BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 1078| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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 SB 1078 Page 2 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. SB 1078 Page 3 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 SB 1078 Page 4 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 SB 1078 Page 5 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. SB 1078 Page 6 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 SB 1078 Page 7 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.) SB 1078 Page 8 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 SB 1078 Page 9 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 SB 1078 Page 10 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 SB 1078 Page 11 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 **** SB 1078 Page 12