BILL ANALYSIS
AB 1067
Page 1
Date of Hearing: May 2, 2001
ASSEMBLY COMMITTEE ON JUDICIARY
Darrell Steinberg, Chair
AB 1067 (Jackson) - As Amended: April 25, 2001
SUBJECT : GROUNDS FOR VACATING ARBITRATION DECISIONS
KEY ISSUE : SHOULD CONSUMERS WHO ARE FORCED INTO MANDATORY
PRE-DISPUTE BINDING ARBITRATION BE ALLOWED TO APPEAL THE AWARD
TO THE COURT FOR ITS REVIEW IF THERE IS A LEGAL OR FACTUAL ERROR
IN THE AWARD THAT RESULTS IN AN INJUSTICE TO THE CONSUMER?
SYNOPSIS
This Bill Seeks To Reverse The 1992 Decision Of The California
Supreme Court In Moncharsh V. Heily & Blase Et Al. By Allowing A
Consumer To Petition The Court For A Review Of An Arbitration
Decision If The Award Is The Result Of A Legal Or Factual Error
That Results In Injustice To The Consumer. The Moncharsh
Decision Provided Matter Of Factly That An Arbitrator's Decision
Is Generally Not Reviewable For Errors Of Fact Or Law, Whether
Or Not Such Error Appears On The Face Of The Award And Causes
Substantial Injustice To The Parties. Attempting To Limit Its
Applicability To Those Matters In Which The Consumer Does Not
Bargain For Arbitration Or "Choose" Arbitration To Seek The
Advantage Of Finality Of Arbitral Decisions, This Bill Is
Limited To Matters In Which The Arbitration Was Mandated By A
Pre-Dispute Binding Arbitration Provision In A Standardized
Contract Drafted By The Nonconsumer Party.
SUMMARY : Responds to the limitations on appealing an
arbitration decision spelled out by the California Supreme
Court, in Moncharsh v. Heily & Blase et al. , by creating broader
grounds for appeal of an arbitration decision. Specifically,
this bill :
1)Requires the court to vacate an arbitration award and hold a
de novo hearing on the matter upon petition by a consumer if:
a) the award is the result of legal or factual error by the
arbitrator that has resulted in an injustice to the party; and
b) the arbitration was mandated by a pre-dispute binding
arbitration provision in a standardized contract by the
nonconsumer party.
AB 1067
Page 2
2)Defines consumer as an individual who is an enrollee or
subscriber in a Knox-Keene health care service plan, an
employee in a dispute arising out of or relating to his or her
employment, or an individual who seeks or acquires by purchase
or lease any goods or services primarily for personal, family,
or household purposes.
3)Provides that this section, expanding the grounds pursuant to
which the court may vacate an arbitration award, may not be
waived by contract or otherwise.
4)Requires an arbitrator to include with his or her award a
written explanation of the basis for the award, including
findings of fact and conclusions of law.
5)Exempts arbitrations conducted under a collective bargaining
agreement from the terms of this bill.
EXISTING LAW :
1)Provides that a written agreement to submit to arbitration an
existing or future controversy is valid, enforceable and
irrevocable, save upon such grounds as exist for the
revocation of any contract. (Code of Civil Procedure section
1281. All further statutory references are to this code
unless otherwise noted.)
2)Provides that an arbitrator's decision is generally not
reviewable for errors of fact or law, whether or not such
error appears on the face of the award and causes substantial
injustice to the parties. ( Moncharsh v. Heily & Blase et al.
(1992) 3 Cal.4th 1.)
3)Provides that, unless they are specifically required to act in
conformity with rules of law by the arbitration agreement,
arbitrators may base their decision upon broad principles of
justice and equity, and in doing so may reject a claim that a
party might successfully have asserted in a judicial action.
( Moncharsh v. Heily & Blase et al. (1992) 3 Cal.4th 1.)
4)Authorizes a court to vacate an arbitration award only under
the following circumstances:
a) The award was procured by corruption, fraud, or other
undue means.
AB 1067
Page 3
b) There was corruption in any of the arbitrators.
c) The rights of the party were substantially prejudiced by
misconduct of a neutral arbitrator.
d) The arbitrators exceeded their powers and the award
cannot be corrected without affecting the merits of the
decision.
e) The rights of the party were substantially prejudiced by
the refusal of the arbitrators to postpone the hearing upon
sufficient cause or by the refusal of the arbitrators to
hear evidence material to the controversy.
f) An arbitrator making the award was subject to
disqualification but failed to disqualify himself or
herself. (Section 1286.2.)
