BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 1078|
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UNFINISHED BUSINESS
Bill No: SB 1078
Author: Jackson (D)
Amended: 8/19/16
Vote: 21
SENATE JUDICIARY COMMITTEE: 6-1, 4/26/16
AYES: Jackson, Moorlach, Hertzberg, Leno, Monning, Wieckowski
NOES: Anderson
SENATE FLOOR: 24-12, 5/12/16
AYES: Allen, Beall, Block, De León, Glazer, Hall, Hancock,
Hernandez, Hertzberg, Hill, Hueso, Jackson, Lara, Leno, Leyva,
McGuire, Mendoza, Mitchell, Monning, Moorlach, Pavley, Roth,
Wieckowski, Wolk
NOES: Anderson, Bates, Berryhill, Cannella, Fuller, Gaines,
Huff, Morrell, Nguyen, Nielsen, Stone, Vidak
NO VOTE RECORDED: Galgiani, Liu, Pan, Runner
ASSEMBLY FLOOR: 48-26, 8/29/16 - See last page for vote
SUBJECT: Civil procedure: arbitration
SOURCE: Author
DIGEST: This bill generally prohibits an arbitrator, in
consumer arbitrations, from entertaining or accepting, from the
time of appointment until the conclusion of the arbitration any
offers of employment as a dispute resolution neutral in another
case involving a party or lawyer for a party in the pending
arbitration without the prior written consent of the parties, as
specified. This bill also adds specified prohibitions and
disclosure requirements relating to certain solicitations made
by, or at the direction of, a private arbitration company to a
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party or a lawyer for a party in a pending arbitration.
Assembly Amendments add a severability clause and otherwise
narrow the bill by: (1) clarifying that the bill applies only to
consumer (including employment) arbitrations; (2) adding
specified exemptions for arbitrations conducted or administered
specified Securities and Exchange Commission-regulated
arbitrations, as well as arbitrations conducted pursuant to a
collective bargaining agreement; (3) deleting a provision that
would have allowed parties to recover costs if their award was
vacated for ethical violations; and (4) clarifying what is and
is not considered a "solicitation."
ANALYSIS:
Existing law:
1)Governs arbitrations in California, under the California
Arbitration Act (CAA), including the enforcement of
arbitration agreements, rules for neutral arbitrators, the
conduct of arbitration proceedings, and the enforcement of
arbitration awards. The CAA generally requires a person
serving as a neutral arbitrator pursuant to an arbitration
agreement to comply with the ethics standards for arbitrators
adopted by the Judicial Council.
2)Requires, under the CAA, that a proposed neutral arbitrator
make specified disclosures and allows a party to disqualify
the arbitrator. Existing law provides that, subject only to
the disclosure requirements of law, the proposed neutral
arbitrator shall disclose all matters required to be disclosed
pursuant to this section to all parties in writing within 10
calendar days of service of notice of the proposed nomination
or appointment.
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3)Requires, under the Judicial Council's "Ethics Standards for
Neutral Arbitrators in Contractual Arbitration," that covered
arbitrators make basic disclosures regarding potential
conflicts of interest and requires compliance with certain
standards of conduct. Standards 7 and 8 of the Ethics
Standards provide for various disclosures that the arbitrator
must make on behalf of him or herself, and on behalf of the
arbitration company, respectively.
4)Provides that, under Standard 12(a) of the Ethics Standards,
from the time of appointment until the conclusion of the
arbitration, an arbitrator must not entertain or accept any
offers of employment or new professional relationships as a
lawyer, an expert witness, or a consultant from a party or a
lawyer for a party in the pending arbitration.
5)Provides, under Standard 12(b) of the Ethics Standards, with
respect to offers for employment or professional relationships
other than as a lawyer, expert witness, or consultant, that:
In addition to disclosures under Standards 7 and 8,
above, a proposed arbitrator must disclose a written
disclosure to all parties, within 10 calendar days of
service of notice of the proposed nomination or
appointment, if, while that arbitration is pending, he or
she will entertain offers of employment or new professional
relationships in any capacity other than as a lawyer,
expert witness, or consultant from a party or a lawyer for
a party, including offers to serve as a dispute resolution
neutral in another case;
If the arbitrator discloses that he or she will
entertain such offers of employment or new professional
relationships while the arbitration is pending, the
disclosure must also state that the arbitrator will inform
the parties as required, below, if he or she subsequently
receives an offer while that arbitration is pending; and
A party may disqualify the arbitrator based on this
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disclosure by serving a notice of disqualification in the
manner and within the time specified in Section 1281.91(b)
of the Code of Civil Procedure (within 10 calendar days of
service of notice of the proposed nomination or
appointment).
