BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 1241|
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THIRD READING
Bill No: SB 1241
Author: Wieckowski (D)
Amended: 4/18/16
Vote: 21
SENATE JUDICIARY COMMITTEE: 5-1, 4/26/16
AYES: Jackson, Hertzberg, Leno, Monning, Wieckowski
NOES: Anderson
NO VOTE RECORDED: Moorlach
SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
SUBJECT: Contracts
SOURCE: Author
DIGEST: This bill makes any provision in a consumer or
employment contract entered into, modified, or extended on or
after January 1, 2017 that purports to designate the venue in
which a controversy arising from the contract may be litigated,
or the choice of law to be applied, voidable by the consumer or
employee, under specified circumstances. Further, this bill
prohibits a seller or employer from requiring a consumer or
employee to agree to such a provision, as specified, and
provides that if such a provision is required, it shall be
inoperative and California law shall apply in its place. Lastly,
this bill authorizes a court to award a plaintiff enforcing his
or her rights under this bill attorney's fees, as specified.
ANALYSIS:
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Existing law:
1)Permits California courts to exercise jurisdiction on any
basis not inconsistent with the state or federal
Constitutions. A court is also authorized to stay or dismiss
most actions in which it finds "that in the interest of
substantial justice" the action should be heard in a forum
outside of California.
2)Codifies the established doctrine that the courts will not
enforce an unconscionable contract. Specifically, existing
law provides that, if a court finds as a matter of law that a
contract or any clause of the contract was unconscionable at
the time it was made, the court may refuse to enforce the
contract or the unconscionable clause.
3)Holds that "unconscionability has both a 'procedural' and a
'substantive' element, the former focusing on 'oppression' or
'surprise' due to unequal bargaining power, the latter on
'overly harsh' or 'one-sided' results." (Armendariz et al. v.
Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th
83, 114.)
4)Holds that forum selection clauses will be enforced only "so
long as California consumers will not find their substantial
legal rights significantly impaired by their enforcement."
"California courts will refuse to defer to the selected forum
if to do so would substantially diminish the rights of
California residents in a way that violates our state's public
policy." (America Online, Inc. v. The Superior Court of
Alameda County (2001) 90 Cal.App.4th 1, 21, 23.)
5)Provides, with respect to a contract between a contractor and
a subcontractor for the construction of a public or private
work of improvement in this state, that a provision shall be
void and unenforceable if it purports to require any dispute
between the parties to be litigated, arbitrated, or otherwise
determined outside this state or purports to preclude a party
from commencing such a proceeding or obtaining a judgment or
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Page 3
other resolution in this state or the courts of this state.
6)Provides for a maxim of jurisprudence that "[a]ny one may
waive the advantage of a law intended solely for his benefit.
But a law established for a public reason cannot be
contravened by a private agreement."
7)Provides the waiver of certain substantive rights as against
public policy, such as a person's rights under the Consumer
Legal Remedies Act (Civ. Code Sec. 1751) and a person's rights
under state securities laws (Corp. Code Sec. 25701). Thus,
those rights are non-waivable.
8)Makes certain other employment contract provisions, such as
non-compete clauses, void or voidable as against public
policy. (See e.g., Civ. Code Secs. 1670.8, 1751, 1799.207,
Bus. & Prof. Sec. 16600; Edwards v. Arthur Andersen LLP (2008)
44 Cal.4th 937, Fillpoint, LLC v. Maas, 208 Cal.App.4th 1170,
1182-1183.)
9)Defines a consumer contract under the Consumer Contract
Awareness Act as a writing prepared by a seller to be signed
by a consumer which provides for the sale or lease of goods or
services that are purchased or leased primarily for personal,
family, or household purposes.
This bill:
1)Adds to the Consumer Contract Awareness Act that,
notwithstanding any other law, a provision in a consumer
contract that purports to designate the venue in which a
controversy arising from the consumer contract may be
litigated, or the choice of law to be applied, is voidable by
the consumer if the provision would either:
Deprive the consumer of the protection of California law
with respect to a controversy arising in California; or
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Require the consumer to litigate outside of California a
claim arising in California.
1)Adds to the Labor Code that, notwithstanding any other law, a
provision in an employment contract that purports to designate
the venue in which a controversy arising from the employment
contract may be litigated, or the choice of law to be applied,
is voidable by the employee if the provision would either:
Deprive the employee of the protection of California law
with respect to a controversy arising in California; or
Require the employee to litigate outside of California a
claim arising in California.
1)Provides that, for these purposes, litigation includes
arbitration.
2)Prohibits a seller or employer from requiring a person to
agree to a provision as described above as a condition of
entering into a contract regulated by the Consumer Contract
Awareness Act or an employment contract. If such a provision
is required, the provision is inoperative and California law
applies in its place.
3)Provides that, in addition to injunctive relief and any other
remedies available, a court may award a plaintiff who is
enforcing his or her rights under this bill reasonable
attorney's fees.
4)Provides that these provisions shall apply to a contract
entered into, modified, or extended on or after January 1,
2017.
Background
As a general matter, arbitrations provide an alternative method
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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 of Civil
Procedure Sections 1141.10 -1141.31) and private arbitrations
(also commonly known as "contractual," "voluntary," or
"nonjudicial" arbitrations; governed under the California
Arbitration Act, Code of Civil Procedure Section 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
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. That 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 arbitration 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 of fairness
surrounding choice of law and choice of forum clauses as a
condition of non-negotiable consumer and employment contracts,
and, specifically, the ability of a seller or employer to
require a California consumer or employee to litigate or
arbitrate their claims arising out of California in another
state, or pursuant to another state's laws. Generally speaking,
California law does not currently prohibit companies or
employers from requiring consumers or employees to agree to a
non-California forum or to apply non-California law to resolve
their disputes. As a matter of case law, such clauses are valid
so long as the California consumer or employee "will not find
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their substantial legal rights significantly impaired by their
enforcement." (America Online, Inc. v. The Superior Court of
Alameda County (2001) 90 Cal.App.4th 1, 21, 23.)
