BILL ANALYSIS Ó
SB 1241
Page 1
Date of Hearing: June 21, 2016
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
SB
1241 (Wieckowski) - As Amended June 20, 2016
SENATE VOTE: 25-13
SUBJECT: CONTRACTS: CHOICE OF VENUE AND CHOICE OF LAW
KEY ISSUE: IN ORDER TO PROTECT CALIFORNIANS FROM BEING FORCED
TO LEAVE THE STATE, OR BEING SUBJECT TO POTENTIALLY
LESS-PROTECTIVE LAWS OF ANOTHER STATE OR COUNTRY TO GOVERN A
LEGAL DISPUTE, SHOULD A CONSUMER OR EMPLOYEE BE ALLOWED TO VOID
A CHOICE-OF-VENUE OR CHOICE-OF-LAW PROVISION THAT WOULD REQUIRE
THE CONSUMER OR THE EMPLOYEE TO ADJUDICATE A LEGAL CLAIM OUTSIDE
OF CALIFORNIA OR DEPRIVE THAT CALIFORNIAN FROM THE PROTECTION OF
CALIFORNIA LAW?
SYNOPSIS
According to the author and supporters of the bill-including
consumer advocates, employment lawyers, small businesses, and
California arbitrators-an increasing number of businesses and
employers are imposing choice of venue and choice of law
contractual provisions on Californians in order to evade
California law. These contractual provisions allow businesses
and employer to pick laws or venues of other states (and even
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other countries) to govern a legal dispute in the event that one
arises. Accordingly, Californians who are forced to agree to
these contractual terms must travel to another state or country
to litigate or arbitrate a legal claim. Given the expense and
burdens of going to another forum, this ultimately means that a
consumer or an employee is unlikely to vindicate his or her
legal rights.
This bill allows a consumer or an employee to void a choice of
venue or choice of law provision that would require the consumer
or employee to either adjudicate a legal claim outside of
California, or require the consumer or employee to waive his or
her protections under California law. Proponents of the bill
argue that many consumers and employees do not have the means to
seek to invalidate one-sided contractual agreements, let alone
travel to another forum to adjudicate a legal claim. Opponents
of the bill, consisting of various business interests led by the
Chamber of Commerce, primarily contend that this bill is
unnecessary because courts may invalidate such provisions.
SUMMARY: Allows a consumer or an employee to void a choice of
venue or choice of law provision that would either require the
consumer or employee to adjudicate a legal claim outside of
California, or require the consumer or employee to waive their
protections under California law. Specifically, this bill:
1)Prohibits a seller from requiring a consumer, as a condition
of entering into a contract, to agree to a provision that
would do either of the following:
a) Require the consumer to adjudicate outside of California
a claim arising in California.
b) Deprive the consumer of the protection of California law
with respect to a controversy arising in California.
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1)Provides that any choice of venue or choice of law provision
is voidable, upon request of the consumer, if the provision
would do either of the following:
a) Require the consumer to adjudicate outside of California
a claim arising in California.
b) Deprive the consumer of the protection of California law
with respect to a controversy arising in California.
2)Establishes that if provision described in #2 above is
rendered void at the request of the consumer, the matter shall
be adjudicated in California and California law shall govern
the dispute.
3)Allows a court to award a consumer who is enforcing his or her
rights under this act reasonable attorney's fees, in addition
to other remedies available.
4)Prohibits an employer from requiring an employee or job
applicant, as a condition of employment, to agree to a
provision that would do either of the following:
a) Require the employee to adjudicate outside of California
a claim arising in California.
b) Deprive the employee of the protection of California law
with respect to a controversy arising in California.
5)Provides that any choice of venue or choice of law provision
is voidable, upon request of the employee, if the provision
would do either of the following:
a) Require the employee to adjudicate outside of California
a claim arising in California.
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b) Deprive the employee of the protection of California law
with respect to a controversy arising in California.
