July 13, 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 last week.

SB 491 (Evans; D-Santa Rosa) would have dramatically increased litigation costs by encouraging more class actions and potentially pushing 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

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.

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.

Court Burden

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.

Key Vote

SB 491 failed to pass the Assembly Judiciary Committee on July 3 on a vote of 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).