This bill seeks to ensure that California consumers and
employees cannot be forced to litigate or arbitrate their
California-based claims outside of California, under
out-of-state laws, as a condition of a consumer or employment
contract. Specifically, this bill provides that, in any
consumer or employment contract entered into, modified, or
extended on or after January 1, 2017, a provision that purports
to designate the venue in which a controversy arising from the
contract may be litigated or arbitrated, or the choice of law to
be applied, is voidable by the consumer or employee, if it: (1)
deprives the consumer or employee of the protection of
California law with respect to a controversy arising in
California; or (2) requires the consumer or employee to litigate
outside of California a claim arising in California. This bill
prohibits a seller or employer from requiring a consumer or
employee to agree to such a provision as a condition of a
consumer or employment contract, and provides that such a
provision is inoperative and California law must be applied in
its place.
Comments
As stated by the author:
Arbitration goes wrong when it is forced - when a company
requires a consumer to submit any dispute that may arise to
arbitration as a nonnegotiable condition of employment or
buying a product or service. Forced arbitration is a private
out-of-court process that businesses and employers usually
require as a condition of receiving a good, service, or a job.
The California consumer is required to waive her right to sue,
to participate in a class action lawsuit, or to appeal. Forced
arbitration is mandatory, the arbitrator's decision is
binding, and the results are not public.
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Unfortunately, forced arbitration clauses are everywhere:
They're in the fine print of car loans and leases, credit
cards, checking accounts, insurance, investing accounts,
student loans, and even certain employment and nursing home
agreements. (In the credit card market alone, arbitration
clauses bind as many as 80 million consumers.)
SB 1241 focuses in on two of the worst clauses that can appear
in a consumer [or employment] contract: (1) Choice of forum
clauses that require a consumer [or employee] to go to an
arbitration or to a court in an entirely different state, and;
(2) Choice of law clauses that intentionally pick what state's
law governs the case - thus deciding what the rules are - to
disadvantage the consumer [or employee].
Specifically, SB 1241 states that consumer and employment
contracts that require a party to litigate or arbitrate in a
different state or require that a different state's law govern
the dispute are voidable by the consumer.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
SUPPORT: (Verified5/11/16)
California Dispute Resolution Council
California Employment Lawyers Association
Consumer Attorneys of California
Consumer Federation
OPPOSITION: (Verified5/11/16)
American Insurance Association
California Bankers Association
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California Chamber of Commerce
California Manufacturers and Technology Association
Civil Justice Association of California
Feld Entertainment
Motion Picture Association of America
National Federation of Independent Business
ARGUMENTS IN SUPPORT: In support of the bill, the California
Employment Lawyers Association writes:
Increasingly, employers, particularly out-of-state employers,
are imposing choice-of-law and forum selection provisions on
their California workers in order to: evade California law,
make it more difficult for employees to pursue legitimate
claims, and ensure that any disputes are decided in a forum
that is most favorable to the employer. [ . . . ]
Needless to say, most workers lack the resources to travel
across the country-let alone around the world-to pursue an
employment claim in another state or country. The problem is
particularly acute for lower income workers and disabled
workers. Those workers that do have the resources and ability
to travel might well find that the protection that they had
under California law does not exist, or is not as
comprehensive, in the jurisdiction that will be deciding their
dispute. [ . . . ]
In [a] recent case, a California employee was fired after
speaking to other employees about alleged violations of
California's Labor Code and because she refused to sign a new
arbitration agreement. Rather than taking her case to court in
California, her employer has forced the claim to be arbitrated
in New York because of a choice-of-venue provision buried in
her new-hire paperwork.
In support, the Consumer Attorneys of California adds that:
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Without any legislation to guide them, California courts have
freely enforced these choice of law and choice of forum
provisions, sending California workers to Florida, Illinois,
New York, Minnesota, and even out of the country, to resolve
their claims and other employment disputes.
People and small businesses should not be forced to travel
outside of California to have their claims heard. Likewise,
it is unconscionable to have to waive your rights to have
California's laws apply to your claims.
ARGUMENTS IN OPPOSITION: In opposition, a coalition
including American Insurance Association, California Bankers
Association, California Chamber of Commerce, California
Manufacturers and Technology Association, Civil Justice
Association of California, Feld Entertainment, Motion Picture
Association of America, and the National Federation of
Independent Business writes:
There is no need to prohibit or limit choice of law o[r] venue
clauses in California contracts. Under existing law,
California employees and consumers are already protected from
contractual choice of law or venue provisions that are
unreasonable, unconscionable or would substantially diminish
their California legal protections. [ . . . ] California
courts currently have the authority to enforce such provisions
by evaluating, in part, the bargaining power of the parties
involved as well as which state has a stronger interest.
[ . . . ]
If SB 1241 becomes law, [a] highly paid employee who had more
than sufficient bargaining power in negotiating his employment
agreement, would be relieved of honoring the terms of his
contract. When the forum is inconvenient or the choice of law
would deny a California resident appropriate protection, the
courts routinely reject such clauses. [Case citations
omitted.]
SB 1241
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The analysis for choice of law or venue provisions in
contracts with arbitration provisions is no different. [Case
citations omitted.] SB 1241 eliminates the discretion of the
courts to weigh varying interests, including the bargaining
power of the parties and the convenience of the parties
involved and simply declares such provisions unenforceable if
it is not litigated in California under California law.
Prepared by:Ronak Daylami / JUD. / (916) 651-4113
5/11/16 15:12:37
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