6)Establishes that if provision described in #6 above is
rendered void at the request of the employee, the matter shall
be adjudicated in California and California law shall govern
the dispute.
7)Allows a court to award an employee who is enforcing his or
her rights under this act reasonable attorney's fees, in
addition to other remedies available.
8)Provides that this act does not apply to a contract with an
employee who is in fact individually represented by legal
counsel in negotiating the terms of an agreement to designate
either the venue or forum in which a controversy arising from
the employment contract may be adjudicated or the choice of
law to be applied.
9)Defines adjudication under this act to include litigation and
arbitration.
EXISTING LAW:
1)Provides that if the court as a matter of law finds the
contract or any clause of the contract to have been
unconscionable at the time it was made the court may refuse to
enforce the contract, or the unconscionable clause. (Civil
Code Section 1670.5.)
2)Establishes the Consumer Contract Awareness Act. (Civil Code
Section 1799.200.)
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3)Under the Consumer Contract Act, defines a consumer contract
to mean a writing as specified that provides for the sale or
lease of goods or services or for the extension of credit.
(Civil Code Section 1799.201.)
4)Holds that a mandatory forum selection clause is generally
given effect unless enforcement would be unreasonable or
unfair. (Verdugo v. Alliantgroup, L.P. (2015) 237 Cal.App.4th
141, 147.)
5)Holds that 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
California's public policy. (America Online, Inc. v. Superior
Court (2001) 90 Cal.App.4th 1, 12.)
6)Holds that the party opposing the enforcement of a forum
selection clause ordinarily bears the substantial burden of
proving why it should not be enforced. (Global Packaging,
Inc. v. Superior Court (2011) 196 Cal.App.4th 1623, 1633.)
FISCAL EFFECT: As currently in print this bill is keyed fiscal.
COMMENTS: Justice Brennan once said that, "courts are the
central dispute-setting institutions of our society. They are
bound to do equal justice under the law, to rich and poor
alike." It comes as no surprise then that the phrase, "Equal
Justice Under Law," is engraved above the entrance to our
nation's highest court. And so it seems, we put a great deal of
faith in our courts - but would we expect any less? We
anticipate our courts to apply the law in a fair, neutral, and
open manner. We hold judges to high standards, and ask that
they avoid even the appearance of impropriety. We count on our
judiciary to advance the law, issue orders, and render written
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opinions. And yet, we acknowledge that our system isn't perfect
and that despite their best efforts, courts sometimes get it
wrong. Acknowledging the imperfection of our justice system is
undoubtedly one reason why it has safeguards. We remember that
decisions of courts are reviewed by appellate courts and indeed,
reviewed by our elected branches. In order to facilitate the
right to appeal, we provide a record of the proceedings, in
criminal matters at least. And so, when our families, friends,
and neighbors are injured, wronged, or have a dispute, we rely
upon that faith that our courts-the institution we trust upon to
promote fairness-will deliver equal justice under the law.
As this Committee is well-aware, arbitration is a form of
alternative dispute resolution held outside of courts where a
third-party (rather than a judge) makes a binding (and rarely
appealable) award. Because most arbitration is created by
entering into a contract (usually a contract that is adhesive or
take-it-or-leave-it), the arbitration agreement will lay-out the
procedures that will be followed during the arbitration hearing.
For example, the terms of the arbitration agreement may
stipulate that the award need not be written or justified
(unlike in court), and that the entire process be kept in secret
(rather than in public view). Arbitrators do not need to be
lawyers, nor do they need to be trained in the law. Arbitrators
who issue favorable awards to a particular company can be
repeatedly-hired by that same company to serve as the
arbitration-neutral without ever notifying the public about that
award-history. It's easy to predict the calls if you can hire
the umpire.
Last year, the New York Times issued a three-part series titled,
"Beware the Fine Print" - a special report examining how
arbitration clauses buried in contracts deprives Americans of
their fundamental constitutional rights:
Over the last 10 years, thousands of businesses across the
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country - from big corporations to storefront shops - have
used arbitration to create an alternate system of justice.
