BILL ANALYSIS
AB 1090
Page 1
Date of Hearing: May 5, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 1090 (Monning) - As Introduced: February 27, 2009
As Proposed to be Amended
SUBJECT : PRIVATE ARBITRATION: ETHICS
KEY ISSUE : SHOULD STATUTORY ETHICAL OBLIGATIONS ON PRIVATE
ARBITRATORS ENACTED TO ENSURE BASIC STANDARDS OF TRANSPARENCY
FOR THE PROTECTION OF THE PARTIES AND THE ARBITRATION INDUSTRY
BE CLEARLY NON-WAIVABLE AND NON-NEGOTIABLE?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
Neutral arbitrators in specified private arbitrations are
required to comply with certain ethical obligations that are
intended to guide the conduct of arbitrators, to inform and
protect participants in arbitration, and to promote public
confidence in the arbitration process. Although it is implicit
in the statutory and regulatory scheme that these obligations
are not waivable or negotiable, there have been instances in
which private judging companies have argued that arbitrators are
not bound by the ethics obligations because of a contractual
waiver. This bill would make that point explicit. Supporters
include arbitration industry trade association and consumer
groups. There is no known opposition.
SUMMARY : Prevents waiver and negotiation regarding private
arbitrator ethics obligations. Specifically, this bill provides
that existing ethical standards and requirements are not subject
to waiver or negotiation.
EXISTING LAW:
1)Requires a person serving as a neutral arbitrator pursuant to
an arbitration agreement to comply with the ethics standards
for arbitrators adopted by the Judicial Council, except that
these provisions do not apply to an arbitration conducted
pursuant to the terms of a public or private sector collective
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bargaining agreement. (Code of Civil Procedure section
1281.85.)
2)Pursuant to those ethics standards, requires covered
arbitrators to make basic disclosures regarding potential
conflicts of interest, and requires compliance with certain
standards of conduct (e.g., gifts from a party, ex parte
communications, offers of employment from parties or their
lawyers, truth and accuracy in marketing), and prohibitions
against contingency fees. These standards are "intended to
guide the conduct of arbitrators, to inform and protect
participants in arbitration, and to promote public confidence
in the arbitration process." (Ethics Standards for Neutral
Arbitrators in Contractual Arbitration.)
3)Provides that the foregoing obligations do not apply to
arbitrations conducted by so-called self-regulatory
organizations in the securities industry because they are
preempted by federal law under the Securities Exchange Act of
1934. (Jevne v. Superior Court, 35 Cal. 4th 935 (2005).)
4)Provides that anyone may waive the advantage of a law intended
solely for his benefit, but a law established for a public
reason cannot be contravened by a private agreement. (Civil
Code section 3513.) Thus, a waiver is unenforceable where it
would seriously compromise any public purpose that a statute
was intended to serve. (DeBerard Properties, Ltd. v. Lim
(1999) 20 Cal.4th 659, 668-669.)
5)Provides that an arbitration award issued by an arbitrator who
has violated the ethics standards - e.g., by failure to timely
disclose a ground for disqualification - may be vacated.
(Ovitz v. Schulman, 133 Cal. App. 4th 830 (2005).)
6)Limits the relief that a court may grant to a party in
arbitration, no matter what misconduct has taken place in the
arbitration, to potential vacatur of the award - returning the
parties to further arbitration, perhaps with the same
arbitrator or arbitration company. The grounds on which an
arbitrator's decision may be vacated are narrow and the
standards for vacatur are high. (Code of Civil Procedure
Section 1282.6.)
7)Establishes the California Arbitration Act (CAA) (Code of
Civil Procedure section 1280 et seq.) and the Federal
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Arbitration Act (9 USC Section 1 et seq.), both of which
provide that agreements to arbitrate shall be valid,
irrevocable, and enforceable, except such grounds as exist at
law or in equity for the revocation of any contract.
8)Provides that trial by jury is an inviolate right and shall be
secured to all. (Cal. Const. Article 1, Section 16.)
9)Does not require that arbitrators be trained in or
knowledgeable about the law, or otherwise regulate who may act
as a private arbitrator.
10) Permits arbitrators to disregard the law and/or the
evidence in rendering their decisions. Awards may be enforced
by the court, even if they are legally and factually
erroneous. (Moncharsh v. Heily & Blase et al (1992) 3 Cal.4th
1.)
