The California Chamber of Commerce has identified SB 33 (Dodd; D-Napa) as a job killer because it seeks to ban arbitration agreements.
The bill discriminates against arbitration agreements 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.
SB 33 has been referred to both the Senate Judiciary and Senate Appropriations committees; however, no hearing dates have been set.
Applies to All Contracts
SB 33 applies to any contract that requires an individual to submit any and all disputes to arbitration, including those arising from claims alleging fraud, identity theft, or misuse of personal identifying information.
CalChamber is concerned that this proposal basically sets up a pleading pathway for consumer attorneys to avoid arbitration by allowing them to allege numerous claims, including a claim for identity theft or wrongful use of identifying information in the complaint in order to avoid arbitration. Thereafter, the attorney can dismiss the claims for fraud, identity theft, or wrongful use of identifying information, and move forward on the remaining claims in litigation that would have been subject to arbitration. Accordingly, despite the intent or argument that this bill is limited only to certain claims, it will actually have an impact on all contracts.
Pre-Empted by Federal Law
The U.S. Supreme Court has been consistently clear that a prohibition of arbitrating certain claims is pre-empted under the Federal Arbitration Act (FAA).
SB 33 targets mandatory arbitration clauses made as a condition of a contract for goods or services that waive an individual’s right to pursue civil litigation and deems such provisions as unconscionable. However, there are numerous other mandatory provisions that a party can require as a condition of entering into a contract for goods and services that are not precluded, such as pricing, time and manner of delivery of the goods and services, warranties, performance of the contract, actions that constitute a material breach versus a minor breach of the contract, subcontracting of the work, etc. All these issues still could be made as a condition of the contract without being statutorily deemed “unconscionable” and, therefore, SB 33 discriminates against arbitration clauses. Accordingly, SB 33 is likely pre-empted by the FAA.
Attorneys, Not Consumers, Generally Biggest Winners in Class Action Litigation
Arbitration can and does provide individuals with a better remedy than pursing lengthy class action litigation.
In one case, the consumer pursued a class action lawsuit against a telecommunications company for false advertisement of a “free phone” when the consumer was required to pay $30.22 for the sales tax.
The arbitration clause in this case, 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, several recent class actions for data breaches/personal identifying information pursued through civil litigation demonstrate that attorneys are the biggest financial winners in class actions:
- Plaintiffs in one case alleged that LinkedIn wrongfully used members’ contact information. The case settled for $13 million with the funds divided as follows: 1) $1,500 for the named plaintiffs; 2) no less than $10 per class member; 3) $3.25 million for attorney’s fees and costs.
- In another case based in Santa Clara County, plaintiffs alleged that personal identifying information of customers was compromised. The case settled for $3 million, with the funds divided as follows: 1) $2,500 for named plaintiffs; 2) up to $3,000 per class member for unreimbursed losses as a result of the identity theft or up to $1,000 for unreimbursed expenses as a result of the identity theft; 3) $652,340 for attorney’s fees.
- A data breach case in which plaintiffs alleged consumer credit card information was compromised was settled for $13 million with the funds divided as follows: 1) up to $1,000 for named plaintiffs; 2) identity theft protection for 18 months; 3) up to $10,000/class member with proof of losses; 4) $8.475 million for attorney’s fees and costs.
An article by Jonathan Sourbeer published on November 23, 2014, in The Wall Street Journal, “A Close Reading of My $20.91 Settlement Check,” effectively summarized the cost of tort litigation. In this article, the 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.”
SB 33 Will Create a Worse Litigation Environment and Result in Lack of Job Creation
Banning pre-dispute arbitration agreements in contracts for goods and services will force individuals into an already-overburdened judicial system. Assuming an individual can find an attorney willing to pursue the case, a consumer potentially will have to wait years for a resolution, as opposed to resolving the case in less than a year through arbitration.
California’s economy depends on its ability to create an environment where job creation can flourish. In the 2014 Chief Executive’s 10th annual survey of CEOs’ opinions of Best and Worst States in which to do business, California was ranked as one of the worst three states in which to do business. The magazine stated: “[a]ccording to Dun & Bradstreet, 2,565 California businesses with three or more employees have relocated to other states between January 2007 and 2011, and 109,000 jobs left with those employers.” Similarly, the American Tort Reform Association’s “Judicial Hellholes Watch List” ranks California as having the second worst litigation environment in the country.
SB 33 will neither help California’s litigation environment nor promote businesses’ ability to create jobs as it will drive up California employers’ litigation costs.