BILL ANALYSIS
AB 1176
Page 1
Date of Hearing: April 5, 2005
ASSEMBLY COMMITTEE ON JUDICIARY
Dave Jones, Chair
AB 1176 (Tran) - As Introduced: February 22, 2005
SUBJECT : ARBITRATION: LEGAL STANDARDS AND JUDICIAL REVIEW
KEY ISSUE : SHOULD PRIVATE ARBITRATION RULES BE CHANGED TO ALLOW
SOME SOPHISTICATED PARTIES - BUT NOT CONSUMERS AND OTHERS
SUBJECT TO MANDATORY ARBITRATION - TO HAVE THE PROTECTIONS OF
LAW AND EVIDENCE AS WELL AS THE RIGHT TO JUDICIAL REVIEW?
SYNOPSIS
This bill would allow, but not require, decisions in private
arbitration to be supported by law and substantial evidence, and
permit a court to vacate the award if it is not supported by
substantial evidence or is based on an error of law. Supporters
contend that these protections are essential to due process, and
that without these rights the outcome of a dispute is wholly
unpredictable. Consumer Attorneys of California agrees that the
lack of legal rights and protections in private arbitration can
be a fundamental shortcoming of that system, among other
problems, but that it is unfair to relieve only sophisticated
parties of these burdens while consumers and employees would
continue to be deprived of their constitutional and other legal
rights. Other opponents comment that these fundamental
distinctions between arbitration and public courts are
advantageous and intentional features of the system that must be
preserved, and that the bill could have the affect of increasing
costs and litigation and diminishing representation by counsel.
SUMMARY : Revises the rules of private arbitration.
Specifically, this bill allows parties to any contract to agree
in writing that in any arbitration to resolve a dispute relating
to the contract, the arbitrator's award shall be supported by
law and substantial evidence, and if the agreement so provides,
a court shall vacate the award if after review of the award it
determines either that the award is not supported by substantial
evidence or that it is based on an error of law.
EXISTING LAW:
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1)Permits arbitrators to disregard the law and/or the evidence
in rendering their decisions. Awards may be enforced by the
court, even if they are legally and factually erroneous.
(Moncharsh v. Heily & Blase et al, 3 Cal.4th 1 (1992).)
2)Allows private arbitrators to issue binding decisions that are
legally enforceable but essentially unreviewable by a court;
there is no appeal from an arbitrator's decision to a public
court, even if the arbitration agreement expressly provides
for judicial review. (Crowell v. Downey Community Hospital
Foundation, 95 Cal. App. 4th 730 (2002).)
3)Allows arbitrators to conduct arbitrations without allowing
for discovery, complying with the rules of evidence, or
explaining their decisions in written opinions. (Code of
Civil Procedure Sections 1283.1; 1282.2; 1283.4.)
4)Allows arbitrators substantial if not absolute immunity from
civil liability for acts relating to their decisions, even in
the case of bias, fraud, corruption or other violation of law.
(Baar v. Tigerman, 140 Cal. App. 3d 979 (1983).)
5)Limits the relief that a court may grant to an arbitral party,
no matter what misconduct has taken place in the arbitration,
to potential vacatur of the award and returning the parties to
further arbitration, perhaps with the same arbitrator or
arbitration company. The grounds on which an arbitrator's
decision may be vacated are narrow and the standards for
vacatur are high. (Code of Civil Procedure Section 1282.6.)
FISCAL EFFECT : As currently in print, this bill is keyed
non-fiscal.
COMMENTS : In support of the bill, the author states:
Contractual arbitration clauses have consumed the
commercial world, particularly with respect to contracts
providing for personal services. Case law has established
that an arbitrator (1) is not required to have any
particular qualifications, (2) is not required to base the
decision upon California law, (3) is not required to render
a statement of decision, and (4) may render decisions that
are final, binding and not reviewable by anyone.
More sophisticated parties tend to include in the
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arbitration clause a provision that the arbitrator be
required to follow the law, and that the decision of the
arbitrator shall be reviewable by a court of law. With
this assurance, parties are able to more accurately predict
the outcome of a dispute regarding the agreement, since the
outcome will be determined by well-established maxims of
law. Without this assurance, the outcome of a dispute is
totally unpredictable.
The sponsor adds: "The right to have a decision supported by law
and substantial evidence is an important due process right that
parties should not be forced to waive merely because they elect
to have contractual arbitration."