1)Provides, under Standard 12(d) of the Ethics Standards, that
if, in the disclosure made pursuant to Standard 12(b), above,
the arbitrator stated that he or she will entertain offers of
employment or new professional relationships other than as a
lawyer, expert witness, or consultant, the arbitrator must
then, from the time of appointment until the conclusion of the
arbitration, inform all parties to the current arbitration of
any such offer and whether it was accepted, as specified. If
the arbitrator fails to inform the parties of an offer or an
acceptance, such failure constitutes a failure to comply with
the arbitrator's obligation to make a disclosure required
under these ethics standards. However, if an arbitrator has
informed the parties in a pending arbitration about an offer
as required, receiving or accepting that offer does not, by
itself, constitute corruption in, or misconduct by, the
arbitrator. If the arbitrator has informed the parties in a
pending arbitration about an offer as required, then the
arbitrator is not subject to disqualification on the basis of
that offer or the acceptance of that offer.
2)Requires, under Standard 17(a) of the Ethics Standards, an
arbitrator to be truthful and accurate in marketing his or her
services. An arbitrator may advertise a general willingness to
serve as an arbitrator and convey biographical information and
commercial terms of employment, but must not make any
representation that directly or indirectly implies favoritism
or a specific outcome. An arbitrator must ensure that his or
her personal marketing activities and any activities carried
out on his or her behalf, including those of a provider
organization that he or she affiliates with, comply with this
requirement.
3)Provides, under Standard 17 of the Ethics Standards, that an
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arbitrator must not solicit business from a participant in the
arbitration while the arbitration is pending, and an
arbitrator must not solicit appointment as an arbitrator in a
specific case or specific cases. "Solicit" generally means to
communicate in person, by phone, or through real-time
electronic contact to any prospective participant in the
arbitration concerning the availability for professional
employment of the arbitrator in which a significant motive is
pecuniary gain.
This bill:
1)Codifies the ethical rule, under item #5 above, that, from the
time of appointment until the conclusion of the arbitration,
an arbitrator shall not entertain or accept any offers of
employment or new professional relationships as a lawyer,
expert witness, or consultant from a party or lawyer for a
party in the pending arbitration. Also prohibits, during that
same time period, an arbitrator from entertaining or
accepting, in a consumer arbitration case, any offers of
employment as a dispute resolution neutral in another case
involving a party or lawyer for a party in the pending
arbitration unless all parties to the pending arbitration,
including the lawyers in the arbitration, have conferred and
agreed in writing, before any solicitation of the arbitrator,
to allow offers of future employment as a dispute resolution
neutral to be made to the arbitrator.
2)Adds to the current statutory list of disclosures that an
arbitrator must make pursuant to existing law, that for a
consumer arbitration case, an arbitrator must also disclose
any solicitation made within the last two years by, or at the
direction of, the private arbitration company to a party or
lawyer for a party to the consumer arbitration. Provides
that, during the pendency of the arbitration, no solicitation
shall be made of a party to the arbitration or of a lawyer for
a party to the arbitration. Solicitation made before January
1, 2017, is not required to be disclosed.
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3)Specifies that "solicitation" includes: private presentations
made to a party or lawyer for a party by the private
arbitration company or the arbitrator, as well as oral or
written discussions, meetings, or negotiations to designate
the private arbitration company or the arbitrator as the
arbitration provider or arbitrator for a party in specific
contracts. Solicitation does not include:
Advertising directed to the general public.
Communications indicating a general willingness to serve
as an arbitrator or private arbitration company, as
specified.
Presentations made by the private arbitration company or
the arbitrator at a program or seminar held open to the
public.
Responding to inquiries regarding the arbitration
provider's costs, rules, procedures, or standards.
Background
As a general matter, arbitrations provide an alternative method
of dispute resolution, outside of the courts, wherein a neutral
third party, known as the arbitrator, renders a decision after a
hearing to which both parties have had an opportunity to be
heard. Under California law, there are two distinguishable types
of arbitration: judicial arbitration (also known as
court-annexed arbitration, governed under Code Civ. Proc. Secs.
