(July 6, 2012) A California Chamber of Commerce-opposed “job killer” bill that created uncertainty for businesses regarding the enforceability of arbitration agreements failed to pass the Assembly Judiciary Committee this week.
SB 491 (Evans; D-Santa Rosa) would have dramatically increased litigation costs by encouraging more class actions and pushed more cases into the courts. SB 491 was another attempt to undermine arbitration and was 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.
Attempt to Circumvent Court, Congress
SB 491 was a direct attack on arbitration agreements. While the language of SB 491 appeared to only create a general contract rule, the reality is that class action waiver clauses are primarily found in arbitration agreements. SB 491 jeopardized the entire arbitration agreement by striking or invalidating one of the most substantive provisions, the class action waiver.
The U.S. Supreme Court held in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) that the Federal Arbitration Act (FAA) prohibits states from conditioning the enforceability of an arbitration agreement on the availability of classwide arbitration procedures, as such a requirement would be inconsistent with the intent of the FAA.
The court struck down California’s rule on the grounds that such a rule “interferes with arbitration” to an extent not tolerated by the FAA.
SB 491 would have run afoul of the court’s ruling because, while seeming to apply neutrally to all standardized contracts, it established a state rule invalidating a clause that can arise only in an arbitration setting. Based on the Supreme Court’s decision, it is almost certain that SB 491 would have been struck down as unlawful.
Class Action Waivers Protect Consumers
The fact that an arbitration agreement includes a class action waiver does not mean the consumer is left with no remedy. It simply means the consumer will individually arbitrate his or her claim pursuant to the terms of the arbitration agreement, which may provide a consumer with an even greater recovery than through class action arbitration.
For example, in Concepcion, the terms of the agreement required payment of all costs for arbitration by the company, allowed the consumer to recover of any type of damages or relief available, provided reimbursement for attorney’s fees, and included a liquidated damages clause of $7,500 plus twice the amount of the consumer’s attorney’s fees if the consumer obtained a greater arbitration award then the most recent settlement offer of the company.
These types of provisions are not necessarily unique, as California courts scrutinize form contracts where the consumer does not have equal bargaining power to ensure that the terms are fair.
Uncertainty for Businesses
Businesses use arbitration agreements in a wide variety of contracts as a way to control litigation costs and preserve business resources for other important purposes, including paying workers.
During the time it would have taken a court challenge to SB 491 to work its way through the courts, businesses would have been in limbo and forced to plan for the worst-case scenario that the bill would have been upheld. The Concepcion case, for example, took five years to make it to the U.S. Supreme Court!
The result of the uncertainty would have been increased costs for consumer products and limited hiring and expansion.
SB 491 also would have driven more cases into California’s court system.
If SB 491 had gone into effect, there were two potential outcomes:
the company is forced to go through class action arbitration as it cannot include a class action waiver in its arbitration agreements; or
the company already has contracts that include class action waivers in its arbitration agreements and a court strikes the agreements as unenforceable/unconscionable due to SB 491.
Either outcome significantly drives up costs. However, for existing contracts that already include class action waivers, SB 491 would have invalidated the contracts and forced the parties into class action litigation.
The recently adopted state budget for 2012–2013 targets the judicial branch for $544 million in cuts. 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.
As a faster and less costly approach than litigation, arbitration benefits both parties in a dispute. The CalChamber argued that the Legislature should be encouraging people to use arbitration, not finding new ways to undermine this form of dispute resolution, as SB 491 would have done.
SB 491 failed to pass the Assembly Judiciary Committee on July 3, 5-4.
Ayes: Dickinson (D-Sacramento), Feuer (D-Los Angeles), Lowenthal (D-Long Beach), Monning (D-Carmel), Wieckowski (D-Fremont).
Noes: Gorell (R-Camarillo), Huber (D-El Dorado Hills), Jones (R-Santee), Wagner (R-Irvine).
Absent, Abstaining, Not Voting: Atkins (D-South Park/Golden Hill).