BILL ANALYSIS Ó SB 1078 Page 1 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 SB 1078 Page 2 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 SB 1078 Page 3 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 SB 1078 Page 4 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. SB 1078 Page 5 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.) SB 1078 Page 6 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.) SB 1078 Page 7 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: SB 1078 Page 8 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. SB 1078 Page 9 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 SB 1078 Page 10 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 SB 1078 Page 11 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 SB 1078 Page 12 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 SB 1078 Page 13 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 SB 1078 Page 14 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 SB 1078 Page 15 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 SB 1078 Page 16 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.") SB 1078 Page 17 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 SB 1078 Page 18 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 SB 1078 Page 19 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 SB 1078 Page 20 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 SB 1078 Page 21 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. SB 1078 Page 22 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 SB 1078 Page 23 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 SB 1078 Page 24 Financial Industry Regulatory Authority JAMS Analysis Prepared by:Alison Merrilees and Eric Dang / JUD. / (916) 319-2334