BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 267 (Swanson)
As Introduced
Hearing Date: July 5, 2011
Fiscal: No
Urgency: No
TW
SUBJECT
Employment Contracts: Choice of Law, Choice of Forum
DESCRIPTION
This bill would prohibit an employer from requiring an employee
or job applicant, as a condition of employment, to waive
California choice of law, choice of forum, or choice of venue,
or to resolve employment disputes outside of California. This
bill would allow employees to voluntarily agree to a choice of
law or forum selection provision that is not required as a
condition of employment and that is the subject of independent
consideration.
BACKGROUND
Existing law does not explicitly prohibit employers from
requiring employees to agree to a non-California forum or
non-California law to resolve employment disputes. The author
reports that courts have upheld non-California forum and choice
of law clauses, which forces California employees to travel
outside of California to litigate employment disputes that arise
in California. As such, these employees are disadvantaged by
other state laws that are not as rigorous in their protection of
employees as California law.
This bill is substantially similar to AB 1043 (Swanson, 2007)
and similar to AB 335 (Swanson, 2009), which were both vetoed by
Governor Schwarzenegger.
This bill, sponsored by the California Employment Lawyers
Association, would provide that California employees would not
(more)
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be required to agree to non-California choice of law, choice of
forum, or choice of venue provisions as a condition of obtaining
or continuing employment, but employees could voluntarily agree
to such provisions, as specified.
This bill was heard by the Senate Labor and Industrial Relations
Committee on June 22, 2011 and approved by a vote of 5-1.
CHANGES TO EXISTING LAW
Existing law provides that, if a court finds as a matter of law
that a contract or any clause of the contract was unconscionable
at the time it was made, the court may refuse to enforce the
contract or the unconscionable clause. (Civ. Code Sec. 1670.5.)
Existing case law , in which the California Supreme Court struck
down a mandatory arbitration agreement in an employment contract
as an unconscionable contract of adhesion, held
"unconscionability has both a 'procedural' and a 'substantive'
element, the former focusing on 'oppression' or 'surprise' due
to unequal bargaining power, the latter on 'overly harsh' or
'one-sided' results." (Armendariz et al. v. Foundation Health
Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114.)
Existing case law , in which the appellate court refused to
enforce a forum selection clause in a consumer contract, held
that forum selection clauses will be enforced only "so long as
California consumers will not find their substantial legal
rights significantly impaired by their enforcement." "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. The Superior Court of Alameda County (2001) 90
Cal.App.4th 1, 21, 23.)
Existing law provides, with respect to a contract between a
contractor and a subcontractor for the construction of a public
or private work of improvement in this state, that a provision
shall be void and unenforceable if it purports to require any
dispute between the parties to be litigated, arbitrated, or
otherwise determined outside this state or purports to preclude
a party from commencing such a proceeding or obtaining a
judgment or other resolution in this state or the courts of this
state. (Code of Civ. Proc. Sec. 410.42.)
Existing law provides the waiver of certain substantive rights
as against public policy, such as a person's rights under the
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Consumer Legal Remedies Act (Civ. Code Sec. 1751) and a person's
rights under state securities laws (Corp. Code Sec. 25701).
Thus, those rights are non-waivable.
This bill would provide that an employer may not require an
employee or job applicant, as a condition of employment, to
waive the application of California law to any dispute regarding
employment, or the securing of employment, in California.
This bill would provide that an employer may not require an
employee or job applicant, as a condition of employment, to
resolve outside of California any dispute regarding employment,
or the securing of employment, in California.
This bill would provide that any choice of law, choice of forum,
or choice of venue provision in a job application, employment
agreement, employment handbook, or other statement of an
employer's policies applicable to its employees, would be
unconscionable, violative of the public policy of California,
and void if the provision would have the effect of either of the
following:
requiring the employee or job applicant, as a condition of
employment, to resolve outside of California claims that arose
from employment, or the securing of employment, in California;
or
depriving the employee or job applicant of the protection of
California law for claims arising from employment, or the
securing of employment, in California.
This bill would provide that an employee could voluntarily agree
to a choice of law or forum selection provision that is not
required as a condition of employment and that is the subject of
independent consideration.