5)Authorizes the court to correct an arbitration award if the
court determines that: a) there was an evident miscalculation
of figures or an evident mistake in the description of any
person, thing or property referred to in the award; b) the
arbitrators exceeded their powers but the award may be
corrected without affecting the merits of the decision; or c)
the award is imperfect in a matter of form not affecting the
merits of the controversy. (Section 1286.6.)
FISCAL EFFECT : The bill as currently in print is keyed
non-fiscal.
COMMENTS : The author introduced this bill to address the
ruling of the California Supreme Court in Moncharsh v. Heily &
Blase et al. , (1992) 3 Cal.4th 1, and to allow a court to vacate
certain arbitration awards based upon a showing of an error of
fact or law that has rendered an injustice on a consumer. The
bill is limited to arbitration awards that are the result of
mandatory pre-dispute binding arbitration provisions in
contracts between consumers and health plans, employers, and
sellers of goods and services acquired primarily for personal,
family, or household purposes.
In Moncharsh , the court held that an arbitrator's decision is
generally not reviewable for errors of fact or law, whether or
not such error appears on the face of the award and causes
AB 1067
Page 4
substantial injustice to the parties. It is that precise
holding which this bill seeks to reverse. The Moncharsh court
noted that, unless the terms of the arbitration agreement
expressly require arbitrators to act in conformity with rules of
law, arbitrators may base their decision upon broad principles
of justice and equity rather than long-established principle,
and in doing so may reject a claim that a party might
successfully have asserted in a judicial action. (3 Cal.4th at
10-11. See also Advanced Micro Devices, Inc. v. Intel , noting
that in Moncharsh , "we held arbitrators do not exceed their
powers merely by erroneously deciding a contested issue of law
or fact." 9 Cal.4th 362 (1994).) The author believes that
arbitrators should be held to the legal rules which guide our
society, and that decisions that are inconsistent with such
rules should be set aside if they are unjust.
However, the Moncharsh court acknowledged that its hands were
tied by the law that the Legislature had put in place: "The
Legislature has set forth grounds for vacation and correction of
an arbitration award and an error of law is not one of those
grounds." (3 Cal.4th at 14.) This bill seeks to provide that,
in certain instances, such errors of law (or fact) are grounds
for vacation of an arbitration award.
Goals of Arbitration . Some argue that the goals of arbitration
and litigation are different, and therefore the guiding
principles should be different. Finality, the argument goes, is
the goal of arbitration, and allowing awards to be appealed
substantially interferes with that goal and the reason parties
select arbitration in the first place. The court in Moncharsh
made this very point, stating that "ensuring arbitral finality .
. . requires that judicial intervention in the arbitration
process be minimized. . . . By ensuring that an arbitrator's
decision is final and binding, courts simply assure that the
parties receive the benefit of their bargain." (3 Cal.4th at
10.) This statement, however, was premised on the following
assumption: "When parties agree to leave their dispute to an
arbitrator, they are presumed to know that his award will be
final and conclusive. . . .[T]he essence of the arbitration is
that an arbitral award shall put the dispute to rest." (3 Cal.
4th at 10. Internal citations omitted.) Finally, the court
"recognize[d] there is a risk that the arbitrator will make a
mistake." The court found that risk "acceptable," however,
because "by voluntarily submitting to arbitration, the parties
have agreed to bear that risk in return for a quick,
AB 1067
Page 5
inexpensive, and conclusive resolution to their dispute." ( Id .
at 11 - 12.)
The author argues, however, that when consumers are forced to
accept arbitration provisions in standardized consumer contracts
on a take-it or leave-it basis, they are not voluntarily
choosing arbitration. The author believes that when consumers
are signing up for health care, for example, they do not know
the implications of the arbitration clause in the contract (if
they know it is there), and even if they do, they do not have
the ability to negotiate on such points. Consumers sign such
contracts because if they do not, they will not have health
coverage. When parties agree, post-dispute, to settle their
differences through arbitration, it is a knowing and voluntary
choice, and the goal of finality may in fact be one of the key
reasons the parties chose the arbitration route. For this
reason, this legislation does not apply to post-dispute
agreements to arbitrate.