11) Allows private arbitrators to issue binding decisions that
are legally enforceable, but essentially unreviewable, by a
court. (Crowell v. Downey Community Hospital Foundation
(2002) 95 Cal. App. 4th 730.)
12) Allows arbitrators to conduct arbitrations without
allowing for discovery, complying with the rules of evidence,
or explaining their decisions in written opinions. (Code of
Civil Procedure Sections 1283.1, 1282.2, 1283.4.)
13) Permits arbitrations to be conducted in secret without
public scrutiny. (Ting v. AT&T (2002) 182 F.Supp. 2d 902
(N.D. Cal.), affirmed, 319 F.3d 1126 (9th Cir 2003.)
14) Allows arbitrators substantial if not absolute immunity
from civil liability for acts relating to their decisions,
even in the case of bias, fraud, corruption or other violation
of law. (Baar v. Tigerman (1983) 140 Cal. App. 3d 979.)
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COMMENTS : In support of the bill the author states, "AB 1090
would clarify the intent of the Legislature and specify that the
ethics standards for arbitrators are nonnegotiable and shall not
be waived. The bill amends the Code of Civil Procedure to
prohibit arbitration providers and arbitrators from contracting
out of California's ethical standards. AB 1090 protects
consumers in the event of arbitration, by ensuring California's
ethics standards are nonnegotiable and shall not be waived.
This bill allows for proper disclosure of any conflict of
interest to be accessible and transparent between the parties
and the arbitration provider."
Although it should be clear that these rules were established
primarily for the purpose of public protection and therefore
should not be subject to negotiation or waiver, there have been
reported instances of private judging companies imposing and
attempting to defend contractual waivers of these obligations,
and there have no doubt been unreported instances as well.
(E.g., Azteca Construction, Inc. v. ADR Consulting, Inc., 121
Cal. App. 4th 1156 (2004); Jevne v. Superior Court, 35 Cal. 4th
935 (2005).) This bill would settle any doubt on the matter by
declaring expressly that arbitrator ethics rules are not subject
to negotiation or waiver.
Mandatory Private Arbitration Is Essentially Unregulated And
Highly Controversial . As this Committee has frequently
discussed, parties may by contract agree to have their disputes
resolved and legal rights determined by a private arbitrator.
The private arbitration system owes much of its popularity and
goodwill to the long history of accomplishment it has enjoyed in
the resolution of labor disputes, where management and union
representatives with relatively equal bargaining power and
sophistication regularly appear before a small group of
specialists who they freely choose (or avoid) and whose function
is to resolve problems with the idea of achieving some measure
of workplace "industrial justice." Private arbitration has also
enjoyed success in many commercial disputes involving willing
parties to a business transaction who are content to pay the
cost in exchange for the speed and flexibility of a private
system.
There has been considerable controversy, however, when this
system has been applied to consumer disputes as the result of
mandatory clauses in boilerplate form contracts imposed by
corporate parties wishing to opt-out of the legal rules of
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liability and accountability that are the hallmarks of the
public court system. What is more, these arbitration clauses
frequently designate a specific private arbitration company
preferred by the drafter of the clause as the exclusive provider
of the arbitration, meaning that a consumer is not only required
to arbitrate, but to do so with a particular arbitration
company.
The reason for the controversy is that private arbitration is a
mostly "anything-goes" system which is often costly and where
there is little if any regulation, oversight or legal
accountability to the parties or the public. Arbitrators need
not 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. Indeed, unlike judges, arbitrators
need not explain or defend the rationale for their decisions.
There is no need to justify his or her decision because the law
and the evidence need not be followed and because there is no
right for any party to appeal or obtain an independent review of
the arbitrator's ruling. Regardless of the level or type of
mistake, or even misconduct, by the arbitrator, the most relief
a court may grant to a party in arbitration is to vacate the
award and return the parties to further arbitration - typically
with the very same arbitrator or arbitration company because
they are so designated in the arbitration clause. The grounds
on which an arbitrator's decision may be vacated, moreover, are
extremely narrow and the standards for vacatur are stringent.
Neither may the parties generally obtain any remedy against the
arbitrator for misconduct because arbitrators are afforded
substantial if not absolute immunity from civil liability for
acts relating to their decisions, even in the case of bias,
fraud, corruption or other violation of law.
