BILL ANALYSIS Ó
SJR 25
Page 1
SENATE THIRD READING
SJR
25 (Wieckowski)
As Amended August 18, 2016
Majority vote
SENATE VOTE: 21-14
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|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Judiciary |7-3 |Mark Stone, Alejo, |Wagner, Gallagher, |
| | |Chau, Chiu, Cristina |Maienschein |
| | |Garcia, Holden, Ting | |
| | | | |
| | | | |
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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
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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
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
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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.
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
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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
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
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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
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. (Public Law. 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 United States
Code (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. In its report, the CFPB concluded that
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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
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, the Legislature has approved 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.
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Analysis Prepared by:
Eric Dang / JUD. / (916) 319-2334 FN: 0004893