BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 1078|
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THIRD READING
Bill No: SB 1078
Author: Jackson (D)
Amended: 5/10/16
Vote: 21
SENATE JUDICIARY COMMITTEE: 6-1, 4/26/16
AYES: Jackson, Moorlach, Hertzberg, Leno, Monning, Wieckowski
NOES: Anderson
SUBJECT: Civil procedure: arbitration
SOURCE: Author
DIGEST: This bill prohibits an arbitrator from entertaining or
accepting, from the time of appointment until the conclusion of
the arbitration any offers of employment as a dispute resolution
neutral in another case involving a party or lawyer for a party
in the pending arbitration without the prior written consent of
the parties, as specified. This bill also authorizes a party
to recover specified costs incurred in an arbitration proceeding
from a private arbitration company or arbitrator to whom the
costs were paid if the arbitration award is vacated because of a
violation of the specified ethical standards or disclosure
requirements. Lastly, this bill adds specified prohibitions and
disclosure requirements relating to solicitations made by, or at
the direction of, a private arbitration company to a party or a
lawyer for a party in a pending arbitration.
Senate Floor Amendments of 5/10/16 clarify provisions under
Section 2 of the bill, relating to costs that must be refunded
upon vacatur of the arbitration award for ethical or disclosure
violations.
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ANALYSIS:
Existing law:
1)Governs arbitrations in California, under the California
Arbitration Act (CAA), including the enforcement of
arbitration agreements, rules for neutral arbitrators, the
conduct of arbitration proceedings, and the enforcement of
arbitration awards. The CAA generally requires a person
serving as a neutral arbitrator pursuant to an arbitration
agreement to comply with the ethics standards for arbitrators
adopted by the Judicial Council.
2)Requires, under the CAA, that a proposed neutral arbitrator
make specified disclosures and allows a party to disqualify
the arbitrator. Existing law provides that, subject only to
the disclosure requirements of law, the proposed neutral
arbitrator shall disclose all matters required to be disclosed
pursuant to this section to all parties in writing within 10
calendar days of service of notice of the proposed nomination
or appointment.
3)Provides, generally, that, subject to specified procedural
requirements, the court shall vacate the award if the court
determines any of the following:
The award was procured by corruption, fraud or other
undue means;
There was corruption in any of the arbitrators
("paragraph 2");
The rights of the party were substantially prejudiced by
misconduct of a neutral arbitrator ("paragraph 3");
The arbitrators exceeded their powers and the award
cannot be corrected without affecting the merits of the
decision upon the controversy submitted;
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The rights of the party were substantially prejudiced by
the refusal of the arbitrators to postpone the hearing upon
sufficient cause being shown therefor, by the refusal of
the arbitrators to hear evidence material to the
controversy or by other conduct of the arbitrators contrary
to the provisions of the CAA; or
An arbitrator making the award either: (a) failed to
disclose within the time required for disclosure a ground
for disqualification of which the arbitrator was then
aware; or (b) was subject to disqualification upon
specified grounds but failed upon receipt of timely demand
to disqualify himself or herself as required by that
provision ("paragraph 6").
1)Requires, under the Judicial Council's "Ethics Standards for
Neutral Arbitrators in Contractual Arbitration," that covered
arbitrators make basic disclosures regarding potential
conflicts of interest and requires compliance with certain
standards of conduct. Standards 7 and 8 of the Ethics
Standards provide for various disclosures that the arbitrator
must make on behalf of him or herself, and on behalf of the
arbitration company, respectively.
2)Provides that, under Standard 12(a) of the Ethics Standards,
from the time of appointment until the conclusion of the
arbitration, an arbitrator must not entertain or accept any
offers of employment or new professional relationships as a
lawyer, an expert witness, or a consultant from a party or a
lawyer for a party in the pending arbitration.
