BILL ANALYSIS �
SB 491
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Date of Hearing: July 3, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 491 (Evans) - As Amended: April 30, 2012
SENATE VOTE : NOT RELEVANT
SUBJECT : CLASS ACTIONS
KEY ISSUE : SHOULD WAIVERS OF CLASS ACTION RIGHTS AND OTHER
REPRESENTATIVE ACTIONS AND COMBINATIONS OF LEGAL CLAIMS BE VOID
IN CONTRACTS OF ADHESION?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill seeks to protect the rights of consumers and others to
engage in class actions, consolidated claims and representative
actions in court and in arbitration by declaring that any term
in a contract of adhesion purporting to waive the right to join
or consolidate claims, or to bring a claim as a representative
member of a class or in a private attorney general capacity
shall be deemed to lack the necessary consent to waive that
right, and is void. Supporters contend that the bill is needed
to respond to a decision of the U.S. Supreme Court last year
upholding a contract provision that required the waiver of class
arbitration rights and striking down a California court rule to
the contrary. Supporters argue that preserving class actions
deters fraudulent and discriminatory business practices by
giving consumers an avenue to bring their claims collectively,
aids legitimate businesses by curtailing illegitimate
competition, and avoids burdening the courts with multiple
claims involving the same issue. Opponents representing business
groups contend that the bill would create a "litigation morass,"
would send disputes into overburdened courts, and undermines the
ability to rely on and enforce arbitration agreements.
SUMMARY : Promotes and protects class action rights and similar
joinder of claims. Specifically, this bill declares that any
term in a contract of adhesion purporting to waive the right to
join or consolidate claims, or to bring a claim as a
representative member of a class or in a private attorney
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general capacity shall be deemed to lack the necessary consent
to waive that right, and is void.
EXISTING LAW :
1)Provides that it is essential to the existence of a contract
that there should be, among other requirements, parties
capable of contracting and their consent. (Civil Code section
1550.)
2)Provides that the consent of the parties to a contract must be
free, mutual; and communicated by each to the other. (Civil
Code section 1565.)
3)Provides that an apparent consent is not real or free when
obtained through: duress, menace, fraud; undue influence; or
mistake. (Civil Code section 1565.)
4)Provides that a contract of adhesion is one "which, imposed
and drafted by the party of superior bargaining strength,
relegates to the subscribing party only the opportunity to
adhere to the contract or reject it." (Discover Bank v.
Superior Court, 36 Cal. 4th 148, 160 (2005).)
5)Pursuant to federal law, provides that States may regulate
contracts, including arbitration clauses, under general
contract law principles and they may invalidate an arbitration
clause 'upon such grounds as exist at law or in equity for the
revocation of any contract.' What states may not do is decide
that a contract is fair enough to enforce all its basic terms
(price, service, credit) but not fair enough to enforce its
arbitration clause. The �FAA] makes any such state policy
unlawful, for that kind of policy would place arbitration
clauses on an unequal 'footing,' directly contrary to the
Act's language and Congress's intent." (Allied-Bruce Terminix
Cos. v. Dobson (1995) 513 U.S. 265, 281.)
COMMENTS : The author explains the bill as follows:
In Discover Bank v. Superior Court of Los Angeles (2005) 36
Cal.4th 148, 162-163, the California Supreme Court held
that a class action waiver is unconscionable where: (1) the
agreement is in an adhesion contract; (2) the disputes
between the parties are likely to involve small amounts of
damages; and (3) the party with superior bargaining power
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is alleged to have carried out a deliberate scheme to
defraud large numbers of people out of individually small
sums of money.
Then in 2011, in AT&T v. Concepcion (2011) 131 S. Ct. 1740,
the U.S. Supreme Court, overruling the 9th Circuit,
abrogated the Discover Bank rule, holding that AT&T could
enforce a contract provision requiring customers to
arbitrate their disputes on an individual basis. A key to
the Court's 5-4 decision was that the FAA prohibits
judicial hostility to arbitration agreements.
In an important footnote to the majority opinion, however,
the Court recognized that, "�o]f course States remain free
to take steps addressing the concerns that attend contracts
of adhesion-for example requiring class-action waiver
provisions in adhesive arbitration agreements to be
highlighted." (Id. at 1750, fn. 6.) In a concurring
opinion, Justice Thomas explained that "the FAA requires
that an agreement to arbitrate be enforced unless a party
successfully challenges the formation of the arbitration
agreement . . . ." (Id. at 1753.)
SB 491 seeks to address a significant problem posed by the
recent U.S. Supreme Court decision in Concepcion.