There, rules tend to favor businesses, and judges and juries
have been replaced by arbitrators who commonly consider the
companies their clients. The change has been swift and
virtually unnoticed, even though it has meant that tens of
millions of Americans have lost a fundamental right: their day
in court. (Silver-Greenberg & Corkery, In Arbitration, a
Privatization of the Justice System, N.Y. Times (Nov. 1,
2015).)
In fact, some legal scholars have stated that, arbitration
"amounts to the whole-scale privatization of the justice
system." (Ibid.) In an effort to protect consumers and
workers, this Legislature has worked on legislation aimed at
leveling the playing field, a turf that has been used by
corporate interests to evade public scrutiny, and even, avoid
the law. This is because arbitrators do not need to be trained
in the law, or even apply the law, or render a decision
consistent with the evidence presented to them. What evidence
is presented may, in fact, be incomplete because parties in
arbitration have no legal right to obtain evidence in support of
their claims or defenses, or the claims or defenses of the other
party, contrary to the longstanding discovery practice in public
courts. Advocates continue to debate about the benefits and
harms of mandatory-arbitration. Proponents of arbitration say
that arbitration produces quicker results and reduces litigation
costs. Opponents argue that arbitration harms consumers and
workers because arbitration proceedings render unfair awards.
A brief review of recent court decisions on arbitration. Given
the preemptive issues surrounding the Federal Arbitration Act
(FAA) and the U.S. Supreme Court's interpretation of the FAA,
the ability to legislate around the issue of arbitration is
difficult. In 2005, the California Supreme Court held that in
certain adhesive take-it-or-leave-it consumer contracts, a
contractual provision requiring the consumer to waive
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class-action is unconscionable and void. This is known as the
Discovery Bank rule (herein the Rule). (36 Cal. 4th 148, 159.)
In the well-known Concepcion decision, the U.S. Supreme Court
struck down the Rule. (AT&T Mobility LLC v. Concepcion (2011)
563 U.S. 333, 344-47.) In that case, Vincent and Liza
Concepcion entered into a cellphone contract that required
claims to be brought in an "individual capacity, and not as a
plaintiff or class member in any purported class or
representative proceeding." (Id. at 336.) Relying on Discovery
Bank, the Concepcions challenged the class-action waiver as an
unconscionable contract provision. (Id. at 338.) In abrogating
the Rule, the Court held that the Rule stood "as an obstacle to
the accomplishment and execution of the full purposes and
objectives of Congress" because it "interferes with fundamental
attributes of arbitration." (Id. at 344-47.) Although the
Supreme Court has not defined a "fundamental attribute of
arbitration," the Court did say that there were potential
advantages of arbitration: lower costs, greater efficiency and
speed, and the ability to choose expert adjudicators to resolve
specialized disputes. (Id. at 348.) Indeed, the Court
analogized to several examples on the kinds of rules or laws
that would amount to "interference" with the "fundamental
attribute of arbitration." For example, a rule to require
arbitration agreements and proceedings to provide
judicially-monitored discovery, or to follow the Federal Rules
of Evidence would clearly violate the FAA. (Id. at 342.) In
those instances, those additional protections and
procedures-admirable as they are-would increase costs, reduce
efficiency and speed, and prevent an arbitrator from applying
the rules he or she wants to apply; accordingly, states and
courts are limited in crafting certain rules.
Despite what some may say, California may regulate issues that
affect arbitration. Relying on these principles in Concepcion,
some argue that anything that interferes with arbitration is
preempted by the FAA, as interpreted under Concepcion; however,
this argument is mistaken. Federal law does not preempt states
from enacting basic protections around the principles of
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contract law. While federal preemption is broad, states are
permitted to set rules that are consistent with certain contract
law principles. Additionally, states may establish specific
arbitration rules in their states. As the Supreme Court has
stated, "parties are generally free to structure their
arbitration agreements as they see fit?[Where] parties have
agreed to abide by state rules of arbitration, enforcing those
rules according to the terms of the agreement is fully
consistent with the goals of the FAA." (Volt Information
Sciences, Inc. v. Board of Trustees of Leland Stanford Junior
Univ. (1989) 489 U.S. 468, 479.) Accordingly, states can enact
legislation that affects arbitration without offending the FAA.
