BILL ANALYSIS Ó
SB 1241
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Date of Hearing: August 25, 2016
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
SB
1241 (Wieckowski) - As Amended August 19, 2016
As Proposed to be Amended
SENATE VOTE: 25-13
SUBJECT: CONTRACTS
KEY ISSUE: IN ORDER TO PROTECT CALIFORNIA EMPLOYEES FROM BEING
FORCED TO LEAVE THE STATE OR BEING SUBJECTED TO THE POTENTIALLY
LESS-PROTECTIVE LAWS OF ANOTHER STATE OR COUNTRY DURING A LEGAL
DISPUTE, SHOULD AN EMPLOYEE BE ALLOWED TO VOID A CHOICE-OF-VENUE
OR CHOICE-OF-LAW PROVISION THAT WOULD REQUIRE 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, 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 employers 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.
Originally, this bill allowed a California employee or consumer
to void such one-sided provisions as described above. As
proposed to be amended, this bill has been narrowed to apply
only to California employees who primarily reside and work in
California. Specifically, this bill prohibits an employer from
requiring a California employee-as a condition of employment-to
agree to a provision that would either: require the employee to
adjudicate outside of California a claim arising in California,
or deprive the employee of protection under California law.
This bill exempts employees represented by legal counsel in
negotiating specified employment terms or by a talent agency.
As this analysis was being prepared, this Committee was unable
to confirm the support or opposition for this bill as proposed
to be amended; accordingly, there is no support or opposition on
file. However, in its prior version, this bill was supported by
consumer advocates, employment lawyers, small businesses, and
California arbitrators, and was opposed by various business
interests, led by the Chamber of Commerce, who primarily
contended that the bill was unnecessary because courts could
invalidate unfair contractual provisions. The author believes
that the bill as proposed to be amended will remove most, if not
all, of the opposition to the bill.
SUMMARY: Allows an employee to void a contractual provision
that requires the employee to adjudicate a legal claim outside
of California, or require the employee to waive his or her
protections under California law. Specifically, this bill:
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1)Prohibits an employer from requiring an employee, who
primarily resides and works in California, 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 substantive protection of
California law with respect to a controversy arising in
California.
2)Provides that any contract that violates 1) is voidable by the
employee. If rendered void at the request of the employee,
the matter shall be adjudicated in California and California
law shall govern the dispute.
3)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.
4)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.
5)Provides that this act does not apply to a contract for which
the employee was represented by a talent agency, as defined.
6)Defines adjudication under this act to include litigation and
arbitration.
EXISTING LAW:
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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)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.)
3)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.)
4)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
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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
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
employment-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:
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Over the last 10 years, thousands of businesses across the
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 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
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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,
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 unproblematic; after
all, the employee "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 of
the bill, an increasing number of businesses and employers are
imposing contractual provisions on Californians in order to
evade California law. These contractual provisions allow
businesses and employers to pick laws or venues of another state
(and even another country) that are favorable to the business
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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 in
order to litigate or arbitrate legal claims. Given the expense
and burden of going to another forum, this ultimately means that
an employee is unlikely to vindicate his or her legal rights.
This bill has been narrowed and as proposed to be amended,
applies its protections to California employees (rather than
California consumers). This bill prohibits an employer from
requiring an employee (who primarily resides and works in
California)-as a condition of employment-to agree to a provision
that would either require the employee to adjudicate a legal
claim outside of California, or deprive the employee of the
protections of California law. If an employee is subject to
such a contractual provision during the course of employment,
this bill would allow an employee to void the provision. If
voided, the legal matter would be adjudicated in California
under California law. This bill applies to contracts commencing
after January 1, 2017, and allows a court to award reasonable
attorney's fees to an employee who is enforcing his or her
rights under this bill.
Author's statement: In support of the bill, the author writes:
Senate Bill 1241 focuses in on two of the worst kinds of
clauses that can appear in an employment contract: (1) Choice
of venue clauses that require a worker 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 arbitration - thus deciding what the rules are -
to disadvantage the worker. A California employee should
never be forced to travel to a different state to exercise her
right to litigate or obligation to arbitrate a claim. If
you're employing Californians who live in California, you
should not be able to force all dispute resolution to take
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place in Florida or under the laws of Delaware. Just the cost
of travel alone prevents California consumers who have been
harmed by an illegal practice from seeking compensation. SB
1241 ensures that employees are able to arbitrate in
California.
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
(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.
This bill is consistent with, but not duplicative of, existing
law. Observers correctly note 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
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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.) 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)
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. The burden seems
unrealistic. The author reasonably argues that many employees
do not have the means to invalidate one-sided contractual
agreements, let alone travel to other forums to adjudicate legal
claims. Thus, it seems likely that without this bill, many
one-sided clauses in employment contracts will remain in place.
Accordingly, this bill does not appear to be 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 employees, this bill does not appear to
violate the Federal Arbitration Act. Additionally, if an
employee 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
during the course of employment, this bill allows the employee
to void the provision and adjudicate the legal claim in
California. This also means that if an employee would otherwise
have been forced to travel outside of California to arbitrate a
claim, the employee could void the provision, and the matter
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would be similarly arbitrated in California under the State's
laws.
This bill does not apply to employees who are represented by
counsel or a talent agency. Since this bill is aimed at
protecting employees who may not have sufficient bargaining
power throughout the employment relationship, this bill 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, or by a
talent agency. These exemptions, intended to alleviate concerns
raised by the business community, are consistent with the policy
goal of this bill: Californians should be bound by potentially
one-sided terms only if the Californian knowingly and
voluntarily agrees to such terms.
Similarly, this bill allows California employees the choice to
adjudicate their claims outside of California. Although
California law provides broad protections for California
employees, there may be an instance where an employee wants to
adjudicate a claim outside of California or to have another
forum's laws govern the dispute. To that end, this bill allows
an employee subject to such a contractual provision the option
of voiding those outside-of-California clauses. By making these
provisions voidable (rather than void), this bill ensures that
employees are not 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
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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
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..
REGISTERED SUPPORT / OPPOSITION:
Support (to the prior version of this bill)
California Conference Board of the Amalgamated Transit Union
California Conference of Machinists
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California Dispute Resolution Council
California Employment Lawyers Association
California Teamsters Public Affairs Council
Consumer Attorneys of California
Consumer Federation of California
Engineers and Scientists of California, IFPTE Local 20, AFL-CIO
International Longshore and Warehouse Union
Professional and Technical Engineers, IFPTE Local 21, AFL-CIO
SAG-AFTRA, AFL-CIO
Small Business California
UNITE-HERE, AFL-CIO
Utility Workers Union of America, AFL-CIO
Opposition (to the prior version of this bill)
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California Chamber of Commerce
American Insurance Association
California Bankers Association
California Farm Bureau Federation
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
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