Californian consumers (and potentially employees) have
essentially been left potentially powerless against
powerful interests because class waivers can be buried deep
into a non-negotiable contract. Such waivers leave
consumers unable to pursue rightful claims where businesses
inflict injuries that are too small to sue over on an
individual basis, even though those small injuries, in the
aggregate, result in an enormous benefit to the business.
Consistent with the Court's recognition in Concepcion that
states govern the validity, irrevocability, and
enforceability of contracts, SB 491 would provide that any
term in a contract of adhesion that prohibits the joinder
of claims, whether in litigation or arbitration, lacks the
necessary consent to waive that right and is void.
Ultimately, preserving class litigations and arbitrations
deters fraudulent or discriminatory business practices by
giving consumers an avenue to bring their claims
collectively, aids legitimate businesses by curtailing
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illegitimate competition, and avoids overburdening the
courts with multiple claims involving the same issue.
Without the class action, unscrupulous corporations would
be allowed to retain the fruits of their wrongdoing.
SB 491 would help restore a degree of fairness in these
contracts and put an end to this practice before it becomes
the standard.
This Bill Seeks To Protect And Promote Class Action Rights And
Other Combinations of Claims and Representative Actions Both In
Court And In Arbitration. This is a simple bill consisting of
one sentence declaring that any term in a contract of adhesion
purporting to waive the right to join or consolidate claims, or
to bring a claim as a representative member of a class or in a
private attorney general capacity shall be deemed to lack the
necessary consent �of the party] to waive that right, and is
void.
It is not clear whether the bill would apply to employment
claims brought by representatives under the Private Attorney
General Act (PAGA), Labor Code sections 2698 et seq. However,
the Concepcion rule has been held not to apply to these cases.
(See Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011).)
Moreover, because the Concepcion rule interferes with the
federal rights of workers to engage in protected and concerted
activity to advance their rights, the National Labor Relations
Board has concluded that it is inapplicable in the employment
context. (See D.R. Horton, Inc., 357 NLRB No. 184. (Jan. 6,
2012).)
A contract of adhesion is a non-negotiable document that is
drafted and offered by the more powerful contracting party on a
take-it or leave-it basis such that the weaker contracting party
(usually a consumer) has no choice in the terms to which they
will be bound. Not surprisingly such contracts tend to be
one-sided and are therefore subject to greater legal scrutiny.
Supporters and opponents debate whether this bill may be
pre-empted by the Federal Arbitration Act as interpreted in
Concepcion. As set out below, a coalition of business groups
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argue that "Senate Bill 491 is an effort to do what is not
possible or warranted - overruling the U.S. Supreme Court and
Congress (Federal Arbitration Act, 9 U.S.C. Sec. 1 et seq.) The
U.S. Supreme Court held in AT&T Mobility LLC v. Concepcion, 131
S. Ct. 1740 (2011) that the Federal Arbitration ACT ("FAA")
pre-empts California state law that had deemed class arbitration
waivers in standard consumer contracts per se unconscionable.
The Court struck down California's rule on the ground that such
a rule "interferes with arbitration" to an extent not tolerated
by the FAA. This bill runs afoul of the Court's ruling because,
while seeming to apply to all standardized contracts, it
establishes a state-law rule that invalidates a clause that can
arise only in an arbitration setting. Therefore it is
antithetical to the U.S. Supreme Court's ruling."
In response, the author argues that this bill does not seek to
overrule either Concepcion or interfere with the spirit of the
FAA. The author argues that the Court did not close the door on
any and all attempts to make a rule affecting arbitration. The
author states, "This bill, on its face, does not single out
arbitrations. It does not even prohibit arbitration clauses in
contracts of adhesion, since the Court decision in Concepcion
would not seem to allow that. It merely prohibits the waiver of
class rights in both litigation and arbitration contexts.
Again, in an oft-noted footnote of the decision, the Court
recognized that, "�o]f course States remain free to take steps
addressing the concerns that attend contracts of adhesion-for
example requiring class-action waiver provisions in adhesive
arbitration agreements to be highlighted." (Id. at 1750, fn.
6.) In a concurring opinion, Justice Thomas explained that "the
FAA requires that an agreement to arbitrate be enforced unless a
party successfully challenges the formation of the arbitration
agreement . . . ." (Id. at 1753.) Simply because this bill
chose a route other than highlighting such a clause does not
make it incompatible with the decision in Concepcion.
While it may not be possible to resolve this question
definitively, it is worth noting that no court has ever held
that a party can be compelled to abide by a contract to which
they have not consented or that longstanding state common law
regarding the formation of contracts is displaced.
