BILL ANALYSIS                                                                                                                                                                                                    Ó



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          Date of Hearing:  June 21, 2016 


                           ASSEMBLY COMMITTEE ON JUDICIARY


                                  Mark Stone, Chair


          SB  
          1078 (Jackson) - As Amended June 14, 2016


          SENATE VOTE:  24-12


          SUBJECT:  ARBITRATION: ETHICS


          KEY ISSUE:  IN ORDER TO ADDRESS ISSUES OF UNFAIRNESS AND BIAS IN  
          CONSUMER ARBITRATION, SHOULD A NUMBER OF REFORMS BE IMPLEMENTED  
          TO AVOID CONFLICTS OF INTEREST, INCREASE TRANSPARENCY, AND  
          COMPENSATE CONSUMERS WHOSE ARBITRATION AWARDS ARE VACATED?  


                                      SYNOPSIS


          Arbitration is a sometimes controversial form of alternative  
          dispute resolution held outside of courts where a third-party  
          (rather than a judge) makes a binding (and rarely appealable)  
          award. In an effort to protect consumers and workers, this  
          Legislature has worked on 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  








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          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.  Some argue  
          that anything that interferes with arbitration is preempted by  
          the FAA, but federal law does not preempt states from enacting  
          basic protections around the principles of contract law.  While  
          federal preemption is broad, states are permitted to set rules  
          that are consistent with certain contract law principles.   
          Additionally, states may establish specific arbitration rules in  
          their states, such as the rules set forth in this bill.


          This well-intentioned bill 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 based on violations of ethical rules or disclosure  
          requirements.  Specifically, the bill does the following: (1)  
          Prohibits an arbitrator, during the pendency of the arbitration,  
          from being offered and taking future cases involving either  
          party without the prior written consent of both parties,  
          including the attorneys in the arbitration; (2) Requires  
          arbitrators to disclose certain targeted marketing activities  
          made by, or at the direction of, the private arbitration company  
          to a party or lawyer for a party to a consumer arbitration, and  
          prohibits such activities during the pendency of an arbitration;  
          and, (3) Ensures that a party can recover specified costs  
          incurred in an arbitration proceeding from a private arbitration  
          company or the arbitrator if the arbitration award is vacated  
          pursuant to existing grounds for vacatur such as violation of  
          ethical standards or disclosure requirements.  The bill exempts  
          SEC-regulated arbitration matters from all three of these  
          provisions.


          This analysis addresses a number of issues relevant to  








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          arbitration in general and the provisions of this bill in  
          particular.  For example, it examines the First Amendment issues  
          associated with disclosures and whether they are unlawful  
          compelled speech and determines that they are reasonable  
          restrictions on commercial speech that serve an important  
          purpose.  The analysis also points out some ambiguities in the  
          current wording of the bill.  For example, the term "entertain"  
          in relation to a ban on entertaining or accepting offers of  
          employment during the pendency of arbitration may not be  
          specific in terms of which acts it prohibits.  Also, the bill's  
          exemption for SEC matters seems to be unclear in terms of how it  
          applies to two of the bill's provisions.  This bill, which  
          passed the Senate by a vote of 24-12, is supported by the  
          California Advocates for Nursing Home Reform; California  
          Employment Lawyers Association; and Consumer Attorneys of  
          California.  It is opposed by the American Arbitration  
          Association; the California Dispute Resolution Council; and the  
          Civil Justice Association of California.  




          SUMMARY:  Prohibits arbitrators in consumer arbitration cases  
          from accepting certain work assignments or offers of employment  
          during the course of an arbitration and requires them to make  
          additional disclosures about solicitations for work received  
          during the course of an ongoing arbitration.  Specifically, this  
          bill: 


          1)Prohibits, from the time of appointment until the conclusion  
            of the arbitration, an arbitrator - except when conducting an  
            arbitration regulated by the Securities and Exchange  
            Commission (SEC)-- from entertaining or accepting either of  
            the following:


             a)   Any offer of employment or new professional relationship  
               as a lawyer, expert witness, or consultant from a party or  








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               lawyer for a party in the pending arbitration.


             b)   In a consumer arbitration case, any offer of employment  
               as a dispute resolution neutral [arbitrator] 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 to be made  
               to the arbitrator.




