BILL ANALYSIS Ó
SB 1078
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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