BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 1090
Assemblymember Monning
As Amended May 12, 2009
Hearing Date: June 9, 2009
Code of Civil Procedure
SK:jd
SUBJECT
Arbitration
DESCRIPTION
This bill would provide that existing ethical standards and
requirements for neutral arbitrators are not subject to
negotiation and may not be waived.
BACKGROUND
In 2001, the Legislature passed and the governor signed SB 475
(Escutia, Ch. 362, Stats. 2001) which required neutral
arbitrators in non-judicial arbitrations to comply with certain
ethical standards. In particular, these arbitrators must comply
with ethics standards for arbitrators adopted by the Judicial
Council. Those standards, which are "intended to guide the
conduct of arbitrators, to inform and protect participants in
arbitration, and to promote public confidence in the arbitration
process," require covered arbitrators to make basic disclosures
regarding potential conflicts of interest and to comply with
certain standards of conduct. In addition, the California
Arbitration Act requires a proposed neutral arbitrator to make
specified disclosures and allows a party to disqualify the
arbitrator.
In response to instances where an arbitrator has imposed
contractual waivers of these obligations, this bill would
provide that existing ethical standards and requirements for
neutral arbitrators are not subject to negotiation and may not
be waived.
CHANGES TO EXISTING LAW
(more)
AB 1090 (Monning)
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Existing law 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.
(Civ. Code Section 3513.) Thus, a waiver of statutory rights is
unenforceable where the "public benefit [of the statute] is one
of its primary purposes." (DeBerard Properties, Ltd. v. Lim
(1999) 20 Cal.4th 659, 668-669.)
Existing law 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.
These provisions do not apply to an arbitration conducted
pursuant to the terms of a public or private sector collective
bargaining agreement. (Code Civ. Proc. Sec. 1281.85.)
Existing law , under the Judicial Council's "Ethics Standards for
Neutral Arbitrators in Contractual Arbitration," requires
covered arbitrators to make basic disclosures regarding
potential conflicts of interest. The standards also require
compliance with certain standards of conduct such as
requirements that the arbitrator has a duty to refuse to accept
a gift from a party to the arbitration and the arbitrator may
not, during the arbitration, entertain or accept any offers of
employment from a party. (Ethics Standards for Neutral
Arbitrators in Contractual Arbitration.)
Existing case law provides that the federal Securities Exchange
Act of 1934 preempts the foregoing obligations as applied to
arbitrations conducted by "self-regulatory organizations" in the
securities industry. (Jevne v. Superior Court (2005) 35 Cal.4th
935.)
Existing law , the California Arbitration Act, requires a
proposed neutral arbitrator to make specified disclosures and
allows a party to disqualify the arbitrator. (Code Civ. Proc.
1281.9.)
Existing case law provides that a party may not waive its
statutory rights to disqualify an arbitrator under Code of Civil
Procedure Sections 1281.9 and 1281.91. (Azteca Construction,
Inc. v. ADR Consulting, Inc. (2004) 121 Cal.App.4th 1156.)
This bill would provide that existing ethical standards and
requirements for neutral arbitrators are nonnegotiable and shall
not be waived.
AB 1090 (Monning)
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COMMENT
1. Stated need for the bill
The author writes that the measure "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." Furthermore, "[l]etting arbitration providers or
arbitrators waive their ethical duties undermines the
legislative intent in establishing these rules and puts the
arbitration consumer in the unintended position of either
postponing their arbitration indefinitely or waiving their
statutory rights under the ethical guidelines."
The California Dispute Resolution Council supports the bill,
arguing that it codifies the court's decision in Azteca
Construction v. ADR Consulting, Inc., supra, 121 Cal.App.4th
1156. Supporter Consumers Union writes that "[b]y specifically
making the adherence to high ethical standards non-waivable,
every individual who submits to the arbitration process is
guaranteed that all arbitrators are required to conform to the
highest standards of conduct with respect to how arbitrations
are handled."
2. Waiver of statute established for public purpose
impermissible
It has long been the case 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.
(Civ. Code Sec. 3513.) Under DeBerard Properties, Ltd. v. Lim,
supra, 20 Cal.4th 659, 668-669, a waiver of statutory rights is
unenforceable where the "public benefit [of the statute] is one
of its primary purposes."
In this case, the author points out, existing ethical standards
and requirements for neutral arbitrators were established
primarily for the purpose of public protection and therefore
should not be subject to waiver or negotiation. Indeed, the
Judicial Council's Ethics Standards expressly state that they
are "intended to guide the conduct of arbitrators, to inform and
protect participants in arbitration, and to promote public
confidence in the arbitration process." (Emphasis added.)
AB 1090 (Monning)
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Despite this, there have been recent instances in which
arbitration companies have imposed and attempted to defend
contractual waivers of these obligations. (See, e.g., Azteca
Construction, Inc. v. ADR Consulting, Inc., supra, 121
Cal.App.4th 1156; Jevne v. Superior Court, supra, 35 Cal.4th
935.) This bill is intended to "settle any doubt on the matter
by declaring expressly that arbitrator ethics rules are not
subject to negotiation or waiver."