          1)Defines, for purposes of 1), above, a "lawyer for a party" to  
            include any lawyer or law firm currently associated in the  
            practice of law with the lawyer hired to represent a party. 


          2)Requires, in a consumer arbitration case other than in a case  
            subject to regulation by the SEC, if an arbitration award is  
            vacated because of a violation of the ethics standards adopted  
            by the Judicial Council or specified improper conduct of the  
            arbitrator, the consumer to be reimbursed for any costs  
            incurred in the arbitration proceeding from the private  
            arbitration company or from the arbitrator to whom the costs  
            were paid. 


          3)Clarifies that a recovery of costs from the private  
            arbitration company or from the arbitrator authorized in 3),  
            above, is only allowed after the private arbitration company  
            or the arbitrator is provided notice and an opportunity to be  
            heard only on the issue of whether there was a violation of  
            the ethics standards or disclosure requirements and is  
            prohibited if the arbitration award is vacated solely on the  
            basis of a harmless error. 









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          4)Requires, in any arbitration pursuant to an arbitration  
            agreement, the proposed neutral arbitrator to disclose the  
            following, in addition to other disclosures required by  
            existing law, in a consumer arbitration case: 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 and provides  
            that any solicitation made before January 1, 2017, is not  
            required to be disclosed.


          5) Prohibits, during the pendency of the consumer arbitration,  
            any "solicitation" to be made of a party to the arbitration or  
            of a lawyer for a party to the arbitration. 


          6)Defines "solicitation" to include private presentations and  
            oral and written requests for arbitration business, but  
            exclude interactions such as advertising directed to the  
            general public.


          EXISTING LAW:   


          1)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 pursuant to  
            this section.  (Code of Civil Procedure (CCP) Section 1281.85  
            (a).  All further statutory references are to this code,  
            unless otherwise indicated.)
          2)Requires the ethics standards adopted by the Judicial Council  
            to address the disclosure of interests, relationships, or  
            affiliations that may constitute conflicts of interest,  
            including prior service as an arbitrator or other dispute  
            resolution neutral entity, disqualifications, acceptance of  
            gifts, and establishment of future professional relationships.  
            (Ibid.)








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          3)Provides that the ethics requirements and standards in the CCP  
            are nonnegotiable and cannot be waived.  (Section 1281.85  
            (c).)


          4)Requires, in any arbitration pursuant to an arbitration  
            agreement, when a person is to serve as a neutral arbitrator,  
            the proposed neutral arbitrator shall disclose all matters  
            that could cause a person aware of the facts to reasonably  
            entertain a doubt that the proposed neutral arbitrator would  
            be able to be impartial, including all of the following:


             a)   The existence of any ground for disqualification of a  
               judge, including whether or not he or she has a current  
               arrangement concerning prospective employment or other  
               compensated service as a dispute resolution neutral or is  
               participating in, or, within the last two years, has  
               participated in, discussions regarding such prospective  
               employment or service with a party to the proceeding.   
               (Section 1281.9.)
             b)   Any matters required to be disclosed by the ethics  
               standards for neutral arbitrators adopted by the Judicial  
               Council.  (Ibid.)


             c)   The names of the parties to all prior or pending  
               noncollective bargaining cases in which the proposed  
               neutral arbitrator served or is serving as a party  
               arbitrator for any a party to the arbitration proceeding or  
               for a lawyer for a party and the results of each case  
               arbitrated to conclusion, including the date of the  
               arbitration award, identification of the prevailing party,  
               the names of the parties' attorneys, and the amount of  
               monetary damages awarded, if any, but not the name of the  
               claimant or respondent if the party is an individual and  
               not a business or corporate entity.  (Ibid.)








