BILL ANALYSIS Ó SJR 25 Page 1 Date of Hearing: August 23, 2016 ASSEMBLY COMMITTEE ON JUDICIARY Mark Stone, Chair SJR 25 (Wieckowski) - As Amended August 18, 2016 SENATE VOTE: 21-14 SUBJECT: ARBITRATION: CLASS ACTIONS KEY ISSUE: IN ORDER TO PROTECT CONSUMERS AGAINST ONE-SIDED CONTRACTS THAT DEPRIVE CONSUMERS OF THEIR SUBSTANTIVE AND PROCEDURAL RIGHTS, SHOULD THE LEGISLATURE URGE THE CONSUMER FINANCIAL PROTECTION BUREAU TO FINALIZE ITS RULES-WHICH LIMIT THE USE OF MANDATORY ARBITRATION CLAUSES IN CONSUMER FINANCIAL SERVICES CONTRACTS AND have been PROMULGATED--TO PROTECT THE PUBLIC'S INTEREST? SYNOPSIS Arbitration is a form of alternative dispute resolution held outside of courts where a third-party (rather than a judge) makes a binding (and rarely appealable) award. Because most arbitration agreements are created by entering into a contract (usually a contract that is adhesive or take-it-or-leave-it), the arbitration agreement will lay-out the procedures that will be followed during the arbitration hearing. For example, the terms of the arbitration agreement may stipulate that the award need not be written or justified (unlike in court), and that the SJR 25 Page 2 entire process must be conducted in secret (rather than in public view, like a court proceeding). Arbitrators are not required to be lawyers, nor to even be trained in the law. Arbitrators who issue favorable awards to a particular company can be repeatedly hired by that same company to serve as the arbitration-neutral without ever notifying the public about that employment history. A company hiring such an arbitration-neutral may find that it's easy to predict the calls made in an arbitration proceeding because it can hire the umpire. Due in part to significant policy concerns over the use of arbitration as a forum to resolve consumer disputes, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which created the Consumer Financial Protection Bureau (CFPB) and authorized the CFPB to study the effect of arbitration clauses in consumer financial product contracts on consumers, and to promulgate rules limiting the use of arbitration clauses if rules would protect consumers. Consistent with that authority, the CFPB issued rules that primarily do two things: (1) Prohibit financial service providers from relying on an arbitration clause to block a consumer from instituting (or joining) a class action; and (2) Require financial service providers to submit certain arbitral records to the CFPB so that it can further study whether additional rules to protect consumers should be promulgated. This resolution urges the CFPB to either finalize those rules, or strengthen those rules. The resolution is supported by a coalition of consumer advocates including, among others, CalPIRG, Center for Public Interest Law, Congress of California Seniors, Consumer Attorneys of California, Consumers Union, and Public Citizen. The resolution is opposed by a coalition of business interests including, among others, the Chamber of Commerce, California Bankers Association, California Business Properties Association, Civil Justice Association of California, California Manufacturers and Technology Association, and the National Federation of Independent Business. SJR 25 Page 3 SUMMARY: Encourages the Consumer Financial Protection Bureau to issue its final rules, either as proposed or in a strengthened form to protect the rights of consumers by limiting the use of mandatory arbitration clauses in consumer contracts for financial products and services. Specifically, this resolution makes the following findings: 1)Class actions are the only remedy for consumers who cannot afford to seek redress alone but who can band together to stop illegal practices; and 2)Contract language that bans consumers from joining class actions prevents consumers from exercising strength in numbers and allows corporations to pilfer small amounts of money from millions of individuals who cannot band together to stop that practice; and 3)Bans against class actions are often one-sided; and deprive consumers of their substantive and procedural rights, preventing consumers from bringing claims against corporations; and 4)Bans against class actions are found in "take-it-or-leave-it" contracts that prohibit consumers from negotiating contract terms, effectively leaving consumers to choose between access to modern goods and services and access to justice; and 5)In the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress authorized the Consumer Financial Protection Bureau (the Bureau) to study mandatory arbitration clauses in consumer contracts and to issue regulations restricting or prohibiting their use if the Bureau found that such regulations would be in the public interest and protect SJR 25 Page 4 consumers; and 6)The Bureau found that nearly all contracts containing mandatory arbitration clauses not only barred consumers from participating in future class action lawsuits, but also specified that any resulting arbitration proceeding could only be conducted on an individual, not a class, basis; and 7)Accordingly, the Bureau has proposed a rule that would prohibit contracts for financial products or services from containing mandatory arbitration clauses barring consumers from filing or participating in a class action relating to the financial product or service; and 8)This proposed rule is based on a finding that mandatory arbitration clauses are being widely used to prevent consumers from seeking relief from legal violations on a class basis and that consumers rarely seek redress as individuals; and 9)Class actions deter violations from occurring and redress violations of consumers' rights when they do occur; and 10)Without class actions, corporations that engage in illegal practices will effectively remain unpunished, undeterred, and unaccountable. EXISTING LAW: 1)Establishes the California Arbitration Act which provides that agreements to arbitrate shall be valid, irrevocable, and enforceable, except upon such grounds as exist at law or in equity for the revocation of any contract. (Code of Civil SJR 25 Page 5 Procedure Section 1280 et seq. Unless otherwise stated, all further statutory references are to the Code of Civil Procedure.) 