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


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