This bill would make specified findings and declarations
regarding public policy related to California employees and job
applicants.
COMMENT
1. Stated need for the bill
The author writes:
Increasingly, employers, particularly out-of-state employers,
are imposing choice-of-law and forum selection provisions on
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their California workers in order to evade California law,
make it more difficult for employees to pursue legitimate
claims, and ensure that any disputes are decided in the forum
that is most favorable to the employer.
Without any legislation to guide them, California courts have
freely enforced these provisions, sending California workers
to Florida, Illinois, New York and Minnesota, even out of the
country, to resolve discrimination claims and other employment
disputes. . . . In addition, the current situation benefits
out-of-state employers at the expense of California employers.
Employers who remain subject to the vigorous 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. . . . Correcting this
problem therefore benefits California employers as well as
employees and contributes to fair competition in California.
California Employment Lawyers Association (CELA), the sponsor of
this bill, writes:
�M]ost workers lack the resources to travel across the country
. . . to pursue an employment claim in another state or
country. The problem is particularly acute for lower income
workers and disabled workers. Those workers that do have the
resources and ability to travel might well find that the
protection that they had under California law does not exist,
or is not as comprehensive, in the jurisdiction that will be
deciding their dispute. AB 267 would correct this patent
injustice . . . �and] would provide clarity to the courts,
justice to California employees, and a more level playing
field for California businesses.
2. California's interest in contracts for employment in
California
This bill would prohibit an employer from requiring an employee,
as a condition of employment, to waive California choice of law,
choice of forum, or choice of venue relating to employment in
California. Under existing law, employers are not prohibited
from inserting certain clauses in employment materials that
predetermine the forum or venue into which an employee may bring
an employment dispute (i.e., forum or venue selection clauses)
or predetermine the law (i.e., the law of a state or a nation)
that will govern an employment dispute (i.e., choice of law
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clauses). Employers may place these clauses in job
applications, employment agreements, employment handbooks, or
other statements of an employer's policies applicable to its
employees.
CELA contends that the use of choice of law and choice of forum
clauses has become more prevalent in employment law practice.
For example, CELA members have seen these clauses in truck
driver contractor agreements, salespeople commission plans, and
in "non-disclosure agreements" that even rank and file employees
are asked to sign. The author points to several court decisions
that exemplify the rationale behind banning such clauses under
specified conditions:
Hopkinson v. Lotus Development Corp. (N.D.Cal. June 21, 1995)
1995 U.S. Dist. Lexis 8804. In Hopkinson, the court required
that San Francisco employees litigate their employment
discrimination claims in Massachusetts pursuant to an
employment agreement.
Flake v. Medline Industries, Inc. (E.D.Cal. 1995) 882 F.Supp.
947. In Flake, the court held that a California employee's
age discrimination lawsuit under FEHA was subject to Illinois
law under the forum selection clause in the employment
contract.
Sarmiento v. BMG Entertainment (C.D.Cal. 2003) 326 F.Supp.2d
1108. In Sarmiento, the court held that a California composer
and music director must litigate his breach of contract and
other claims in New York, pursuant to a forum selection
clause.
Olinick v. BMG Entertainment et al. (2006) 138 Cal.App.4th
1286. In Olinick, the court held, in an age discrimination
lawsuit filed under FEHA, that the case was subject to New
York law under forum selection and choice of law provisions in
the employment contract, despite the fact that the employee
worked in California and the agreement was entered into in
California. The court based its holding on two points: New
York's law provided an adequate age discrimination remedy, and
FEHA does not contain a specific antiwaiver provision. The
court pointed to several examples of California statutes that
contain antiwaiver provisions: Civil Code Section 1751, the
Consumer Legal Remedies Act, Corporations Code Section 25701,
the Corporations Security Law, and Civil Code Section 1717,
relating to attorney's fees.
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Besag v. Custom Decorators, Inc. (N.D.Cal. Feb. 10, 2009) 2009
U.S. Dist. Lexis 13582. In Besag, the court held that a
California Costco demonstrator must litigate her employee
misclassification case in Oregon pursuant to a forum selection
clause because she failed to prove the heavy burden that
litigating in Oregon would be so difficult and inconvenient
that she was effectively denied a meaningful day in court.