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             d)   The names of the parties to all prior or pending  
               noncollective bargaining cases involving any a party to the  
               arbitration or lawyer for a party for which the proposed  
               neutral arbitrator served or is serving as neutral  
               arbitrator, and the results of each case arbitrated to  
               conclusion, including the date of the arbitration award,  
               identification of the prevailing party, the names of the  
               parties' attorneys and the amount of monetary damages  
               awarded, if any.  In order to preserve confidentiality, it  
               shall be sufficient to give the name of any party not a  
               party to the pending arbitration as "claimant" or  
               "respondent" if the party is an individual and not a  
               business or corporate entity.  (Ibid.) 


             e)   Any attorney-client relationship the proposed neutral  
               arbitrator has or had with any a party or lawyer for a  
               party to the arbitration proceeding.  (Ibid.)


             f)   Any professional or significant personal relationship  
               the proposed neutral arbitrator or his or her spouse or  
               minor child living in the household has or has had with any  
               party to the arbitration proceeding or lawyer for a party.   
               (Ibid.)


          5)Requires the proposed neutral arbitrator to disclose all  
            matters required to be disclosed pursuant to existing law, as  
            well as the new disclosures required by the bill, to all  
            parties in writing within 10 calendar days of service of  
            notice of the proposed nomination or appointment.  (Section  
            1281.9 (b).)
          6)Requires a court to vacate an arbitration award if it  
            determines any of the following:










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             a)   The award was procured by corruption, fraud, or other  
               undue means.


             b)   There was corruption in any of the arbitrators.


             c)   The rights of a party were substantially prejudiced by  
               misconduct of a neutral arbitrator.


             d)   The arbitrators exceeded their powers and the award  
               cannot be corrected without affecting the merits of the  
               decision.  


             e)   The rights of a party were substantially prejudiced by  
               the refusal of the arbitrators to postpone the hearing upon  
               sufficient cause being shown for postponement, or by the  
               refusal of the arbitrators to hear evidence material to the  
               controversy, or by other misconduct of the arbitrators.


             f)   An arbitrator making the award failed to disclose a  
               ground for disqualification or was subject to  
               disqualification but failed to disqualify himself or  
               herself.  (Section 1286.2.)


          7)Provides that a petition to vacate an arbitration award must  
            be served and filed no later than 100 days after the date of  
            the service of a signed copy of the award on the petitioner.   
            (Section 1288.)


          FISCAL EFFECT:  As currently in print this bill is keyed  
          non-fiscal.










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          COMMENTS:  Justice Brennan once said that, "courts are the  
          central dispute-setting institutions of our society.  They are  
          bound to do equal justice under the law, to rich and poor  
          alike."  It comes as no surprise then that the phrase, "Equal  
          Justice Under Law," is engraved above the entrance to our  
          nation's highest court.  And so it seems, we put a great deal of  
          faith in our courts - but would we expect any less?  We  
          anticipate our courts to apply the law in a fair, neutral, and  
          open manner.  We hold judges to high standards, and ask that  
          they avoid even the appearance of impropriety.  We count on our  
          judiciary to advance the law, issue orders, and render written  
          opinions.  And yet, we acknowledge that our system isn't perfect  
          and that despite their best efforts, courts sometimes get it  
          wrong.  Acknowledging the imperfection of our justice system is  
          undoubtedly one reason why it has safeguards.  We remember that  
          decisions of courts are reviewed by appellate courts and indeed,  
          reviewed by our elected branches.  In order to facilitate the  
          right to appeal, we provide a record of the proceedings, in  
          criminal matters at least.  And so, when our families, friends,  
          and neighbors are injured, wronged, or have a dispute, we rely  
          upon that faith that our courts-the institution we trust upon to  
          promote fairness-will deliver equal justice under the law.  


          As this Committee is well-aware, 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 kept in secret  
          (rather than in public view).  Arbitrators do not need to be  
          lawyers, nor do they need to 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  








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          award-history.  It's easy to predict the calls if you 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 worked on 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 about the benefits and  
          harms of mandatory-arbitration.  Proponents of arbitration say  
          that arbitration produces quicker results and reduces litigation  








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          costs.  Opponents argue that arbitration harms consumers and  
          workers because arbitration proceedings render unfair awards.  


