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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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