2)Similarly establishes the Federal Arbitration Act (FAA) which provides that agreements to arbitrate shall be valid, irrevocable, and enforceable, except such grounds as exist at law or in equity for the revocation of any contract. (9 U.S.C. Section 1 et seq.) FISCAL EFFECT: As currently in print this resolution is keyed non-fiscal. COMMENTS: Arbitration is a form of alternative dispute resolution held outside of courts where a third-party (rather than a judge) makes a binding (and rarely appealable) award. Because most arbitration is created by entering into a contract (usually a contract that is adhesive or take-it-or-leave-it), the arbitration agreement will lay-out the procedures that will be followed during the arbitration hearing. For example, the terms of the arbitration agreement may stipulate that the award need not be written or justified (unlike in court), and that the entire process be conducted in secret (rather than in public view). Arbitrators are not required to be lawyers, nor do they need to even be trained in the law. Arbitrators who issue favorable awards to a particular company can be repeatedly-hired by that same company to serve as the arbitration-neutral without ever notifying the public about that employment history. A company hiring such a business-friendly arbitration-neutral may find that it's easy to predict the calls made in an arbitration proceeding because it can hire the umpire. Last year, the New York Times issued a three-part series titled, "Beware the Fine Print" - a special report examining how arbitration clauses buried in contracts deprives Americans of SJR 25 Page 6 their fundamental constitutional rights: Over the last 10 years, thousands of businesses across the country - from big corporations to storefront shops - have used arbitration to create an alternate system of justice. There, rules tend to favor businesses, and judges and juries have been replaced by arbitrators who commonly consider the companies their clients. The change has been swift and virtually unnoticed, even though it has meant that tens of millions of Americans have lost a fundamental right: their day in court. (Silver-Greenberg & Corkery, In Arbitration, a Privatization of the Justice System, N.Y. Times (Nov. 1, 2015).) In fact, some legal scholars have stated that, arbitration "amounts to the whole-scale privatization of the justice system." (Ibid.) In an effort to protect consumers and workers, this Legislature has considered legislation aimed at leveling the playing field, a turf that has been used by corporate interests to evade public scrutiny, and even, avoid the law. This is because arbitrators do not need to be trained in the law, or even apply the law, or render a decision consistent with the evidence presented to them. What evidence is presented may, in fact, be incomplete because parties in arbitration have no legal right to obtain evidence in support of their claims or defenses, or the claims or defenses of the other party, contrary to the longstanding discovery practice in public courts. Advocates continue to debate the benefits and harms of mandatory-arbitration. Proponents of arbitration say that arbitration produces quicker results and reduces litigation costs. Opponents argue that arbitration harms consumers and workers because arbitration proceedings render unfair awards. In light of these concerns, Congress has enacted various measures to restrict the use of arbitration in certain instances. In 2010, Congress enacted the Dodd-Frank Wall Street SJR 25 Page 7 Reform and Consumer Protection Act (Dodd-Frank Act), which among other things, established the Bureau of Consumer Financial Protection Bureau (CFPB) and prohibited the use of arbitration agreements in connection with mortgage loans and certain whistleblower proceedings. (Pub.L. No. 111-203 (July 21, 2010) 124 Stat. 1376.) The Dodd-Frank Act also authorized the CFPB to issue regulations to prohibit or limit the use of arbitration provisions in consumer financial product or service contracts, if the CFPB found that such regulations would be in the public's interest and protect consumers. (12 U.S.C. 5518.) In 2012, the CFPB began to empirically study the impact of mandatory arbitration and class action clauses on consumers. In March 2015, the CFPB released its report, concluding that arbitration clauses had a detrimental effect on consumers. For example, the CFPB found that arbitration was primarily used as a venue for the financial services company to recover a debt from a consumer, rather than as a venue for the consumer to obtain relief from the financial services company. Indeed, the CFPB found that annually, only a handful of consumers subject to an arbitration clause were able to obtain relief, while over 32 million consumers not subject to an