          A brief review of recent court decisions on arbitration.  Given  
          the preemptive issues surrounding the Federal Arbitration Act  
          (FAA) and the U.S. Supreme Court's interpretation of the FAA,  
          the ability to legislate around the issue of arbitration is  
          difficult.  In 2005, the California Supreme Court held that in  
          certain adhesive take-it-or-leave-it consumer contracts, a  
          contractual provision requiring the consumer to waive  
          class-action is unconscionable and void.  This is known as the  
          Discovery Bank rule (herein the Rule).  (36 Cal. 4th 148, 159.)   
          In the well-known Concepcion decision, the U.S. Supreme Court  
          struck down the Rule.  (AT&T Mobility LLC v. Concepcion (2011)  
          563 U.S. 333, 344-47.)  In that case, Vincent and Liza  
          Concepcion entered into a cellphone contract that required  
          claims to be brought in an "individual capacity, and not as a  
          plaintiff or class member in any purported class or  
          representative proceeding."  (Id. at 336.)  Relying on Discovery  
          Bank, the Concepcions challenged the class-action waiver as an  
          unconscionable contract provision.  (Id. at 338.)  In abrogating  
          the Rule, the Court held that the Rule stood "as an obstacle to  
          the accomplishment and execution of the full purposes and  
          objectives of Congress" because it "interferes with fundamental  
          attributes of arbitration."  (Id. at 344-47.)  Although the  
          Supreme Court has not defined a "fundamental attribute of  
          arbitration," the Court did say that there were potential  
          advantages of arbitration: lower costs, greater efficiency and  
          speed, and the ability to choose expert adjudicators to resolve  
          specialized disputes.  (Id. at 348.)  Indeed, the Court  
          analogized to several examples on the kinds of rules or laws  
          that would amount to "interference" with the "fundamental  
          attribute of arbitration."  For example, a rule to require  
          arbitration agreements and proceedings to provide  
          judicially-monitored discovery, or to follow the Federal Rules  
          of Evidence would clearly violate the FAA.  (Id. at 342.)  In  
          those instances, those additional protections and  
          procedures-admirable as they are-would increase costs, reduce  








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          efficiency and speed, and prevent an arbitrator from applying  
          the rules he or she wants to apply; accordingly, states and  
          courts are limited in crafting certain rules.


          Despite what some may say, California may regulate issues that  
          affect arbitration.  Relying on these principles in Concepcion,  
          some argue that anything that interferes with arbitration is  
          preempted by the FAA, as interpreted under Concepcion; however,  
          this argument is mistaken.  Federal law does not preempt states  
          from enacting basic protections around the principles of  
          contract law.  While federal preemption is broad, states are  
          permitted to set rules that are consistent with certain contract  
          law principles.  Additionally, states may establish specific  
          arbitration rules in their states.  As the Supreme Court has  
          stated, "parties are generally free to structure their  
          arbitration agreements as they see fit?[Where] parties have  
          agreed to abide by state rules of arbitration, enforcing those  
          rules according to the terms of the agreement is fully  
          consistent with the goals of the FAA."  (Volt Information  
          Sciences, Inc. v. Board of Trustees of Leland Stanford Junior  
          Univ. (1989) 489 U.S. 468, 479.)  Accordingly, states can create  
          procedural protections for arbitration agreements without  
          offending the FAA.
                                                                             

          Restriction on solicitation of business during arbitration.   
          Existing ethical rules for arbitrators provide that, 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.  (Standard 12 (a).)  In addition,  
          ethical rules require an arbitrator to do the following: (1)  
          Disclose a written disclosure to all parties, within 10 calendar  
          days of service of notice of the proposed nomination or  
          appointment,  if he or 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  








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          for a party, including offers to serve as a dispute resolution  
          neutral in another case, while that arbitration is pending; and  
          (2) Inform the parties if he or she subsequently receives an  
          offer while that arbitration is pending.  (Standard 12 (b).) 


          This bill would codify the ethical rule 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 would also prohibit an  
          arbitrator, in a consumer arbitration case, 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, something which is not prohibited by  
          existing Judicial Council regulations.  Therefore, arbitrators  
          in consumer arbitration cases would be prohibited from  
          entertaining and accepting a wider range of employment for a  
          party involved in the pending arbitration.  There is an  
          exception if all parties to the pending arbitration, including  
          the lawyers in the arbitration, confer and agree 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. 