A Return of the Lochner Era? In 1897, the State of New York
enacted a labor law intended to protect its bakers: no employee
may work in a bakery establishment for more than sixty hours in
any one week. That law-which seems reasonable when considering
today's standards-was infamously struck down by the Supreme
Court in 1905. The Court held that the state law interfered
with a person's freedom to contract, rejecting New York's
argument that the law was intended to promote the public's
welfare. (Lochner v. New York (1905) 198 U.S. 45, 52.) Some
legal commentators have repudiated the Lochner decision as a
relic, even a stain in American jurisprudence. Indeed, some
scholars have stated that "[a]side from Dred Scott itself,
Lochner?is now considered the most discredited decision in
Supreme Court history." (Schwartz, A History of the Supreme
Court, (1995).) While scholars continue to debate the Lochner
decision, one thing seems clear: the Lochner era prioritized
economic liberty over the state's interests in protecting the
general welfare of its residents. Although one might expect
that the principles behind Lochner are long behind us,
sometimes, Lochner rears its ugly head. Recently, businesses and
employers have been requiring consumers and employees to agree
to contractual provisions that seek to evade California law.
For instance, a consumer might be required to sign a choice of
venue provision, which would require the consumer to go to
another state to resolve a legal dispute. In other contracts,
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an employee might be obligated to sign a choice of law
provision, which would require the employee to accept the laws
of another state to govern a legal dispute. In a Lochner era,
one might argue that these provisions were not problematic
because parties voluntarily agreed to the terms of these
contracts - no matter how unfair or unreasonable. Indeed, it
would seem that no matter how beneficial the social regulation,
the view under Lochner is that consumers and employees who enter
into contracts do so at their own peril. But we proudly know
that California is no home of Lochner.
The problem that this bill seeks to fix: According to author
and supporters of the bill, an increasing number of businesses
and employers are imposing choice of venue and choice of law
contractual provisions on Californians in order to evade
California law. These contractual provisions allow businesses
and employer to pick laws or venues of another state (and even
another country) that are favorable to the business interest to
govern a legal dispute if one should arise. Accordingly,
Californians who are forced to agree to these contractual terms
must travel to other states or countries to litigate or
arbitrate a legal claim. Given the expense and burdens of going
to another forum, this ultimately means that a consumer or an
employee is unlikely to vindicate his or her legal rights.
Summary of the bill: This bill prohibits a seller or an
employer from requiring a consumer or an employee from agreeing
to a provision, as a condition of entering into a contract, that
would either require the consumer or employee to adjudicate a
legal claim outside of California, or deprive the consumer or
the employee of protection under California law. Additionally,
if a consumer or an employee becomes subject to such contractual
provisions during a contractual relationship with a seller or
employer, this bill allows a consumer or an employee to void
these provisions so that the legal claim may be adjudicated in
California under California law. This bill applies to contracts
commencing after January 1, 2017, and also allows a court to
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award reasonable attorney's fees for a consumer or an employee
who enforces rights under this bill.
Author's statement: In support of the bill, the author writes:
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 or employee 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.
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 ensures that a California consumer who purchases a
good or service in California or works in California is not
forced to arbitrate or litigate in a different state; and give
up protections afforded under California law.
California has a history of protecting against potentially
one-sided contractual arrangements. It should come as no
surprise that California has previously enacted laws restricting
the use of choice of law and forum selection clauses in
contracts. (See AB 2781 (Leno, Ch. 797, Stats. 2006) child
support collection choice of law agreements; AB 268 (Wayne, Ch.