1141.10 -1141.31) and private arbitrations (also commonly known
as "contractual," "voluntary," or "nonjudicial" arbitrations;
governed under the CAA, Code Civ. Proc. Sec. 1280 et seq.).
On March 1, 2016, the Senate Judiciary Committee held an
informational hearing on the topic of private or contractual
arbitration agreements, entitled The Federal Arbitration Act,
the U.S. Supreme Court, and the Impact of Mandatory Arbitration
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on California Consumers and Employees. In that hearing, many
issues facing consumers and employees who are subject to
arbitration clauses contained in standardized,
take-it-or-leave-it, or "adhesive" contracts were brought to
light. The hearing also brought to light the various
difficulties facing the state in addressing some of the
underlying, fundamental harms faced by consumers and employees
as a result of federal preemption and U.S. Supreme Court
precedent interpreting the Federal Arbitration Act. A package of
bills, of which this bill is one, arose out of the hearing,
seeking to address various fairness issues surrounding the rules
that govern the conduct and operation of arbitrators and
arbitrations in this state.
Of particular relevance to this bill are issues surrounding
arbitrator ethics, as discussed during the March hearing. In
2001, as a result of a concern mutually shared by Governor
Davis, Chief Justice George, and the Chair of the Senate
Judiciary Committee that the Legislature take a serious look at
the growing use of private judges and how that growing use
raises questions of fairness and the creation of a dual justice
system that favors the wealthy litigant over the poor litigant,
SB 475 (Escutia, Chapter 362, Statutes of 2001) was enacted to
require the Judicial Council to adopt ethical rules for
arbitrators. (See Senate Judiciary Committee analysis of SB 475
(2001-2002 Reg. Session) Apr. 17, 2001, p. 4.)
The resulting Judicial Council ethical standards are "intended
to guide the conduct of arbitrators, to inform and protect
participants in arbitration, and to promote public confidence in
the arbitration process," and require covered arbitrators to
make basic disclosures regarding potential conflicts of interest
and to comply with certain standards of conduct. In addition,
the CAA (Code Civ. Proc. Sec. 1280 et seq.) requires a proposed
neutral arbitrator to make specified disclosures and allows a
party to disqualify the arbitrator within certain timelines
based on those disclosures or improper non-disclosures. These
ethical standards and requirements for neutral arbitrators are
not subject to negotiation and may not be waived. (See AB 1090,
Monning, Chapter 133, Statutes of 2009.)
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This bill now seeks to build upon the current ethical rules and
disclosure requirements under California law by: (1) generally
prohibiting an arbitrator from being offered future cases
involving either party during the pendency of the arbitration,
without the prior written consent of both parties, including the
attorneys in the arbitration; and (2) requiring arbitrators to
disclose certain targeted solicitation activities made by, or at
the direction of, the private arbitration company to a party or
a lawyer for a party to a consumer arbitration, and prohibits
such activities during the pendency of an arbitration.
Comments
As stated by the author, "SB 1078 addresses issues of unfairness
and bias in consumer arbitrations [by strengthening] 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."
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified8/29/16)
California Advocates for Nursing Home Reform
California Employment Lawyers Association
Consumer Attorneys of California
Consumer Federation of California
OPPOSITION: (Verified8/29/16)
American Arbitration Association
California Dispute Resolution Council
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California Farm Bureau Federation
California Hospital Association
California Professional Association of Specialty Contractors
California Restaurant Association
California Retailers Association
Civil Justice Association of California
ARGUMENTS IN SUPPORT: The California Employment Lawyers
Association writes in support:
[T]he current rules are deficient in numerous respects. [ . .
. Today,] in a 'consumer or employment' arbitration as defined
by the rules, the arbitrator now must disclose the new cases
they have taken from one party but there is still no
opportunity to reject the arbitrator or oppose the
solicitation or acceptance of that new case based merely on
the disclosure. In commercial cases the old rule remains the
same which means that one party can offer and the arbitrator
can accept an unlimited number of new matters and keep those
professional and financial relationships secret. This is
obviously an unacceptable practice.