Standard of Review . This measure provides for de novo review of
the arbitrator's decision in the limited circumstances to which
the bill applies. Opponents argue that "this provision reduces
arbitration to little more than a non-binding mediation.
Currently when an arbitration award is vacated, unless the
entire arbitration agreement is invalidated on contractual
grounds, the case is generally returned to arbitration."
Additionally, opponents argue that "the bill goes far beyond the
current appeal standard as applied by the Ninth Circuit Court of
Appeal under the Federal Arbitration Act which allows for
appeals only when a decision made resulting in a 'manifest
disregard of the law.' Assembly Bill 1067 allows appeals when
there has been a 'legal or factual error by the arbitrator that
has resulted in an injustice to the party.' A party can find a
factual error in virtually every case which would result in
nearly all arbitration decisions being overturned and forced to
rehear the measure in court."
The author strongly disagrees, noting that the standard proposed
by this bill should not increase litigation if the arbitration
award is fair. The author further argues that consumers would
not subject themselves to needless costs of litigation if the
arbitration award is fair. Proponents support this viewpoint
noting that "under current law, a consumer cannot get an
arbitration award reviewed even when the arbitrator wrongly
applied the law, violated the agreed-upon rules of arbitration,
AB 1067
Page 6
or made a plain error of fact. AB 1067 simply permits the
courts to examine the most egregious cases in which arbitration
involving a consumer goes awry, in order to ensure that justice
is done and the consumer is protected."
Appealability of the Decision by the Consumer Only . The
Consumer Attorneys of California (CAOC), writing in support of
this measure, agrees with the author "that only the consumer
party should be able to seek judicial review from an arbitration
award because in 'take-it-or-leave it' agreements (like HMO
contracts or employment agreements), the consumer party has not
knowingly consented to arbitration. The superior party
inserting the arbitration provision in such agreements has
knowingly consented to arbitration, including the arbitral
finality standard announced in Moncharsh and subsequent cases.
Providing limited judicial review only to the consumer party is
critical to prevent not only a miscarriage of justice, but a
waiver of the fundamental constitutional right to a jury trial."
CAOC notes that this provision is analogous to the approach
taken in small claims court regarding who may appeal the
decision: "As in the small claims court system, only the party
forced into the system should have the right to appeal....By
electing to file a case in small claims court, the plaintiff
elects to waive his or her right to a jury trial. The defendant
does not. That is why only the defendant has a right to seek
and obtain a trial de novo from an adverse judgment. Similarly,
the party who drafts the contract selects the arbitration forum;
the consumer does not, and should be the party with an appellate
right."
Kaiser Permanente, writing in opposition to this measure,
disagrees. "Small claims court is not analogous to this
situation because it involves only minor disputes. There is
much more at stake in health plan arbitrations. . . .[Therefore]
allowing only the plaintiff to vacate an arbitration award is
unfair." Opponents further argue that allowing "only one
dissatisfied party . . . to appeal an award . . . is manifestly
unfair, especially when the parties to the contract agreed that
the arbitrator's award would be both final and binding. We are
aware of no other state in the country adopting a one-sided
proposal such as this."
Pertinent Pending Legislation . SB 1040 (Machado), which allowed
those who imposed the arbitration requirement, as well as
consumers, to appeal an arbitration decision in disputes between
AB 1067
Page 7
health plans and consumers, failed passage in the Senate
Judiciary Committee by a vote of 2-3 on April 24, 2001.
REGISTERED SUPPORT / OPPOSITION :
Support
Consumers Union
Consumer Attorneys of California
Opposition
Engineering Contractors' Association
California Fence Contractors' Association
Sacramento Builders' Exchange
Marin Builders' Exchange
Flasher/Barricade Association
American Fence Contractors' Association, California Chapter
Association of California Insurance Companies
Blue Cross of California
Kaiser Permanente
California Chamber of Commerce
California Landscape Contractors Association
Californians Allied for Patient Protection
California Manufacturers and Technology Association
Del Monte Corporation
Civil Justice Association of California
California Employment Law Council
Analysis Prepared by : Donna S. Hershkowitz / JUD. / (916)
319-2334