          "Entertain offers." While the prohibition on an arbitrator  
          entertaining an offer of employment is well-intentioned and  
          consistent with good policy, it may not be as clear as it could  
          be in terms of what it does-and does not-prohibit arbitrators  
          from doing.  As currently drafted, the bill provides that an  
          arbitrator shall not "entertain" or accept certain offers of  
          employment.  Although this language is intended to mirror the  
          language that is used in the Judicial Council's regulations, the  
          use of "entertain" in this context seems overly broad.  Indeed,  
          according to Black's Dictionary, entertain means "to bear in  
          mind or consider."  (See Black's Law Dict. (8th ed. 2004) p.  
          572, col.2.)  While it may be prudent to require an arbitrator  








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          to not even think about offers of employment from a party who is  
          subject to an arbitration proceeding, such a prohibition seems  
          both impossible to heed and impractical to enforce.  And while  
          it is certainly reasonable to prohibit the serious consideration  
          of a job offer by an arbitrator, it is unclear whether the  
          current language is limited enough to only apply to such cases.   
          If an unsolicited job offer is made to the arbitrator and the  
          arbitrator thinks about it and then immediately rejects it, has  
          it been entertained?  Does it matter how long the arbitrator  
          considers the offer before ultimately rejecting it?  Should an  
          affirmative act - such as initiating oral or written contact  
          about a job, inquiring about the terms and conditions of  
          employment, responding to a solicitation in any way other than  
          immediately rejecting it, or negotiating terms and conditions of  
          employment-be required as evidence that the arbitrator  
          entertained an offer?  If the intent of the language is to  
          prohibit an arbitrator from seriously considering an offer of  
          employment without immediately rejecting it, then the author may  
          wish to consider making the language of the bill more specific.




          Exemption for SEC-regulated arbitration.  The bill exempts from  
          these requirements "an arbitration conducted or administered by  
          a self-regulatory organization, as defined by the federal  
          Securities Exchange Act of 1934 (15 U.S.C. Sec. 78a) or  
          regulations adopted under that act"- or in other words, an  
          arbitration proceeding that is regulated by the SEC.  While it  
          seems appropriate to exempt arbitrations under the SEC, as  
          currently drafted, the language is unclear in terms of how and  
          when the exemption would apply.  For example, if an arbitrator  
          was the neutral in an SEC arbitration between Acme, Inc. and  
          XYZ, Corp., could the arbitrator accept an offer of employment  
          from Acme, Inc. in a consumer arbitration case?  It would seem  
          so.  Conversely, if an arbitrator was the neutral for a consumer  
          case between Acme, Inc. and Consumer Jane, could the arbitrator  
          accept an offer of employment from Acme, Inc. for an SEC matter?  
           It would also seem so.  Or is the intent of the SEC exemption  








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          that both the original arbitration matter and offer of new  
          employment must be SEC matters?  The author may wish to clarify  
          how the SEC exemption is intended to operate as the bill moves  
          forward.




          Disclosure rules under current law and as proposed to be  
          enhanced by this bill.  CCP Section 1281.9 requires proposed  
          neutral arbitrators to disclose all matters that could cause a  
          person aware of the facts to reasonably entertain a doubt that  
          the proposed neutral arbitrator would be able to be impartial.   
          These include any matters required to be disclosed by the ethics  
          standards developed by Judicial Council, among other things.  If  
          a proposed neutral arbitrator fails to comply with this  
          requirement and any party entitled to receive the disclosure  
          serves a notice of disqualification within 15 calendar days  
          after the proposed nominee or appointee fails to comply, then  
          the proposed neutral arbitrator is disqualified.  (CCP Section  
          1281.91 (a).)  Additionally, if the proposed neutral arbitrator  
          complies with this requirement, then any party entitled to  
          receive the disclosure may disqualify the arbitrator on the  
          basis of the disclosure statement if the party serves a notice  
          of disqualification within 15 calendar days after service of the  
          disclosure statement.  (CCP Section 1281.91 (b).)  