3)Provides, under Standard 12(b) of the Ethics Standards, with
respect to offers for employment or professional relationships
other than as a lawyer, expert witness, or consultant, that:
In addition to disclosures under Standards 7 and 8,
above, a proposed arbitrator must disclose a written
disclosure to all parties, within 10 calendar days of
service of notice of the proposed nomination or
appointment, if, while that arbitration is pending, he or
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she will entertain offers of employment or new professional
relationships in any capacity other than as a lawyer,
expert witness, or consultant from a party or a lawyer for
a party, including offers to serve as a dispute resolution
neutral in another case;
If the arbitrator discloses that he or she will
entertain such offers of employment or new professional
relationships while the arbitration is pending, the
disclosure must also state that the arbitrator will inform
the parties as required, below, if he or she subsequently
receives an offer while that arbitration is pending; and
A party may disqualify the arbitrator based on this
disclosure by serving a notice of disqualification in the
manner and within the time specified in Section 1281.91(b)
of the Code of Civil Procedure (within 10 calendar days of
service of notice of the proposed nomination or
appointment).
1)Provides that if, under Standard 12(d) of the Ethics
Standards, in the disclosure made pursuant to Standard 12(b),
above, the arbitrator stated that he or she will entertain
offers of employment or new professional relationships other
than as a lawyer, expert witness, or consultant, the
arbitrator must then, from the time of appointment until the
conclusion of the arbitration, inform all parties to the
current arbitration of any such offer and whether it was
accepted, as specified. If the arbitrator fails to inform the
parties of an offer or an acceptance, such failure constitutes
a failure to comply with the arbitrator's obligation to make a
disclosure required under these ethics standards. However, if
an arbitrator has informed the parties in a pending
arbitration about an offer as required, receiving or accepting
that offer does not, by itself, constitute corruption in, or
misconduct by, the arbitrator. If the arbitrator has informed
the parties in a pending arbitration about an offer as
required, then the arbitrator is not subject to
disqualification on the basis of that offer or the acceptance
of that offer.
2)Requires, under Standard 17(a) of the Ethics Standards, an
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arbitrator to be truthful and accurate in marketing his or her
services. An arbitrator may advertise a general willingness to
serve as an arbitrator and convey biographical information and
commercial terms of employment, but must not make any
representation that directly or indirectly implies favoritism
or a specific outcome. An arbitrator must ensure that his or
her personal marketing activities and any activities carried
out on his or her behalf, including those of a provider
organization that he or she affiliates with, comply with this
requirement.
3)Provides that, under Standard 17 of the Ethics Standards, an
arbitrator must not solicit business from a participant in the
arbitration while the arbitration is pending, and an
arbitrator must not solicit appointment as an arbitrator in a
specific case or specific cases. For this standard, "solicit"
generally means to communicate in person, by phone, or through
real-time electronic contact to any prospective participant in
the arbitration concerning the availability for professional
employment of the arbitrator in which a significant motive is
pecuniary gain.
This bill:
1)Codifies the ethical rule, above, that, from the time of
appointment until the conclusion of the arbitration, an
arbitrator shall not entertain or accept any offers of
employment or new professional relationships as a lawyer,
expert witness, or consultant from a party or lawyer for a
party in the pending arbitration. This bill also prohibits,
during that same time period, an arbitrator from entertaining
or accepting any offers of employment as a dispute resolution
neutral in another case involving a party or lawyer for a
party in the pending arbitration unless all parties to the
pending arbitration, including the lawyers in the arbitration,
have conferred and agreed in writing, before any solicitation
of the arbitrator, to allow offers of future employment as a
dispute resolution neutral to be made to the arbitrator.
2)Adds to the statutory list of disclosures that an arbitrator
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must make pursuant to Section 1281.9, above, that for a
consumer arbitration case, an arbitrator must disclose any
solicitation made within the last two years by, or at the
direction of, the private arbitration company to a party or
lawyer for a party to the consumer arbitration. This bill also
provides that, during the pendency of the arbitration, no
solicitation shall be made of a party to the arbitration or of
a lawyer for a party to the arbitration. "Solicitation"
includes an oral or written request for arbitration business,
but does not include advertising directed to the general
public or communications indicating a general willingness to
serve as an arbitrator or private arbitration company.
3)Provides that if an arbitration award is vacated pursuant to
specified provisions (paragraphs 2, 3, or 6) of the existing
vacatur statute, above, because of a violation of the ethical
standards adopted by the Judicial Council or a violation of
the disclosure requirements established by the CAA, a party
may recover any costs incurred in the arbitration proceeding
from the private arbitration company or the arbitrator to whom
the costs were paid. "Costs" for these purposes includes
filing fees, administrative costs, arbitrator fees, or any
other fees paid to the private arbitration company or
arbitrator.
