The Senate Judiciary Committee today will consider a California Chamber of Commerce-opposed job killer that if passed into law would create a worse litigation environment and result in lack of job creation.
CalChamber has identified SB 33 (Dodd; D-Napa) as a job killer because it unfairly attacks the use of arbitration agreements in consumer contracts with “financial institutions” as broadly defined, is likely preempted by the Federal Arbitration Act (FAA), and will negatively impact “financial institutions” with unnecessary and costly class action litigation that does not ultimately benefit the consumer.
Despite the fact sheet that indicates this is a narrowly tailored proposal which seeks to address financial accounts created without the consent of the consumer, it is not. SB 33 applies to “financial institutions,” which is broadly defined to include any business that engages in financial services, including insurance.
Under SB 33, any consumer contract for goods or services with a “financial institution” that includes a provision to resolve all disputes arising from their relationship through arbitration would be invalid.
Generally, arbitration provisions in a contract do not identify a list of claims subject to arbitration, but rather govern any dispute arising out of the contractual relationship. SB 33 goes well beyond the stated purpose or need for legislation and unnecessarily burdens all businesses included in the broad definition of “financial institutions.”
Preempted By Federal Law
SB 33 is likely preempted under the FAA, which will create years of litigation until this determination is confirmed. The U.S. Supreme Court has been consistently clear that prohibiting the arbitration of certain claims; imposing contractual requirements that target arbitration provisions; or interfering with the attributes of arbitration, such as prohibiting class action waivers, are all preempted under the FAA.
SB 33 suffers all three of these fatal flaws.
- First, it prohibits the arbitration of only certain claims arising from a “fraudulent relationship” or “unlawful use of personal identifying information” with a financial institution. Accordingly, it is not a general contractual defense to anycontract created under the laws of California. Instead, it is limited to only those contracts with financial institutions that contain an arbitration provision.
- Moreover, SB 33 specifically does not apply to formation of contracts, but rather to “relationships.” The only area the FAA has left to the state to regulate is general contractual defenses that are applicable to all contracts, not “relationships.” In fact, SB 33 acknowledges there is a valid agreement to arbitrate that has been consented to by the consumer. Accordingly, SB 33 does not have an impact on general contract formation.
- Third, SB 33 bars arbitration and the use of class action waivers, which as specified under the bill, were specifically contained in a contract consented to by the consumer.” Barring the application of arbitration or class action waivers has already been explicitly struck down by the U.S. Supreme Court. Challenging SB 33 through the legal system to ultimately establish it is preempted will take years, leaving California employers unnecessarily exposed to costly litigation in the meantime.
Ambiguous in Application
SB 33 states that upon petition to compel arbitration, the court must determine whether the arbitration agreement involves a “financial institution” that is seeking to apply a written contract to arbitrate to a “fraudulent relationship” or “unlawful use of consumer personal identifying information.” It is unclear how the court would make this determination.
If the decision to compel arbitration is based simply upon an allegation of a fraudulent relationship or unlawful use of consumer personal identifying information, then SB 33 provides the perfect pleading pathway for class action attorneys to avoid arbitration. Nothing in SB 33 requires a court to bifurcate claims that fall within this provision from other alleged causes of action that should be compelled to arbitration under a valid contract.
If SB 33 requires a court to make a factual determination that a “fraudulent relationship” or “the unlawful use of consumer personal identifying information” exists, then SB 33 turns a petition to compel arbitration into a substantive, dispositive motion on the validity of the claims asserted. The parties would have to litigate the existence of a fraudulent relationship or unlawful use of consumer personal identifying information at the outset of the case, undermining the very point of arbitration.
Attorneys, Not Consumer Are Financial Winners
Consumer attorneys dislike arbitration because such agreements include class action waivers. The validity of class action waivers in arbitration agreements was affirmed by the U.S. Supreme Court in 2011, in AT&T Mobility LLC v. Concepcion.
By prohibiting an arbitration clause in any consumer contract with a financial institution for all disputes arising from the relationship, the bill also limits the use of a class action waiver for such claims.
Consumer attorneys can easily plead one of these claims in a civil complaint to avoid arbitration, and pursue a class action. Once litigation is far enough down the procedural timeline, the trial attorneys can dismiss such claims and continue with the other claims that would have been subject to arbitration.
Generally, the financial winners in class actions are the attorneys who receive a significant fee/cost award compared to what class members receive. Recent examples of this distribution are:
- A case in which it was alleged LinkedIn wrongfully used members’ contact information. The case settled for $13 million; the funds were divided as follows: $1,500 for the named plaintiffs; no less than $10 per class member; and $3.25 million for attorney’s fees and costs.
- A case in which it was alleged personal identifying information of customers was compromised. The case settled for $3 million; the funds were divided as follows: $2,500 for named plaintiffs; 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; and $652,340 for attorney’s fees.