Hill)
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AB 446 (Negrete McLeod, 2005) was substantially similar to AB
2570 and would have prohibited regulatory gag orders in civil
cases with DCA licensees. This bill was vetoed by Governor
Schwarzenegger.
AB 2260 (Negrete McLeod, Chapter 565, Statutes of 2006)
prohibited regulatory gag clauses in civil settlement agreements
by a physician or surgeon.
AB 249 (Eng, 2007) would have prohibited the inclusion of
regulatory gag clauses in settlement agreements by healthcare
licensees regulated by DCA. This bill was vetoed by Governor
Schwarzenegger.
SB 1111 (Negrete McLeod, 2010) among several other provisions,
would have prohibited inclusion of regulatory gag clauses in
settlement agreements by any licensee of a healing arts board as
defined. This bill failed passage in the Senate Business,
Professions, and Economic Development Committee.
SB 544 (Price, 2011) was substantially similar to SB 1111
(Negrete McLeod, 2010), referenced above. This bill failed
passage in the Senate Business, Professions, and Economic
Development Committee.
Prior Vote :
Senate Business, Professions and Economic Development Committee
(Ayes 6, Noes 1)
Assembly Floor (Ayes 42, Noes 24)
Assembly Appropriations Committee (Ayes 11, Noes 5)
Assembly Business, Professions, and Consumer Protection
Committee (Ayes 6, Noes 3)
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