BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 1241| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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: SB 1241 Page 2 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 SB 1241 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 SB 1241 Page 4 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 SB 1241 Page 5 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 SB 1241 Page 6 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. SB 1241 Page 7 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 SB 1241 Page 8 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: SB 1241 Page 9 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 Page 10 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 **** END ****