The Assembly Judiciary Committee today will consider a job killer bill that seeks to ban arbitration clauses for alleged civil rights violations, thereby forcing consumers into an already-overburdened judicial system.

AB 2667 (Thurmond; D-Richmond) has been identified as a job killer because the bill unfairly discriminates against arbitration agreements that waive a right to pursue civil rights violations made as a condition of entering into a contract for goods or services and interferes with the fundamental attributes of arbitration, which is likely preempted by the Federal Arbitration Act (FAA). This will lead to confusion, uncertainty and costly litigation for such contracts.

AB 2667 Pre-empted by Federal Law

AB 2667 deems any arbitration agreement made as a condition of a contract for goods or services that waives “any legal right, penalty, forum, or procedure” for civil rights violations as unconscionable, involuntary, and against public policy.” This prohibition directly conflicts with rulings from both the California Supreme Court and the U.S. Supreme Court.

Banning arbitration clauses made as a condition of a contract will interfere with and disfavor arbitration as a practical matter. Accordingly, AB 2667 is likely preempted by the FAA. Forcing parties to litigate this issue through the courts for the next several years to reach a final determination will create uncertainty and significant costs for California businesses.

Studies Prove Arbitration More Efficient with Similar Success Rates for Consumers

According to the U.S. District Court Judicial Caseload Profiler, there were 29,312 civil cases filed in California in 2014. As of June 2014, approximately 2,132 cases had been pending in federal court in California for more than three years and the median time from filing a civil complaint to trial in Northern California was 31 months. There is general consensus that arbitration is more efficient than litigation, with most cases being resolved in a year or less.

A report published in July 2013 by the Heritage Foundation, titled “The Unfair Attack on Arbitration: Harming Consumers by Eliminating a Proven Dispute Resolution System,” concludes that “[a]rbitration is generally faster, cheaper, and more effective than the litigation system. It is not affected by cutbacks in judicial budgets or the increases in court dockets that significantly delay justice.” The Heritage Foundation report supported the findings of an analysis of consumer arbitration in California published in July 2006.

In a presentation to the George Washington University Law School in March 2011, attorney Andrew Pincus also agreed that the national data and evidence available demonstrate that consumers do the same, if not better, in arbitration than litigation, as one of the largest arbitration providers documented at least 45% of consumer arbitrations result in a damages award, while more than 70% of consumer-initiated securities arbitrations result in a recovery to the consumer.

Attorneys, Not Consumer, Generally Biggest Winners in Class Action Consumer Litigation

Consumer arbitration provisions can and do actually provide consumers with a better remedy than pursing lengthy class action litigation.

In AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), the consumer pursued a class action lawsuit against AT&T for false advertisement of a “free phone” when the consumer was required to pay $30.22 for the sales tax.

The arbitration clause in Concepcion provided the consumer with the following remedies: (1) the consumer could initiate a dispute on the company’s website; (2) once initiated, the company had 30 days to resolve or settle the dispute; (3) if no resolution after 30 days, the consumer could initiate arbitration, all costs of which were covered by the company for nonfrivolous claims; (4) the arbitration had to take place in the county where the customer was billed for his/her services; (5) if the claim was less than $10,000, the consumer could decide whether to have the arbitration take place by phone, in person, or through written statements; (6) the company was barred from seeking reimbursement of any attorney’s fees; and (7) if the arbitrator awarded the consumer more than the company’s last settlement offer, the consumer automatically received an additional $7,500.

Comparatively, below are several recent consumer class actions pursued through civil litigation with a breakdown of the recovery between the attorneys and consumers:

• Starks v. Jimmy John’s LLC, Los Angeles Superior Court, BC501113, in which the plaintiff filed a consumer class-action against the sandwich franchise, alleging it failed to put sprouts on her sandwich. The class action settled in July 2014 as follows: (1) $5,000 to the named plaintiff; (2) $1.40 coupon to each class member; and, (3) $370,000 to the plaintiff’s attorney for fees and costs.
• McCrary v. Elations Company, LLC, Central District of California, in which the plaintiff alleged the defendant misrepresented the drink as improving joint comfort, joint health, and improving joint flexibility. The class action settled in August 2015 as follows: (1) $5,000 to the named plaintiff; (2) $6.00 per class action member who has proof of receipt of purchasing the drinks, for up to $18.00; (2) Plaintiff’s counsel costs award of $585,000; and, (3) Plaintiff’s counsel attorney’s fee award of $362,000.

A November 23, 2014 article by Jonathan Sourbeer in the Wall Street Journal titled “A Close Reading of My $20.91 Settlement Check,” effectively summarized the cost of tort litigation. In this article, an owner of a Toyota vehicle received a settlement check for $20.91 for the class action litigation regarding the unintentional acceleration alleged product defect in Toyota vehicles. The check was sent to the recipient for any potential personal injury or property damage, even though the recipient  never claimed to have suffered either. The recipient went to the website referenced on the check to find out more about the lawsuit and learned that the court awarded attorney’s fees totaling $200 million, plus $27 million for expenses. The 25 primary plaintiffs and class representatives received $395,270.

After learning this information, the recipient posed the following questions: “For me to get that $20.91 check is costing Toyota more than half a billion dollars in litigation, fees and the settlement awards. How much will that cost me in the future? Will it add $200 to the price of my next car? Or $500? Or $1,000? Maybe that’s too much of an add-on in this case. But is it too much when we start totaling the lawsuits that hit all the products we buy every year? Why do we have so much litigation, and why are courts (and the juries of our peers), awarding so much money in situations when lawyers have produced so little, comparatively, for their clients? . . . . Ultimately, we’re sticking it to ourselves.”

AB 2667 Will Worsen Litigation Environment, Discourage Job Creation

In the Chief Executive’s tenth annual survey, CEOs in 2014 ranked California as one of the worst three states in which to do business. The magazine cited Dun & Bradstreet in reporting that 2,565 California businesses with three or more employees relocated to other states between January 2007 and 2011, and 109,000 jobs left with those employers.

California’s economic recovery depends on its ability to create an environment where job creation can flourish. AB 2667 will neither help California’s litigation environment nor promote businesses’ ability to create jobs as it will drive up California employers’ litigation costs.