3. Bill addresses issues raised in Azteca Construction, Inc. v.
ADR Consulting, Inc.
By providing that existing ethical standards and requirements
for neutral arbitrators are nonnegotiable and may not be waived,
this bill would address issues raised in the appellate court's
ruling in Azteca Construction, Inc. v. ADR Consulting, Inc.,
supra, 121 Cal.App.4th 1156. In Azteca, ADR Consulting argued
that Azteca Construction had waived its statutory rights to
disqualify an arbitrator under Code of Civil Procedure Sections
1281.9 and 1281.91 when it agreed to submit to arbitration
before the American Arbitration Association (AAA). The court
held that Azteca could not waive its statutory rights to
disqualify an arbitrator by agreeing to arbitration before the
AAA for several reasons, stating:
First, there is no doubt that these statutes were enacted
primarily for a public purpose. As we have seen, the
Legislature has gone out of its way, particularly in recent
years, to regulate in the area of arbitrator neutrality by
revising the procedures relating to the disqualification of
private arbitrators and by adding, as a penalty for
noncompliance, judicial vacation of the arbitration award. .
. . Second, there is a "'fundamental distinction between
contractual rights, which are created, defined, and subject to
modification by the same private parties participating in
arbitration, and statutory rights, which are created, defined,
and subject to modification only by [the Legislature] and the
courts ? .'" [Citations.] 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
aspect[s] of the arbitration" process. [Citation.] The
critical subject of arbitrator neutrality is a structural
AB 1090 (Monning)
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aspect of the arbitration and falls within the Legislature's
supreme authority.
Finally, the 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. The California Supreme Court has termed
the requirement of a neutral arbitrator "essential to ensuring
the integrity of the arbitration process." [Citations.]
"Participants who agree to binding arbitration are giving up
constitutional rights to a jury trial and appeal. [Statutory]
[d]uties of disclosure and disqualification are designed to
ensure an arbitrator's impartiality." [Citation.] . . .
"[E]ven though state and federal policy favors private
arbitration and the AAA is certainly a respected forum for
such arbitration, AAA nevertheless is 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.'" [Citations.] Only by adherence
to the Act's prophylactic remedies can the parties have
confidence that neutrality has not taken a back seat to
expediency. (Azteca Construction, Inc. v. ADR Consulting,
Inc., supra, 121 Cal.App.4th 1156, 1167.)
4. Bill does not involve more controversial issues regarding
mandatory private arbitration clauses
As many have noted, the use of mandatory arbitration clauses in
consumer contracts has increased immeasurably in recent years.
Many of these clauses are contained in adhesion contracts used
by companies including telecommunications providers, banks,
doctors, insurance companies, hospitals, and nursing homes.
The increased use of private arbitration in consumer disputes as
the result of mandatory clauses in boilerplate form contracts is
highly controversial for several reasons. First, arbitrators
are permitted to disregard the law (Moncharsh v. Heily & Blase
et al. (1992) 3 Cal.4th 1), and are also permitted to issue
binding decisions that are legally enforceable but are not
reviewable by a court. (Crowell v. Downey Community Hospital
Foundation (2002) 95 Cal.App.4th 730.) In addition, arbitrators
are allowed to conduct arbitrations without allowing for
discovery, complying with the rules of evidence, or explaining
their decisions in written opinions. (Code Civ. Proc. Secs.
AB 1090 (Monning)
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1283.1, 1282.2, 1283.4.) And, arbitrations may be conducted in
private with no public scrutiny. (Ting v. AT&T, 182 F.Supp.2d
902 (N.D. Cal. 2002), affirmed, 319 F.3d 1126 (9th Cir. 2003).)
Existing law also limits the relief that a court may grant to a
party to the arbitration to potential vacatur of the award.
(Code Civ. Proc. Sec. 1286.2.) If the court vacates the award,
the court may order a rehearing before new arbitrators or, in
some cases, order a rehearing before the original arbitrators.
(Code Civ. Proc. Sec. 1286.2.)
This bill avoids these controversial issues because it is
limited to the waiver of existing ethical standards and
requirements for neutral arbitrators although, as the Assembly
Judiciary Committee analysis pointed out, "[i]ronically, then,
despite this worthy measure, parties would continue to be
compelled to waive their underlying statutory and constitutional
rights under mandatory private arbitration clauses."
Support : California Dispute Resolution Council; Consumer
Attorneys of California; Consumers Union
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation : SB 475 (Escutia, Ch. 362, Stats. 2001) See
Background.
Prior Vote :
Assembly Judiciary Committee (Ayes 10, Noes 0)
Assembly Floor (Ayes 71, Noes 0)
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