California has a history of protecting against potentially
one-sided contractual arrangements. The California Supreme Court
struck down a mandatory arbitration agreement in an employment
contract as an unconscionable contract of adhesion, the court
held that "unconscionability has both a 'procedural' and a
'substantive' element, the former focusing on 'oppression' or
'surprise' due to unequal bargaining power, the latter on
'overly harsh' or 'one-sided' results." (Armendariz et al. v.
Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83,
114.)
Further, the Legislature has enacted laws that restricted choice
of law and forum selection between contracting parties in order
to protect its residents. (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.) In these cases, a
sufficient nexus was drawn between California's desire to
protect its citizens and the nature of the contract between the
parties.
Similarly, California has a legitimate interest in protecting
its citizens from unconscionable contracts that would overly
burden the resident by litigating a claim arising in California
but litigated or arbitrated in a different state applying
out-of-state law. The court in America Online, Inc. v. Superior
Court (2001) 90 Cal.App.4th 1 addressed forum selection clauses
and held that "�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." (Id. at pg. 21.)
California has a substantial nexus to choice of law, choice of
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forum, and choice of venue agreements between an employer and
California employees. Employees, particularly in today's
difficult economic climate, may not have the freedom to select
their employer with particularity, let alone negotiate the terms
of their employment contracts. Employers arguably have the
upper hand when requiring an employee to agree to choice of law,
choice of venue, and choice of forum provisions. Accordingly,
the choice of law, choice of forum, and choice of venue
agreements do not appear to be procured freely and voluntarily.
Further, since the employment dispute between the employer and
the California employee arises in California, where the employee
performs his or her services, using California law in these
disputes is logical.
The author and sponsor argue that, without the employee
protections under this bill and in light of current Labor Code
provisions that do not contain antiwaiver provisions, employers,
particularly out-of-state employers, will continue to take
advantage of choice of law and forum selection clauses in
employment contracts that deprive California employees of their
employment rights under California law. The author and sponsor
also argue that this is particularly relevant to employees who
do not stand on a level playing field with their employers.
3. Freedom of parties to contract
This bill would prohibit choice of law, choice of forum, and
choice of venue clauses in employment agreements if they would
require the employee to litigate in another state or deprive the
employee of substantive rights available in California. Such
protective antiwaiver statutes have been enacted in other areas,
such as in construction (Code Civ. Proc. Sec. 410.42) and in
regulating private child support collections.
Existing law provides with respect to a contract between a
contractor and a subcontractor for the construction of a public
work of improvement in California that a provision shall be void
and unenforceable if it purports to require any dispute between
the parties to be litigated, arbitrated, or otherwise determined
outside this state or purports to preclude a party from
commencing such a proceeding or obtaining a judgment or other
resolution in this state or the courts of this state. (Code
Civ. Proc. Sec. 410.42.)
In addition, private child support collectors are forbidden to
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require, as a condition of providing services to an obligee,
that the obligee waive any right or procedure provided for in
any state law regarding the right to file and pursue a civil
action, or that the obligee agree to resolve disputes in a
jurisdiction outside of California or to the application of laws
other than those of California. Any waiver, including, but not
limited to an agreement to arbitrate or regarding choice of
forum or choice of law, that is required as a condition of doing
business with the private child support collector is presumed
involuntary, unconscionable, against public policy, and
unenforceable. (Fam. Code Sec. 5614(b)(7).)
Under both the federal and state constitutions, a federal or
state law may not unduly impair existing contractual
relationships. (U.S. Const. art. I, Sec. 10, Cal. Const. art.
I, Sec. 9.) In Energy Reserves Group v. Kansas Power & Light
(1983) 459 U.S. 400, the U.S. Supreme Court laid out a
three-part test for whether a state law violates the Contract
Clause. First, the state regulation must substantially impair a
contractual relationship. Second, the state "must have a
significant and legitimate purpose behind the regulation, such
as the remedying of a broad and general social or economic
problem." (Id. at 411-13.) Third, the law must be reasonable and
appropriate for its intended purpose (this test is similar to
the rational basis review). Thus, a state regulation that
imposes a substantial impairment on a contractual relationship
will be upheld if a significant or legitimate public interest
justifies the regulation and if the law adjusts the parties'
rights in a reasonable and appropriate way. (Id. at 411-413;
Associated Builders & Contractors v. Baca (1991) 769 F. Supp.