ARGUMENTS IN OPPOSITION : A coalition of business advocates lead
by the Civil Justice Association of California opposes the bill,
stating:
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�C]ontracts of adhesion ... are nothing more than standard
contracts in consumer, employment, and business to business
contexts. A standardized contract is "a familiar part of
the modern legal landscape." (Graham v. Scissor-Tail, Inc.,
28 Cal.3d 807 (1981)). These contracts are valid,
enforceable and provide an economy of scale in the
marketplace. Contracts can contain provisions specifying
how to resolve contract disputes in order to expeditiously
resolve contractual problems, including the use of
arbitration. Arbitration provides fair, efficient and
timely resolution of disputes in a litigious society.
Class waivers are found only in arbitration agreements. By
providing these provisions are unenforceable, SB 491
creates litigation over whether the arbitration may be
enforced.
This bill is part of an ongoing effort by the plaintiff's
bar to eradicate the use of arbitration agreements in
California, despite the demonstrable benefits arbitration
has brought to governments, businesses and consumers.
Arbitration has evolved into a productive and useful method
of resolving disputes. Existing law requires arbitration
to provide both procedural and substantive due process in
order to ensure the process is fair (Armendariz v.
Foundation Health Psychcare Services, Inc, 99 Cal.Rptr.2d
745 (2000); see also Mercuro v. Superior Court, 96
Cal.App.4th 167 (2002). Arbitration is an alternative
method of resolving disputes derived from the need to more
efficiently handle conflicts.
The U.S. Supreme Court held in AT&T Mobility LLC v.
Concepcion, 131 S.Ct. 1740 (2011) that the Federal
Arbitration Act ("FAA") pre-empts California state law,
which had deemed class arbitration waivers in standard
consumer contracts unconscionable. The Court struck down
California's rule on the ground that such a rule
"interferes with arbitration" to an extent not tolerated by
the FAA. This bill runs afoul of the Court's ruling
because, while seeming to apply neutrally to all
standardized contracts, it establishes a state-law rule
that invalidates a clause that can arise only in an
arbitration setting. Courts that strike the arbitration
clause would run afoul of the U.S. Supreme Court's ruling.
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Additionally, should the court simply strike the class
action waiver and force class arbitration, the U.S. Supreme
Court has held that a party may not be compelled to submit
to class arbitration unless the parties agreed to do so
(Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130
S.Ct. 1758 (2010)). Class waivers are clear expressions
that parties did not agree to class arbitration.
In short, SB 491 creates a litigation morass. On one hand
it would have the effect of compelling classwide
arbitration, which Stolt-Neilson would prohibit, while on
the other hand, it would have a court striking arbitration
altogether, which violates Concepcion. In any case, the
result is increased complicated, expensive litigation.
SB 491 sends disputes into overburdened courts.
California's court system is struggling to serve the needs
of Californians. This will be the fourth year of deep
budget reductions to the judicial branch. In the recent
budget proposal, a total of $544 million is targeted to be
slashed from the state court budget. This comes on top of
large, cumulative cuts over the last three years. Courts
have already been reporting they may have to close civil
courtrooms and increasing time delays expected to resolve
civil lawsuits. Arbitration is a valuable alternative
method to resolve disputes and should be encouraged.
Instead, SB 491 would send more cases into a system that
can ill-afford it.
Senate Bill 491 undermines the ability to rely on and
enforce arbitration agreements in the state. During a time
when our court resources are overburdened already, we
should promote arbitration rather than undermine it.
REGISTERED SUPPORT / OPPOSITION :
Support
Consumer Attorneys of California (co-sponsor)
Consumer Federation of California (co-sponsor)
California Alliance for Retired Americans
California Conference Board of the Amalgamated Transit Union
California Conference of Machinists
California Labor Federation, AFL-CIO
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California National Organization for Women
California Teamsters Public Affairs Council
CALPIRG
Consumer Action
Consumers for Auto Reliability and Safety
Consumer Watchdog
Engineers and Scientists of California, IFPTE Local 20
International Longshore and Warehouse Union
MALDEF
Privacy Rights Clearinghouse
Professional and Technical Engineers, IFPTE Local 21
The Utility Reform Network (TURN)
United Food & Commercial Workers Western States Council
United Policyholders
UNITE-HERE, AFL-CIO
Utility Workers Union of America, Local 132, AFL-CIO
Opposition
California Chamber of Commerce
California Financial Services Association
CA Manufacturers & Technology Association
California New Car Dealers Association
California Retailers Association
Civil Justice Association of California
International Franchise Association
Personal Insurance Federation of CA
TechNet
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334