Background
As a general matter, arbitrations provide an alternative method
of dispute resolution, outside of the courts, wherein a neutral
third party, known as the arbitrator, renders a decision after a
hearing to which both parties have had an opportunity to be
heard. Under California law, there are two distinguishable types
of arbitration: judicial arbitration (also known as
court-annexed arbitration, governed under Code of Civil
Procedure Sections 1141.10 -1141.31) and private arbitrations
(also commonly known as "contractual," "voluntary," or
"nonjudicial" arbitrations; governed under the CAA, Code of
Civil Procedure Section 1280 et seq.).
On March 1, 2016, the Senate Judiciary Committee held an
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informational hearing on the topic of private or contractual
arbitration agreements, entitled The Federal Arbitration Act,
the U.S. Supreme Court, and the Impact of Mandatory Arbitration
on California Consumers and Employees. In that hearing, many
issues facing consumers and employees who are subject to
arbitration clauses contained in standardized,
take-it-or-leave-it, or "adhesive" contracts were brought to
light. That hearing also brought to light the various
difficulties facing the state in addressing some of the
underlying, fundamental harms faced by consumers and employees
as a result of federal preemption and U.S. Supreme Court
precedent interpreting the Federal Arbitration Act. A package
of arbitration bills, of which this bill is one, arose out of
the hearing, seeking to address various fairness issues
surrounding the rules that govern the conduct and operation of
arbitrators and arbitrations in this state.
Of particular relevance to this bill are issues surrounding
arbitrator ethics, as discussed during the March hearing. In
2001, as a result of a concern mutually shared by Governor
Davis, Chief Justice George, and the Chair of the Senate
Judiciary Committee that the Legislature must take a serious
look at the growing use of private judges and how that growing
use raises questions of fairness and the creation of a dual
justice system that favors the wealthy litigant over the poor
litigant, SB 475 (Escutia, Chapter 362, Statutes of 2001) was
enacted to require the Judicial Council to adopt ethical rules
for arbitrators. (See Sen. Judiciary Com., analysis of SB 475
(2001-2002 Reg. Session) Apr. 17, 2001, p. 4.)
The resulting Judicial Council ethical standards are "intended
to guide the conduct of arbitrators, to inform and protect
participants in arbitration, and to promote public confidence in
the arbitration process," and require covered arbitrators to
make basic disclosures regarding potential conflicts of interest
and to comply with certain standards of conduct. In addition,
the CAA (Code Civ. Proc. Sec. 1280 et seq.) requires a proposed
neutral arbitrator to make specified disclosures and allows a
party to disqualify the arbitrator within certain timelines
based on those disclosures or improper non-disclosures. These
ethical standards and requirements for neutral arbitrators are
not subject to negotiation and may not be waived. (See AB 1090,
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Monning, Chapter 133, Statutes of 2009.)
This bill now seeks to build upon the current ethical rules and
disclosure requirements under California law to: (1) prohibit an
arbitrator from being offered future cases involving either
party during the pendency of the arbitration, without the prior
written consent of both parties, including the attorneys in the
arbitration; (2) require arbitrators to disclose certain
targeted marketing activities made by, or at the direction of,
the private arbitration company to a party or a lawyer for a
party to a consumer arbitration, and prohibits such activities
during the pendency of an arbitration; and, (3) ensure that a
party can recover specified costs incurred in an arbitration
proceeding from a private arbitration company or arbitrator if
the arbitration award is vacated because of a violation of
specified ethical standards or disclosure requirements.