          In an effort to protect against conflicts of interest in  
          consumer arbitrations, this bill requires arbitrators to  
          disclose certain targeted solicitation activities, beginning  
          January 1, 2017, made by, or at the direction of, the private  
          arbitration company to a party or lawyer for a party to a  
          consumer arbitration, and prohibits arbitrators from undertaking  
          such activities during the pendency of an arbitration.   
          Specifically, the bill requires the proposed neutral arbitrator  
          to disclose any solicitation made within the last two years (but  








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          not including any such solicitation prior to January 1, 2017)  
          by, or at the direction of, the private arbitration company to a  
          party or lawyer for a party to the consumer arbitration.  The  
          bill exempts from these requirements "an arbitration conducted  
          or administered by a self-regulatory organization, as defined by  
          the federal Securities Exchange Act of 1934 (15 U.S.C. Sec. 78a)  
          or regulations adopted under that act"- or in other words, an  
          arbitration proceeding that is regulated by the SEC.  


          The First Amendment issues and mandatory disclosures -  
          unconstitutional compelled speech?  It is well-established that  
          the First Amendment generally prohibits the government from  
          compelling speech.  "[T]he right of freedom of thought protected  
          by the First Amendment ? includes both the right to speak freely  
          and the right to refrain from speaking at all." (Wooley v.  
          Maynard, 430 U.S. 705, 714; see R.J. Reynolds Tobacco Co. v.  
          Shewry (9th Cir. 2005) 423 F.3d 906, 915.)  However, the First  
          Amendment's protections-including the right to not be compelled  
          to speak-are not absolute.  (See Schenck v. United States (1919)  
          249 U.S. 47, 52, "The most stringent protection of free speech  
          would not protect a man [from] falsely shouting fire in a  
          theatre and causing panic.")


          In a compelled speech analysis, a court will uphold a law that  
          compels speech if the law is tailored and the government's  
          reasoning behind the law survives the applicable level of  
          scrutiny.  A court applies different levels of scrutiny  
          depending on how the speech is classified.  The higher the  
          scrutiny, the more tailored the law must be, and the more  
          compelling the government's interest must be.  (See Riley v.  
          National Federation of the Blind of North Carolina (1988) 487  
          U.S. 781, 796, "Our lodestars in deciding what level of scrutiny  
          to apply to a compelled statement must be the nature of the  
          speech taken as a whole and the effect of the compelled  
          statement thereon.")










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          A. Content-Based or Content-Neutral.  The first classification  
          of any regulation of speech is whether the regulation is  
          "content-based" or "content-neutral."  However, the Supreme  
          Court has stated that "[m]andating speech that a speaker would  
          not otherwise make necessarily alters the content of the  
          speech."  (Riley v. National Federation of the Blind of North  
          Carolina, Inc. (1988) 487 U.S. 781, 795.)  Accordingly, any  
          compelled speech is viewed as a content-based regulation (i.e. a  
          law proscribing certain content).  (Ibid.)  


          B. Commercial Speech.  The second level of analysis for a speech  
          regulation is whether the speech being regulated is commercial  
          or noncommercial speech.  If the regulation is content-based and  
          the speech is noncommercial, a court will likely apply the  
          strict scrutiny.  Conversely, a similar regulation that is  
          content-based but where the speech is commercial, a court will  
          apply a more lenient standard.  (See Dex Media West, Inc. v.  
          City of Seattle (9th Cir. 2012) 696 F.3d 952, 956-957.)  Indeed,  
          regulations targeting misleading commercial speech need only  
          survive rational basis scrutiny.  (See Zauderer v. Office of  
          Disciplinary Counsel of the Supreme Ct. (1985) 471 U.S. 626.)


          It is well-settled law that the government is "free to prevent  
          the dissemination to commercial speech that is false, deceptive,  
          or misleading" without violating the First Amendment.  (Zauderer  
          v. Office of Disciplinary Counsel of the Supreme Ct. (1985) 471  
          U.S. 638.)  Specifically, "disclosure requirements trench much  
          more narrowly on an advertiser's interests [because] warnings or  
          disclaimers might be appropriately required in order to  
          dissipate the possibility of consumer confusion or deception."   
          (Id. at 651 [internal quotations omitted]).  Accordingly,  
          misleading commercial speech only needs to survive rational  
          basis scrutiny.  (Ibid.)


