(June 11, 2012) The California Chamber of Commerce has identified a new “job killer” bill that creates uncertainty for businesses regarding the enforceability of arbitration agreements.
SB 491 (Evans; D-Santa Rosa) also dramatically increases litigation costs by encouraging more class actions and pushing more cases into the courts. SB 491 is another attempt to undermine arbitration and is substantially broader than last year’s AB 1062 (Dickinson; D-Sacramento), which would have weakened the enforcement of arbitration agreements by limiting appeals. AB 1062 was voted down by the Senate.
SB 491 invalidates any provision in a form contract proposing to waive the right of one of the parties to pursue a class action, class arbitration, or a private attorney general action, and would apply broadly to most employment contracts and consumer sales contracts, and also to many business-to-business contracts.
Although the language of SB 491 appears to create a general contract rule, in reality class waivers are used only in arbitration agreements, meaning the bill actually creates a rule targeting arbitration.
Arbitration permits parties to efficiently and economically resolve a dispute through a neutral person. Fairly drawn arbitration agreements benefit businesses, employees, and consumers— and reduce pressure on an already burdened court system.
Quicker, Less Expensive, Fair
Arbitration and mediation provisions work well in many areas of law. The cost and time savings of arbitration offer considerable benefits to both parties. In lieu of going to trial, using arbitration to settle a dispute is a widely accepted, faster, and less-costly alternative to the court system.
A 2003 survey by the American Bar Association (ABA) found that 78% of trial lawyers felt arbitration was timelier than regular litigation. A recent Cornell study also found arbitration was significantly less time consuming than litigation.
A 2005 Harris Poll found arbitration litigants—both plaintiffs and defendants—were very satisfied with arbitration. Likewise, a survey conducted by the Dispute Resolution Times found that 83% of employees favored using arbitration.
Circumvents Court, Congress
SB 491 is a blatant attempt to circumvent the U.S. Supreme Court and Congress in order to benefit class action attorneys.
SB 491 is an effort to do what is not possible or warranted — overruling the U.S. Supreme Court and Congress.
Recently, 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 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 neutrally to all standardized contracts, it establishes a state-law rule that invalidates a clause that can arise only in an arbitration setting.
Additionally, although it may be argued that this bill would allow classwide arbitration, the U.S. Supreme Court has also 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. Animal Feeds International Corp., 130 S.Ct. 1758 (2010)).
In short, SB 491 creates a litigation morass. On one hand it would have the effect of compelling classwide arbitration, while on the other hand, it would have a court striking arbitration altogether. In any case, the result is increased complicated, expensive litigation.
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 recently released May 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 expect increased time delays 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 them.
California-Only, Anti-Business Treatment
California’s economic recovery depends on its ability to create an environment where job creation can flourish. Unfortunately, California’s unemployment rate continues to be one of the worst.
In Chief Executive’s eighth annual survey of CEOs’ opinion of Best and Worst States in which to do business, California was ranked last for the eighth consecutive year.
Moreover, in a 2011 Harris Poll, California’s litigation environment continued to be ranked as one of the worst in the country, which affects companies’ decisions to grow or locate business.
SB 491 undermines the ability to rely on and enforce arbitration agreements in the state. During a time when court resources are overburdened already, California should promote arbitration rather than undermine it.
SB 491 will most likely be assigned to the Assembly Judiciary Committee. Contact members of Assembly Judiciary and your Assembly representative and urge them to oppose SB 491.