Comments
As stated by the author:
SB 1078 addresses issues of unfairness and bias in consumer
arbitrations. The bill strengthens current rules relating to
targeted marketing activities of private arbitration companies
as well as rules relating to the ability of arbitrators to
enter into future arrangements with one party to a pending
arbitration. This bill also prevents unjust enrichment to an
arbitration company where an award has been vacated or where
the arbitrator has been removed during an arbitration for
violations of ethical rules or disclosure requirements.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified5/11/16)
California Advocates for Nursing Home Reform
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California Employment Lawyers Association
Consumer Attorneys of California
OPPOSITION: (Verified5/11/16)
American Arbitration Association
California Dispute Resolution Council
Civil Justice Association of California
ARGUMENTS IN SUPPORT: In support of the bill, the California
Advocates for Nursing Home Reform (CANHR) states that it
supports this bill's efforts to better ensure that parties to an
arbitration are aware of possible conflicts of interest with an
arbitrator. CANHR writes that "[t]hese days, a vast majority of
long-term care facilities require residents to sign pre-dispute
mandatory arbitration agreements so more and more disputes are
being settled by arbitrators who have financial and other
reasons to rule against the residents. Therefore it is
increasingly important that arbitrators be as impartial as
possible. Prohibiting employment offers to arbitrators while a
matter is pending and requiring disclosure of solicitations to
parties or lawyers involved in the arbitration are eminently
reasonable measures to safeguard the integrity of arbitrations."
The California Employment Lawyers Association writes in support:
[T]he current rules are deficient in numerous respects. [ . .
. Today,] in a 'consumer or employment' arbitration as defined
by the rules, the arbitrator now must disclose the new cases
they have taken from one party but there is still no
opportunity to reject the arbitrator or oppose the
solicitation or acceptance of that new case based merely on
the disclosure. In commercial cases the old rule remains the
same which means that one party can offer and the arbitrator
can accept an unlimited number of new matters and keep those
professional and financial relationships secret. This is
obviously an unacceptable practice.
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The impact of arbitrators' repeat dealings with the same party
is very troubling. A recent study by Cornell University's ILR
Review journal examined results of 11 years of employment
arbitration cases administered by the American Arbitration
Association (AAA). Their findings show a significant repeat
"employer/arbitrator pairing" effect: employers that use the
same arbitrator on multiple occasions win more often and have
lower damages awarded against them than do employers appearing
before an arbitrator for the first time.
One of our member's recent arbitration experience illustrates
how the "repeat player" phenomenon loads the deck against
employees in mandatory arbitration. In 2013, our member's
client sued his employer to recover unpaid sales commissions
that were owed to him [. . .]. During the pendency of the
arbitration, the arbitrator disclosed that he had accepted
forty four additional matters from the same defense firm
representing the defendant in that case. A motion to
disqualify the arbitrator in that matter was recently denied
by JAMS.
ARGUMENTS IN OPPOSITION: California Dispute Resolution
Council (CDRC) writes in opposition to this bill in large degree
because it believes the current ethical rules are working
properly. CDRC believes that Rule 12 of the Judicial Council
Ethics Standards works very well, as is, because a party who is
concerned by an arbitrator's disclosure that he or she will
accept solicitations as a dispute resolution neutral while the
arbitration is pending can disqualify the arbitrator. If they
don't, "then the party obviously is aware that the arbitrator
may accept offers from its adversaries (or itself) for future
work as a dispute resolution neutral and is not concerned about
that possibility." CDRC also expresses concern that the bill
allows a party to an arbitration to recover undefined costs
incurred in an arbitration proceeding from the private
arbitration company (the provider) if the award is vacated. This
bill would "therefore make the provider vicariously liable for
any act of an arbitrator that led to the vacat[ur] of an award.
[. . .]"
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The Civil Justice Association of California (CJAC) also writes
in opposition that this bill "will prohibit arbitration
companies from soliciting business from a party to a consumer
arbitration for as long as the arbitration lasts. Because some
arbitration companies offer dozens or hundreds of neutrals, any
one of whom could be providing service as a neutral at any time
for a party that frequently uses arbitration, SB 1078 will
operate as a ban on solicitation by arbitration companies of
their most frequent users. SB 1078 will also prohibit an
arbitrator, during an arbitration, from entertaining any offers
of employment as a dispute resolution neutral from a party to
the arbitration. If a party to an ongoing arbitration is a
frequent user of arbitration, this ban constitutes a practical
barrier to the arbitrator scheduling subsequent work, and will
complicate the logistical challenge faced by arbitration
companies as they try to keep track of which neutrals are
available." CJAC believes that existing law is already
sufficient to address issues of corruption or misconduct of a
neutral arbitrator.
Prepared by:Ronak Daylami / JUD. / (916) 651-4113
5/11/16 16:06:36
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