          Indeed, "laws requiring a commercial speaker to make purely  
          factual disclosures relating to its business affairs, whether to  








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          prevent deception or simply to promote informational  
          transparency, have a purpose consistent with the reasons for  
          according constitutional protection to commercial speech."   
          (Beeman v. Anthem Prescription Management, LLC (2013) 58 Cal.4th  
          329, 356 [citations omitted].)  Similarly, "[m]andated  
          disclosure of accurate, factual, commercial information does not  
          offend the core First Amendment values of promoting efficient  
          exchange of information or protecting individual liberty  
          interests.  Such disclosure furthers, rather than hinders, the  
          First Amendment goal of the discovery of truth and contributes  
          to the efficiency of the 'marketplace of ideas.'"  (National  
          Electric Manufacturers Assn. v. Sorrell (2d Cir. 2001) 272 F.3d  
          104, 113-114.)  


          Here, the bill does not propose to dictate what the proposed  
          neutral arbitrator is required to tell prospective clients.   
          Instead, the requirement is to information about the neutral  
          arbitrator his or her business dealings in addition to similar  
          disclosures required under existing law.  Specifically, the bill  
          requires the proposed neutral arbitrator to disclose any  
          solicitation made within the last two years (but not including  
          any such solicitation prior to January 1, 2017) by, or at the  
          direction of, the private arbitration company to a party or  
          lawyer for a party to the consumer arbitration.  Therefore, the  
          disclosure requirement would likely be considered  
          viewpoint-neutral commercial speech that would be subject to  
          intermediate scrutiny.  


          C. Intermediate Scrutiny.  To survive intermediate scrutiny, the  
          law must directly advance a substantial governmental interest.   
          (See Association of National Advertisers, Inc. v. Lungren (9th  
          Cir. 1994) 44 F.3d 726, 729.)  Here, the interest is to ensure  
          that consumers are adequately informed of any potential conflict  
          of interest that the proposed neutral arbitrator may have  
          because of a solicitation.  Given that the fact of a  
          solicitation by or at the direction of the private arbitration  
          company could naturally affect the neutrality of the proposed  








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          neutral arbitrator, the disclosure of this information is likely  
          to advance a substantial government interest: to ensure that a  
          proposed neutral arbitrator is, in fact, neutral and that a  
          consumer is able to understand any potential real or perceived  
          bias on the part of the arbitrator.  Furthermore, if there is an  
          entrenched belief among the public that arbitration is not a  
          fair forum for dispute resolution as provided in the Senate's  
          analysis, the government would necessarily have an interest in  
          improving the public's faith and perception of the arbitration  
          system.




          Exemption for SEC-regulated arbitration.  The bill exempts from  
          these disclosure requirements an arbitration proceeding that is  
          regulated by the SEC.  As currently drafted, however, the  
          language is unclear in terms of how and when the exemption would  
          apply.  While it seems clear that the author intends to exempt  
          arbitrators from the bill's disclosure requirements while  
          involved in arbitrating an SEC matter, the exemption could be  
          interpreted to apply more broadly.  For example, if an  
          arbitrator were the neutral for a consumer case between Acme,  
          Inc. and Consumer Jane, would the arbitrator be required to  
          disclose the fact that Acme, Inc. engaged her services in an SEC  
          matter less than two years earlier, or would that arbitration be  
          exempt from disclosure because it was an SEC matter?  The author  
          may wish to clarify how the SEC exemption is intended to apply  
          to the bill's new disclosure requirement as the bill moves  
          forward.



          Recovery of costs.  Section 1285 provides that "any party to an  
          arbitration in which an award has been made may petition the  
          court to confirm, correct or vacate the award."  A court is  
          required to vacate the award if the court determines any of a  
          number of facts or circumstances that would reasonably  
          compromise the fairness of the proceeding, including the fact  








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          that the award was procured by corruption, fraud or other undue  
          means.  (Section 1286.2 (a)(1).)  One reason for vacating an  
          award is that the arbitrator who made the award either:  (1)  
          failed to disclose within the time required for disclosure a  
          ground for disqualification of which the arbitrator was then  
          aware; or (2) was subject to disqualification upon specified  
          grounds but failed upon receipt of timely demand to disqualify  
          himself or herself as required by that provision.  (Section  
          1286.2 (a)(6).)



