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 SB 1241 Page 2 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. SB 1241 Page 3 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. SB 1241 Page 4 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.) SB 1241 Page 5 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 SB 1241 Page 6 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 SB 1241 Page 7 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 SB 1241 Page 8 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 SB 1241 Page 9 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, SB 1241 Page 10 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 SB 1241 Page 11 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 SB 1241 Page 12 (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) SB 1241 Page 13 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 SB 1241 Page 14 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 SB 1241 Page 15 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. SB 1241 Page 16 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. SB 1241 Page 17 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 SB 1241 Page 18 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