1537, 1551 (N.D. Cal.).)
A ban on choice of law and choice of forum clauses in employment
agreements could arguably pass constitutional muster under the
above test only if the ban is imposed as a condition of
employment and because it would be aimed at a broad, generalized
social problem potentially affecting every California employee,
not a private interest matter. (See Allied Structural Steel Co.
v. Spannaus (1978) 438 U.S. 234, 261.)
A Louisiana law that imposes an outright ban on these clauses
was upheld as constitutional by the Louisiana Supreme Court in
Sawicki v. K/S Stavanager Prince and Assurane-Foreninger Skuld
(La.2001) 802 So.2d 598. The Louisiana law prohibits choice of
forum clauses and choice of law clauses in employment contracts,
except where "expressly, knowingly, and voluntarily agreed to
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and ratified by the employee after the
occurrence of the incident which is the subject of the civil or
administrative action." (La. Rev. Stat. 23:921(a)(2).) The
Louisiana Supreme Court held that the statute did not violate
the Contract Clause because it did not impair the contractual
relationship between the employer and the employee and that the
statute reasonably accomplished a legitimate public purpose.
Likewise, this bill would ban such clauses under the same
conditions to protect the rights of California workers.
4. Protection for California businesses
CELA argues that this bill, by requiring out-of-state businesses
to litigate in California rather selecting a state with weaker
labor laws than California, would level the playing field for
California employers and would be particularly advantageous for
California employers in the context of non-competition
agreements. Some out-of-state companies, particularly in the
tech industry, are believed to require their employees to sign
non-competition agreements that are unenforceable in California
because of our protective standard for free enterprise under
Business and Professions Code, Section 16600.
In an effort to avoid California law, however, these
out-of-state companies add choice of law and forum selection
provisions specifying another state to their employment
agreements. Several California small businesses, in support of
this bill, argue that "out-of-state employers employing
California residents can use 'choice-of-law' and forum selection
clauses to exempt themselves from California's laws governing
employment relationships and adopt another State's weaker worker
protections. This creates an unfair competitive advantage over
employers . . . who remain subject to the rigorous requirements
of California labor and employment laws. Correcting this
problem therefore benefits California employers as well as
employees and contributes to fair competition in California."
It has been reported that attorneys representing out-of-state
companies have advised those out-of-state companies to include
forum selection clauses in an effort to increase the chances
that the non-compete contract will be litigated and enforced in
another state, making it more difficult and costly for
California companies to hire the employees they want. If
enacted, this bill would deter efforts to enforce
non-competition clauses in other states that are contrary to
California rules.
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5. Opposition concerns
Opponents, the California Chamber of Commerce and the Civil
Justice Association of California, have three main arguments:
First, opponents argue that the bill is unnecessary because
judges already have the discretion to strike down unconscionable
contracts and unreasonable choice of law provisions. CELA
responds that this ignores the practical reality that California
courts have never invalidated a choice-of-law or forum selection
clause in the employment context, and have routinely required
California workers to travel to distant states like Florida,
Illinois, New York, and Minnesota to pursue discrimination
claims that arose from work here in California.
CELA notes that the case that set the standard in this area,
Spradlin v. Lear Siegler Management Services (9th Cir. 1991) 926
F.2d 865, involved an American company that imposed on a
California resident the requirement that he litigate his
employment law claims in Saudi Arabia under Saudi Arabian law.
The Ninth Circuit found that the employee failed to prove that
the choice-of-law and forum selection clauses were unreasonable.
Courts have consistently relied on Spradlin to demonstrate the
extraordinary level of hardship necessary to invalidate a
choice-of-law or forum selection clause, with the predictable
outcome that no employee has been able to meet the test. (See,
e.g., Hopkinson, supra (court ordered California residents who
worked in California to litigate sex and age discrimination
claims in Massachusetts under Massachusetts law).) The author
argues that California courts routinely reject employees'
arguments that these provisions are unfair, unreasonable, and
against public policy, and the Legislature needs to provide
clarity and guidance in this area.