          Opponents and concerned third parties focus on this provision in  
          the bill, saying - in the words of JAMS -- that it is  
          "unworkable, patently unfair to Providers and arbitrators and  
          disrupts long-standing principles ensuring the Provider and  
          arbitrator remain neutral."  Regarding the solicitation  
          provision, JAMS states that it would "significantly restrain a  
          provider's ability to conduct business."  




          However, the bill appears to deliberately exclude cases where an  
          award is vacated for a reason other than misconduct by the  
          arbitrator.  For example, the bill reasonably does not include  
          Section 1286.2 (a)(2), the award was procured by corruption,  
          fraud or other undue means, which otherwise seems to be a  
          perfectly appropriate (and necessary) reason to vacate an award,  
          apparently because that language does not specify that the  
          arbitrator must be responsible for the corruption, fraud or  
          other undue means.  The bill does not even include Section  
          1286.2(a)(4), the arbitrators exceeded their powers and the  
          award cannot be corrected, presumably out of an abundance of  
          deference to arbitrators who may sometimes act in excess of  
          their authority.  Finally, the bill specifies that "recovery of  
          costs under this paragraph is prohibited if the arbitration  
          award is vacated solely on the basis of a harmless error."  As a  
          result, the only grounds for vacating an award in Section 1286.2  








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          that are included in the bill are those which are based upon  
          clear and significant misconduct by the arbitrator which seems  
          to be a perfectly reasonable basis for awarding costs to the  
          consumer as a result.




          According to the author:




               Despite the fact that arbitrators are prohibited from  
               directly soliciting cases for themselves, arbitration  
               provider organizations can engage in undisclosed  
               arrangements and activities (e.g., holding seminars on how  
               to do better in arbitration, or consulting on which cases  
               to submit to an arbitration). Such activities  
               understandably cause the consumer or employee to question  
               the objectivity of the company and its arbitrators.


               . . . [T]here are few consequences to an arbitrator or  
               private arbitration company that fails to comply with the  
               ethical rules and disclosure requirements, because there is  
               no entity with general oversight or enforcement authority  
               over arbitrators. In fact, when an arbitrator's award is  
               vacated or the arbitrator is removed for failure to comply  
               with the ethical rules or make necessary disclosures, the  
               arbitrator and/or private arbitrator company is permitted  
               to retain the fees collected, even though the parties may  
               have to restart the proceedings, thus resulting in an  
               unjust enrichment to the arbitrator and the private  
               arbitration company.












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          ARGUMENTS IN OPPOSITION:  The Civil Justice Association writes  
          that, "The bill would seriously hamper the ability of the  
          providers of arbitration services to function, diminishing or  
          eliminating arbitration as a practical option for resolving  
          disputes, especially for parties who frequently seek the  
          advantages of speed and cost efficiency offered by arbitration  
          compared to civil court litigation." 


          The American Arbitration Association argues that it would be  
          unfair to award costs to a consumer whose arbitration award is  
          vacated because the arbitrator or provider may not be  
          responsible for the grounds justifying vacatur.  The association  
          also argues that the definition of "solicitation" could  
          encompass both commercial and non-commercial speech and  
          therefore trigger First Amendment issues.




          ARGUMENTS IN SUPPORT:  In support of the bill, the California  
          Advocates for Nursing Home Reform (CANHR) states that it  
          supports the 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."  



          Also in support, the Consumer Attorneys of California writes  
          that "SB 1078 addresses issues of unfairness and bias in forced  








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          consumer arbitrations.  Private arbitration firms that  
          administer the arbitrations (firms like JAMS and AAA) often  
          operate with defendant companies on a regular basis without  
          disclosing a conflict of interest to the consumer plaintiff."  


          REGISTERED SUPPORT / OPPOSITION:




          Support


          California Advocates for Nursing Home Reform


          California Employment Lawyers Association


          Consumer Attorneys of California




          Opposition


          American Arbitration Association 


          California Dispute Resolution Council 


          Civil Justice Association of California


          Concerns









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          Financial Industry Regulatory Authority


          JAMS




          Analysis Prepared by:Alison Merrilees and Eric Dang / JUD. /  
          (916) 319-2334