Further in support of the bill, the sponsor points to the
dissenting opinion in the case this bill would overrule. The
existing law, it is argued, "will discourage people from
agreeing to arbitrate, which is the exact opposite of
California's public policy. Most arbitration proceedings are
conducted fairly, economically, and expeditiously by arbitrators
who are experts in their field. [T]here [may be] literally
hundreds of cases annually that do not go into arbitration
because attorneys or parties are fearful of receiving an
arbitrary result that is totally final, without the safety net
of judicial review. If my position were followed, those who do
not want arbitration with expanded judicial review would not
have to opt for it. However, those who do wish it--and would
otherwise be unwilling to arbitrate--may do so." Crowell v.
Downey Community Hospital Foundation, 95 Cal. App. 4th 730,
741-42 (2002).
Background: Private Arbitration Is Radically Different From
Public Courts Where Constitutional and Other Legal Rights And
Safeguards Exist To Protect The Fairness and Integrity Of The
Process . As this Committee has frequently discussed, private
arbitration is a mostly "anything goes" private-court system
where constitutional and other honored legal rights and
safeguards do not follow. Arbitrators need not be lawyers.
Arbitration is conducted in secret, without public scrutiny.
Unlike courts, arbitrators need not allow full discovery, comply
with the rules of evidence, or explain their decisions in
written opinions as public judges do. Arbitrators issue
decisions that are legally binding but effectively unreviewable
by a court; there is no appeal from an arbitrator's decision to
a public court - even if the arbitration agreement expressly
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provides for judicial review. Arbitration awards are upheld
even if they demonstrate patent disregard for the law or the
facts of the case.
Remarkably, private arbitration companies are largely
unregulated and may maintain undisclosed business and personal
relationships and other potential conflicts of interest with
corporate parties that may disadvantage employees. Legislative
efforts to require disclosure of these potential conflicts of
interest have been opposed by the arbitration companies.
Perhaps surprisingly, in light of the lack of legal standards
and protections in private arbitration, arbitrators and their
private judging companies assert absolute immunity from civil
liability for acts relating to their decisions - even in the
case of bias, fraud, corruption or other violations of law.
Legislative efforts to constrain that immunity so that it is no
broader than the immunity enjoyed by public judges have been
vigorously battled by the private arbitration industry. The
relief that a court may grant to an arbitral party - no matter
what misconduct has taken place in the arbitration - is limited
to vacating the award and returning the parties to further
arbitration, perhaps with the same arbitrator or arbitration
company. In addition, the grounds on which an arbitrator's
decision may be vacated are narrow and the standards for vacatur
are high.
Of course, private arbitration is neither inherently inferior
nor superior to civil litigation as a mechanism for dispute
resolution. Proponents of arbitration contend that it is
advantageous to both plaintiffs and defendants because it is
cheaper, faster, and more flexible than litigation, has the
potential to relieve overcrowded court dockets, and leads to
results that are more satisfying for the disputants. For those
reasons, among others, arbitration is said to be preferred by
many. Certainly parties ought to have every right to
voluntarily choose to engage in private arbitration, among other
methods of dispute resolution, if they prefer it to civil
litigation.
Consumers, Employees And Other Parties Can Be Forced Into
Binding Mandatory Arbitration. Despite concerns about the
potential unfairness of private arbitration and the virtually
unfettered discretion of private arbitrators, courts have
largely enforced mandatory arbitration clauses against
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consumers, employees and others and protect arbitrators and
private judging companies from legal responsibility for their
conduct. Interestingly, there have been some recent
legislative efforts to prohibit mandatory arbitration in some
circumstances. As with AB 1176, however, these efforts have
gained momentum only with respect to businesses, not consumers
or employees. For example, controversy about the use of
mandatory private arbitration led Congress last year to adopt
legislation, signed by President Bush, prohibiting such
arrangements in franchise agreements between car dealers and
auto manufacturers - although not between car dealers and their
consumers. Like the auto dealers, farmers are seeking a similar
ban on mandatory arbitration under a bill with bipartisan
support in Congress.
Legislative Efforts To Make Arbitration Voluntary Have Been
Defeated. Last session, AB 1715 (Judiciary) would have
precluded employers who are covered by the Fair Employment and
Housing Act (FEHA) from imposing arbitration clauses and
otherwise demanding involuntary waivers of FEHA rights from
employees and applicants as a condition of employment. That
bill, like its predecessor, SB 1538 (Burton) of 2002, was
opposed by business groups and vetoed by the Governor.