Second, opponents argue that the bill would interfere with the
right to contract and employees already voluntarily entered into
these waiver provisions. CELA responds that the bill does not
prevent employers and employees from voluntarily agreeing to
choice-of-law or forum selection provisions, but merely
prohibits employers from requiring that employees agree to such
provisions as a condition of employment. CELA argues that
employees in this economic climate do not have bargaining power
equal to employers. This bill would still preserve the right of
high level executives and national sales staff, among others, to
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give up these rights if they wish to do so, but the bill would
prevent an employer from making the waiver a condition of the
job. (See also Comment 3.) Thus, the bill does not impair the
freedom to contract.
Third, opponents suggest that the bill would deter employers
from doing business in California and that it starts down a
slippery slope toward outlawing all choice-of-law provisions.
CELA responds that the opposition ignores that this bill will
help California businesses by leveling the playing field and
requiring out-of-state employers to play by the same rules that
California employers do. It is fair to ask employers who take
advantage of California's valuable labor market to be
accountable to its laws when claims arise from employment in
California. As to creating a "slippery slope," CELA argues that
if other bills seek to restrict choice-of-law provisions in
other contexts, those bills may be evaluated on their merits.
AB 267 is a reasonable and narrowly-tailored way to ensure that
California workers are not forced to surrender their rights
under California law and that California businesses and
out-of-state employers are on equal footing.
6. Governor Schwarzenegger's veto of AB 1043 and AB 335
This bill is substantially similar to the enrolled version of AB
1043 (Swanson, 2007). In vetoing AB 1043, Governor
Schwarzenegger stated:
This bill appears to create a solution in search of a problem.
California law currently ensures that employees can not �sic]
be subjected to unconscionable contract provisions that would
force them to forego the protections of California law or
litigate their claims in an inappropriate out-of-state forum.
Moreover, this bill creates unnecessary and unhelpful
uncertainties for the employers and employees concerning
issues of federal preemption. Lastly, I strongly support the
right of parties to freely contract for the terms of their
employment relationship. This bill fundamentally conflicts
with that policy.
This bill is similar to the enrolled version of AB 335 (Fuentes,
2009). In vetoing AB 335, Governor Schwarzenegger stated:
This bill is similar to AB 1043 (Swanson, 2007), which I also
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vetoed. Like AB 1043, this bill would discourage out-of-state
and multinational employers from hiring California-based
workers and potentially contribute toward the growing problem
of unemployment. Additionally, the bill is unnecessary
because courts are already well equipped to determine when a
choice of law or choice of forum provision in a private
contract should be enforced in consideration of all applicable
circumstances.
Support : Aioli Restaurant; American Federation of State, County
and Municipal Employees, AFL-CIO; California Communities United
Institute; California Conference Board of the Amalgamated
Transit Union; California Conference of Machinists; California
Labor Federation; California Official Court Reporters
Association; California Teamsters Public Affairs Council;
Consumer Attorneys of California; Equal Rights Advocates;
IkonCycles, Inc.; International Longshore and Warehouse Union; L
Wine Lounge & Restaurant; Lambert Water Conditioning, Inc.;
Professional and Technical Engineers, IFPTE Local 21; SCOP,
Laborers International Union of North America; Women's
Employment Rights Clinic of Golden Gate University of Law;
United Food and Commercial Workers Region 8 States Council;
UNITE HERE!; Utility Workers Union of America, Local 132
Opposition : California Chamber of Commerce; Civil Justice
Association of California
HISTORY
Source : California Employment Lawyers Association
Related Pending Legislation : None Known
Prior Legislation :
AB 335 (Fuentes, 2009) See Background.
AB 1403 (Swanson, 2007) See Background.
AB 1740 (Assembly Judiciary Committee, 2005) would have provided
that an agreement entered into or renewed on or after January 1,
2006, establishing a forum outside of this state for the hearing
of specified matters relating to a California consumer would be
contrary to public policy and void and unenforceable. This bill
passed out of the Assembly and was referred to this Committee.
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Prior Vote :
Senate Labor and Industrial Relations Committee (Ayes 5, Noes 1)
Assembly Floor (Ayes 49, Noes 26)
Assembly Labor and Employment Committee (Ayes 5, Noes 1)
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