The impact of arbitrators' repeat dealings with the same party
is very troubling. A recent study by Cornell University's ILR
Review journal examined results of 11 years of employment
arbitration cases administered by the American Arbitration
Association (AAA). Their findings show a significant repeat
"employer/arbitrator pairing" effect: employers that use the
same arbitrator on multiple occasions win more often and have
lower damages awarded against them than do employers appearing
before an arbitrator for the first time.
One of our member's recent arbitration experience illustrates
how the "repeat player" phenomenon loads the deck against
employees in mandatory arbitration. In 2013, our member's
client sued his employer to recover unpaid sales commissions
that were owed to him [. . .]. During the pendency of the
arbitration, the arbitrator disclosed that he had accepted
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forty four additional matters from the same defense firm
representing the defendant in that case. A motion to
disqualify the arbitrator in that matter was recently denied
by JAMS.
Also in support, the Consumer Federation of California writes
that, "[t]he use of mandatory arbitration clauses in consumer
contracts has skyrocketed over the last few years. These clauses
are often in adhesion contracts, conditional to receiving a
good, service, or a job, and deny consumers their day in court.
Consumers are required to waive their right to sue, to
participate in a class action lawsuit, or to appeal. SB 1078
will help to ensure that consumers receive fairer treatment
during the arbitration process and work to safeguard the
objectivity of arbitrators."
ARGUMENTS IN OPPOSITION: A coalition including the Civil
Justice Association of California, among others, writes in
opposition that this bill "will prohibit arbitration companies
from soliciting business from a party to a consumer arbitration
for as long as the arbitration lasts. Because some arbitration
companies offer dozens or hundreds of neutrals, any one of whom
could be providing service as a neutral at any time for a party
that frequently uses arbitration, SB 1078 will operate as a ban
on solicitation by arbitration companies of their most frequent
users. SB 1078 will also prohibit an arbitrator, during an
arbitration, from entertaining any offers of employment as a
dispute resolution neutral from a party to the arbitration. If a
party to an ongoing arbitration is a frequent user of
arbitration, this ban constitutes a practical barrier to the
arbitrator scheduling subsequent work, and will complicate the
logistical challenge faced by arbitration companies as they try
to keep track of which neutrals are available." The coalition
believes that existing law is already sufficient to address
issues of corruption or misconduct of a neutral arbitrator.
The American Arbitration Association (AAA) writes in opposition
to this bill that "[b]ecause of SB 1078's broad and imprecise
definition of 'solicitations,' the majority of those individual
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communications - regardless of where in the world they may take
place - would need to be captured and documented so that they
could be disclosed in the event that one of the parties, lawyers
or law firms involved in the communication is involved in a
consumer arbitration in California within the next two years.
Establishing and maintaining a recordkeeping process with the
scope necessary to comply with the disclosure process contained
in SB 1078 would be unduly burdensome and effectively
unworkable." AAA further asserts that the disclosure
requirements "are so extremely burdensome and difficult for an
organization like the AAA to comply with that we would decline
to administer consumer and employment arbitrations in
California."
ASSEMBLY FLOOR: 48-26, 8/29/16
AYES: Alejo, Travis Allen, Arambula, Atkins, Bloom, Bonilla,
Bonta, Brown, Burke, Calderon, Chau, Chiu, Chu, Cooley,
Dababneh, Daly, Dodd, Eggman, Cristina Garcia, Eduardo Garcia,
Gatto, Gomez, Gonzalez, Hadley, Roger Hernández, Holden,
Irwin, Jones-Sawyer, Linder, Lopez, Low, McCarty, Medina,
Mullin, Nazarian, O'Donnell, Quirk, Ridley-Thomas, Salas,
Santiago, Mark Stone, Thurmond, Ting, Wagner, Weber, Williams,
Wood, Rendon
NOES: Achadjian, Baker, Bigelow, Brough, Chang, Chávez, Dahle,
Beth Gaines, Gallagher, Gray, Grove, Harper, Jones, Kim,
Lackey, Levine, Maienschein, Mathis, Mayes, Melendez,
Obernolte, Olsen, Patterson, Steinorth, Waldron, Wilk
NO VOTE RECORDED: Campos, Cooper, Frazier, Gipson, Gordon,
Rodriguez
Prepared by:Ronak Daylami / JUD. / (916) 651-4113
8/30/16 14:08:24
**** END ****
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