Similarly, AB 1448 (Liu) of 2003 would have prohibited mandatory
pre-dispute arbitration clauses and other waivers of elder and
dependent adult abuse laws as a condition of admission to long
term care facilities. In the face of industry opposition, the
author ultimately decided not to pursue that measure. A similar
fate befell SB 211 (Dunn) which would have prohibited
pre-dispute arbitration clauses in admission agreements between
residents and "assisted living" facilities. The story has been
the same for related measures in prior legislative sessions.
This Bill Would Allow Sophisticated Parties With Equal
Bargaining Power To Opt-Out Of Some Of The Inherent Features Of
Private Arbitration That Are Alleged To Be Unfair, But Would
Leave Consumers, Employees And Other Persons Stuck In The
Existing Scheme. As the sponsor notes below, this bill would
allow - but not require - arbitration contracts to dictate that
the arbitrator adhere to the law and the evidence, and give a
right to judicial review of the arbitrator's award. In
opposition to the bill, Consumer Attorneys of California (CAOC)
argues that it offers only a "piecemeal" approach, without
addressing the real problems of private arbitration and, "in
fact, impliedly approves the practice of forcing consumers into
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these contracts." CAOC contends that private arbitration has
many shortcomings compared to the civil justice system. CAOC
states, "AB 1176 attempts to deal with two of these issues: the
lack of a requirement that arbitrators follow the law and the
lack of real appellate rights. While we agree that both are
astonishingly shocking, AB 1176 is not the answer." CAOC states
that the only real solution to mandatory pre-dispute binding
arbitration provisions in consumer contracts is to prohibit
them.
Would This Bill Increase Litigation And Costs And Therefore
Diminish Consumer Access To Legal Counsel In Private
Arbitration? The California Dispute Resolution Council (CDRC),
representing the arbitration industry, opposes the bill on the
grounds that it will promote court appeals of arbitrator awards,
leading to increased cost and potentially deterring attorneys
from representing consumers and employees in some arbitrations.
The sponsor rebuts this argument as follows: "At outset, it is
important to understand that this bill would affect only
arbitrations where both parties have expressly agreed in writing
that the arbitration award may be subject to judicial review.
Most consumer and employee contracts are drafted by the business
entity or employer, who would be unlikely to include a provision
for judicial review in the arbitration clause ? since it would
not necessarily be in the best interest of the person with the
superior bargaining power to include this provision in the
arbitration agreement. The reason is that the provision could
cut both ways, i.e., a consumer or employee would also have the
right to seek judicial review, which is a result that most
businesses and employers seek to avoid."
If Supporters Are Correct That This Bill Would Leave The
Resolution Of Disputes To The Civil Justice System, Would That
Not Achieve The Supporters Goals Of Ensuring Legal Rights And
Judicial Review? Supporters argue that parties should be able
to reserve the right to have their dispute decided in accordance
with the law if they wish to do so. The alternative, they note,
is to have no arbitration clause in the agreement whatsoever,
which means the dispute on the agreement must be decided by a
court. A similar argument was made in the Crowell dissent. And
yet, paradoxically, resolution of disputes by the civil justice
system would afford parties the right to have their disputes
resolved by application of the law and the standards of
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evidence, and guarantee the right to judicial review of the
decision by the fact-finder, as this bill seeks.
This Measure Has Been Criticized By Committees And Offices Of
The State Bar. The California State Bar Committee on
Alternative Dispute Resolution argued against this proposal when
it was advocated for adoption by resolution of the Board of
Governors. The ADR Committee commented: "The California
Arbitration Act provides specific grounds upon which courts are
authorized to review and vacate an arbitration award. The
intent of the Act itself would be severely compromised if
judicial review of the merits of the case were permitted. The
legislative intent of the Act is to insure a speedy and less
costly resolution while providing finality of decision. ? This
change would negate the intent of the Act and result in an
increased burden on the courts. ? Additionally, the costs of
arbitration would substantially increase as parties begin to
require court reporters be present in such arbitrations. Those
unhappy with the result of arbitration would request review as a
matter of delay or leverage in negotiating a new settlement."
The State Bar Office of Mandatory Fee Arbitration likewise
argued against the measure's adoption by the Board of Governors
on the ground that it would negatively impact attorney's fees
arbitrations.
REGISTERED SUPPORT / OPPOSITION :
Support
W. Patrick O'Keefe, Jr., Orange County Bar Association (sponsor)
1 individual
Opposition
California Dispute Resolution Council
Consumer Attorneys of California
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334