arbitration clause were able to obtain relief through class action settlements in federal court. In fact, CFPB concluded that consumers subject to arbitration were reluctant to bring claims against financial service companies. It will come as no surprise then that the CFPB concluded that arbitration clauses act as a barrier to class actions. (Consumer Financial Protection Bureau Study Finds that Arbitration Agreements Limit Relief for Consumers, Fact Sheet, Consumer Financial Protection Bureau, March 2015.) Additionally, CFPB found that there was no evidence that companies that eliminated their arbitration clauses increased the cost of doing business. (Ibid.) The rules promulgated by CFPB seek to ensure that consumers are able to obtain relief if they suffer damages caused by a financial services provider. Relying upon the findings in its SJR 25 Page 8 report, the CFPB announced that it would propose rules to regulate mandatory arbitration. According to the CFPB, the proposed rules generally do two things: First, the proposed rule prohibits companies that provide consumer financial products and services from relying on a pre-dispute arbitration clause to block a class action. Second, the proposed rule requires financial companies that are involved in an arbitration to submit specified arbitral records to CFPB. This resolution urges the CFPB to either finalize the rules that it has promulgated, or to revise and strengthen those rules to further protect consumers. In light of the overwhelming demonstrative evidence in the CFPB report that arbitration clauses prevents consumers from seeking relief for the harm caused by certain financial service providers, and given that the proposed rules do not prohibit financial services providers from including arbitration clauses in its agreements, the rules promulgated by CFPB appear to be reasonable. Indeed, consistent with CFPB's findings, this Committee has adopted several measures aimed at protecting consumers and workers in contractual relationships where arbitration clauses are used to force Californians to waive important protections like civil rights. Accordingly, this resolution-which urges the CFPB to adopt such reasonable rules-appears to be consistent with the Legislature's previous efforts in leveling the playing field to prevent certain business or corporate interests from evading public scrutiny or the law. ARGUMENTS IN SUPPORT: The East Bay Community Law Center supports the rules promulgated by the CFPB and urges the Legislature to encourage the CFPB in its efforts: When it issued the proposed rules earlier this year, the CFPB noted that it was targeting "gotcha" clauses that allow companies to "sidestep the legal system, avoid accountability, and continue to pursue profitable practices SJR 25 Page 9 that may violate the law and harm countless consumers." SJR 25 [encourages] the CFPB to issue final rules protecting the rights of wronged consumers to join together to seek redress when they have been ripped off over financial products and services, including credit cards, checking and deposit accounts, auto loans, consumer mortgages, prepaid cards, consumer debt acquisition, credit reporting and debt collection services. ARGUMENTS IN OPPOSITION: The Civil Justice Association of California opposes this resolution, arguing that CFPB's proposed rule is flawed and promotes class-action lawsuits over individual arbitration: Arbitration provides consumers with a meaningful way to resolve disputes. The proposed CFPB rule prohibiting class-action waivers in arbitration agreements will increase the cost of consumer financial services without improving consumer protection or serving the public interest. Instead, consumers will be pushed into class actions, often without their knowledge or consent, from which the lawyers will make millions while the consumers get pennies-or coupons for pennies. REGISTERED SUPPORT / OPPOSITION: Support Alliance for Justice California Alliance for Retired Americans SJR 25 Page 10 California Immigrant Policy Center California Rural Legal Assistance Foundation California Public Interest Research Group Center for Public Interest Law Congress of California Seniors Consumer Action Consumer Attorneys of California Consumer Federation of California Consumer Watchdog Consumers for Auto Reliability & Safety Consumers Union Courage Campaign East Bay Community Law Center SJR 25 Page 11 Homeowners Against Deficient Dwellings Home Owners for Better Building Housing and Economic Rights Advocates National Consumer Voice for Quality Long-Term Care Privacy Rights Clearinghouse Public Citizen Public Good Public Law Center Service Employees International Union The Utility Reform Network Woodstock Institute Workplace Fairness Opposition SJR 25 Page 12 California Chamber of Commerce Acclamation Insurance Management Services Allied Managed Care American Insurance Association California Assisted Living Association California Bankers Association California Building Industry Association California Business Properties Association California League of Food Processors California Manufacturers and Technology Association California Restaurant Association California Retailers Association Civil Justice Association of California SJR 25 Page 13 Coalition of Small and Disabled Veteran Business Flasher Barricade Association National Federation of Independent Business Western Growers Association Western Manufactured Housing Communities Association Analysis Prepared by:Eric Dang / JUD. / (916) 319-2334