624, Stats. 2001) sale of structured settlements received in
tort claims choice of law and forum selection agreements; SB 586
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(Sher, Ch. 194, Stats. 1997) Uniform Interstate Family Support
Act choice of law; AB 1051 (Eastin, Ch. 582, Stats. 1991)
construction subcontracts cannot be litigated or arbitrated
outside this state).) Indeed, many California courts recognize
this strong public policy. For instance, "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. Superior Court (2001) 90 Cal.App.4th 1, 12.) This is
because "[o]ur law favors forum selection agreements only so
long as they are procured freely and voluntarily, with the place
chosen having some logical nexus to one of the parties or the
dispute, and so long as California consumers will not find their
substantial legal rights significantly impaired by their
enforcement." (Ibid.) Accordingly, it appears that this bill
is consistent with the Legislature's previous efforts in
protecting Californians from potentially unfair and unreasonable
contracts aimed at protecting consumers and workers.
This bill is consistent with, but not duplicative of, existing
law. The opposition correctly argues that California courts
have the authority to refuse to enforce one-sided choice of
venue and choice of law provisions. For example, a court may
invalidate a provision if the inconvenience of the forum is so
grave that it effectively deprives litigants of their day in
court. (The Bremen v. Zapata Off-Shore Co. (1972) 407 U.S. 1,
17.) Additionally, a court may refuse to enforce a choice of
law if another state's laws fundamentally conflict with the
public policy of California. (Washington Mutual Bank v.
Superior Court (2001) 24 Cal.4th 906, 916; see Nedlloyd Lines
B.V. v. Superior Court (1992) 3 Cal.4th 459, 465.) Based on
these rules, the opponents argue that this bill is unnecessary.
However, their arguments appear to be misplaced. While courts
have the authority to strike down one-sided contracts, there is
a strong presumption that forum selection clauses are valid and
enforceable unless the contesting party meets the "heavy burden"
of proving that enforcing the clause would be unreasonable under
the circumstances of a case. (Bancomer v. Superior Court (1996)
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44 Cal.App.4th 1450, 1457.) In order words, a consumer or an
employee seeking to invalidate an unfair forum selection clause
must show that adjudicating in another state, or following the
laws of another forum would be unreasonable. Supporters of this
bill sensibly argue that this burden is unrealistic. Supporters
argue that many consumers and employees do not have the means to
invalidate one-sided contractual agreements, let alone travel to
other forums to adjudicate legal claims. Additionally,
supporters contend that in consumer contracts where the amount
in controversy is often small, the costs and burdens of
traveling to another forum will exceed the potentially
redressible remedies. Thus, it seems likely that without this
bill, many one-sided clauses will remain in place. Accordingly,
this bill does not appear to be unnecessary, or duplicative of
existing law.
Adjudication includes both litigation and arbitration. At issue
is whether this bill somehow implicates the Federal Arbitration
Act: it does not appear so. Since this bill applies to all
contracts involving consumers and employees, this bill does not
appear to violate the Federal Arbitration Act. Additionally, if
an employee or consumer is subject to a choice of law or choice
of venue provision that requires adjudication outside of
California, or deprives the Californian of protection under
California law, this bill allows the employee or the consumer to
void the provision and adjudicate the legal claim in California.
Accordingly, under this bill, if a consumer would be forced to
travel outside of California to arbitrate a claim, the consumer
could void the provision, and the matter would be similarly
arbitrated in California under the State's laws.
This bill does not apply to employees who are represented by
counsel who have negotiated employment terms. The opposition
raises the concern that this bill would relieve a highly paid
employee-who has more than sufficient bargaining power in
negotiating her employment agreement-of honoring the terms of
her contract. The author's recent amendments appear to be aimed
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at addressing this concern. This bill now exempts employment
contracts where an employee is individually represented by legal
counsel in negotiating terms of an agreement that designate
venue or the choice of law. Although it is unclear whether this
recent amendment alleviates all of the opposition's concerns,
the amendment addresses the crux of this bill: Californians
should only be bound by these potentially one-sided terms if the
Californian knowingly and voluntarily wants to leave the state
to adjudicate a legal claim.