As one court put it succinctly, "Arbitrators are not bound by
rules of law, but may base their decisions on broad principles
of justice and equity. With narrow exceptions, the courts are
not permitted to review the validity of an arbitrator's
reasoning or the sufficiency of the evidence to support the
award. Precisely because arbitrators wield such mighty and
largely unchecked power, the Legislature has taken an
increasingly more active role in protecting the fairness of the
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process." (Azteca Construction, Inc. v. ADR Consulting, Inc.,
121 Cal. App. 4th 1156 (2004).) "While the parties may be free
to contract among themselves for alternative methods of dispute
resolution, such contracts would be valueless without the
state's blessing. Because it imbues private arbitration with
legal vitality by sanctioning judicial enforcement of awards,
the state retains ultimate control over the structural aspects
of the arbitration process. The critical subject of arbitrator
neutrality is a structural aspect of the arbitration and falls
within the Legislature's supreme authority. [T]he neutrality of
the arbitrator is of such crucial importance that the
Legislature cannot have intended that its regulation be
delegable to the unfettered discretion of a private business.
Participants who agree to binding arbitration are giving up
constitutional rights to a jury trial and appeal. Statutory
duties of disclosure and disqualification are designed to ensure
an arbitrator's impartiality. Private arbitration companies
are] a business enterprise in competition not only with other
private arbitration services but with the courts in providing -
in the case of private services, selling - an attractive form of
dispute settlement. It may set its standards as high or as low
as it thinks its customers want. Only by adherence to the
[ethical obligations] prophylactic remedies can the parties have
confidence that neutrality has not taken a back seat to
expediency. (Id.)
The Revenue Incentives Of Private Arbitration Have Caused
Concerns About The Advantages Enjoyed By "Repeat-Players" And
The Disadvantages For Consumers . As this Committee has also
frequently discussed, not only is private arbitration
effectively unregulated, it has caused concerns because it is a
revenue-driven system where, critics contend, "repeat players"
have unfair advantages when they are involved in mandatory
arbitration against "one-shot" users, such as individual
consumers. This may be particularly true where the dispute
involves stigmatizing allegations, such as elder abuse charges.
This Bill Does Not Involve The More Controversial Issue Of
Whether Parties May Or Should Be Compelled To Waive Their
Underlying Legal Right. As many commentators have noted,
mandatory private arbitration clauses have proliferated in
recent years to become a common feature of adhesion contracts
imposed by many large commercial enterprises ranging from
telecommunications providers, banks and insurance companies, to
doctors, hospitals and nursing homes. These contracts have
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generally been enforced by the courts unless they meet the
strict standards of unconscionability. As indicated above,
because arbitrators are not required to follow the law or adhere
to the evidence or accepted standards of due process, consumers
lose both their substantive and procedural legal rights when
their disputes are diverted from the public court system to
private arbitration. In short, both the laws passed by this
Legislature (e.g., consumer protection, unfair business
practices, etc.) and common law rights (e.g, negligence) are now
subject to compelled waiver.
Unfortunately, legislative efforts to ensure a modicum of
fairness by ensuring that these agreements are knowing and
voluntary and not imposed as a take-it-or-leave-it condition of
the transaction have been unsuccessful in the face of vigorous
opposition by business groups. (See, e.g, AB 2947 (Eng) of 2008
(prohibiting residential care facility for the elderly from
requiring, as a condition of admission or continued care, that
the elder or dependent adult or his or her representative waive
certain rights against abuse; AB 1448 (Liu) of 2003 (precluding
long-term care facilities from requesting that residents or
applicants sign pre-dispute binding arbitration agreements or
otherwise waive the rights and procedures afforded under elder
abuse statute); SB 211 (Dunn) (pre-dispute binding arbitration
clauses in residential care facility admission agreements); AB
2656 (Jackson) of 2004 (automobile contracts); AB 1715
(Judiciary) of 2003 (employment discrimination); SB 1750
(Dunn)(2000)(mobilehome tenancy).
This bill avoids that controversial issue because it is limited
only to involuntary waiver of the arbitrator ethics rules.
Ironically then, despite this worthy measure, parties would
continue to be compelled to waive their underlying statutory and
constitutional rights under mandatory private arbitration
clauses.
Author's Clarifying Amendment. In order to avoid any
inappropriate implication that other related statutory ethical
obligations are potentially more subject to waiver than the
Judicial Council standards expressly covered by the bill as
introduced, the author wisely proposes to amend the bill as
follows:
(c) These ethics requirements and standards of this chapter are
nonnegotiable and shall not be waived.
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REGISTERED SUPPORT / OPPOSITION :
Support
California Dispute Resolution Council
Consumer Attorneys of California
Consumers Union
Opposition
None on file
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334