Similarly, this bill allows California consumers and employees
the choice to adjudicate their claims outside of California.
Although California law provides broad consumer and employee
protections, there might be an instance when a consumer or an
employee would like to have a legal claim be adjudicated outside
of California, or would want to have the laws outside of
California govern a dispute. To that end, this bill allows
consumers and employees the option to void a choice of venue and
choice of law provision. As previously mentioned, at issue is
whether a party agrees to such terms knowingly and voluntarily.
By making these provisions voidable (rather than void), this
bill ensures that consumers and employees are not being coerced
into signing away their rights under California law.
The bill does not appear to violate the Contract Clause
Violation. Article I, Section 10 of the U.S. Constitution,
known as the Contract Clause, provides that, "[n]o state
shall?pass any?law impairing the obligation of contracts."
(U.S. Const., art. I, § 10.) But it is well-established that
the Contract Clause does not prevent the government from
regulating the terms of future contracts. Given that this bill
only applies prospectively to contracts entered into after
January 1, 2017, the Contract Clause is not implicated.
Prior Vetoed Bills: The prohibitions of this bill limiting
choice of law or choice of forum provisions in employment
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contracts is similar to a prior bill, AB 267 (Swanson, 2011),
which was vetoed by Governor Brown.
In vetoing AB 267, Governor Brown stated:
This measure would prohibit employment contracts that require
California employees to agree to the use of legal forums and
laws of other states. Current law prohibits California
employees from being subjected to laws or forums that
substantially diminish their rights under our laws and I have
not seen convincing evidence that these protections are
insufficient to protect employees in California. Finally, I
would note that imposing this burden could deter out of state
companies from hiring Californians - something we can ill
afford at this time of high unemployment.
ARGUMENTS IN SUPPORT: The Small Business California which
represents employers and small businesses, argues that this bill
will help small businesses that lack the resources to deal with
legal claims outside of the state or country. In support, it
writes:
Generally, it is only large companies, usually with
out-of-state headquarters or a substantial out-of-state
presence, that are in a position to force consumers to
litigate claims in distant forums under non-California law. A
small business in California is unlikely to have the ties to
other forums to be able to make choice of law work. These
clauses give large companies an unfair competitive advantage
over California-based small businesses. Sometimes, it is the
small business that is the customer of or the contractor to
the large business and loses its rights because it cannot
afford to bring its own claim or defend itself against the
large business in that distant forum.
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California Employment Lawyers Association supports this bill
because it supports California employees and employers. In
support, CELA writes:
The current situation clearly benefits out-of-state employers
at the expense of California employers. Employers who remain
subject to the rigorous requirements of California labor and
employment law are at a distinct competitive disadvantage when
an out-of-state employer uses a choice-of-law provision to
exempt itself from California's laws governing employment
relationships and adopt another state's less protective
regime. Correcting this problem therefore benefits California
employers as well as employees and contributes to fair
competition in California.
ARGUMENTS IN OPPOSITION: Opponents of the bill, consisting of
various business interests led by the Chamber of Commerce,
primarily contend that this bill is unnecessary. The opposition
writes:
There is no need to prohibit or limit choice of law of 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 refuse to enforce such
provisions by evaluating, in part, the bargaining power of the
parties involved as well as which state has a stronger
interest. 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 voidable if it does not designate
California as the forum and California law.
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REGISTERED SUPPORT / OPPOSITION:
Support
California Dispute Resolution Council
California Employment Lawyers Association
Consumer Attorneys of California
Consumer Federation of California
Small Business California
Opposition
California Chamber of Commerce
American Insurance Association
California Bankers Association
California Farm Bureau Federation
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California Manufacturers and Technology Association
Civil Justice Association of California
Dish Network
Feld Entertainment, Inc.
Motion Picture Association of America
Analysis Prepared by:Eric Dang / JUD. / (916)
319-2334