BILL ANALYSIS Ó SB 270 Page 1 Date of Hearing: June 28, 2016 ASSEMBLY COMMITTEE ON JUDICIARY Mark Stone, Chair SB 270 (Mendoza) - As Amended June 22, 2016 As Proposed to be Amended SENATE VOTE: 29-9 SUBJECT: COURT REPORTERS BOARD OF CALIFORNIA: CORPORATIONS KEY ISSUE: IN ORDER TO ENSURE A LEVEL PLAYING FIELD, SHOULD THE COURT REPORTERS BOARD HAVE BROAD REGULATORY POWERS OVER CORPORATIONS OR OTHER ENTITIES THAT OFFER, RENDER, OR PROVIDE SHORTHAND COURT REPORTING SERVICES IN THE STATE? SYNOPSIS According to the author, foreign corporations operating in California employ or contract with California-licensed court reporters to render professional court reporting services. These corporations and their owners are not licensed or certified under California law, creating a situation where licensees must adhere to California laws regulating court reporting services while the corporate owners or operators seemingly (and unfairly) are not required to do so. The SB 270 Page 2 certified court reporters who support and sponsor this bill contend that as a result of this discrepancy, some foreign corporations engage in unfair business practices, such as illegal gift giving or so-called "penny invoicing" (in which a shorthand reporting firm will charge a penny per invoice to assist a law firm with its litigation costs while charging full price to that law firm's opposition). The proponents of this bill note that when the Court Reporters Board (CRB or Board) has tried to issue citations and fines against these foreign corporations that purportedly do not adhere to California statutes and regulations regarding professional conduct, the courts have found that CRB does not have the authority to impose citations and fines over unlicensed corporations. According to the sponsor, the California Court Reporters Association, this bill is needed to strengthen the authority of the CRB to impose penalties and fines on entities rendering court reporting services in California in violation of the Board's professional and ethical rules for certified shorthand reporters. As approved by the Business & Professions Committee approximately one week ago, this bill would have expressly required foreign and domestic corporations that arrange for shorthand reporting services to comply with certain ethical and professional rules, including gift-giving restrictions, that would have been codified from existing Board regulations, and given the board "jurisdiction to enforce" these requirements. As proposed to be amended, this bill no longer codifies those regulations to require compliance, but instead seeks to establish more specific parameters of the Board's enforcement powers. The proposed amendments seek to expand the Board's enforcement to enforce virtually all applicable existing statutes and regulations governing court reporters, and, consistent with the author's longstanding intent, seek to create a level playing field where corporations or other entities that offer or arrange for the provision of shorthand court reporting services are required to follow the same rules that certified shorthand reporters themselves already are required to follow. SB 270 Page 3 A coalition of national deposition service companies remains strongly opposed to the bill, even as proposed to be amended. These companies contend that the bill effectively creates a new quasi- licensing program for companies "offering" court reporting services, regulating activities which courts have expressly concluded do not constitute the practice of court reporting. Among other things, these opponents also contend that the bill would give the CRB unfettered authority to issue citations and penalties against companies that do not even enjoy the protections of a property interest in a license, and the effect would be to drive business out of the state. SUMMARY: Provides the Court Reporters Board (CRB) with broad powers of enforcement, as specified, over foreign or domestic corporations that offer or arrange for court reporter services in California. Specifically, this bill: 1)Authorizes the Court Reporters Board, the Director of Consumer Affairs, and the Attorney General to seek injunctive relief or issue citations, fines, and other penalties against corporations, persons or entities, whether foreign or domestic, that for a fee or other financial consideration, offer, offer to arrange for, render, or provide the services of a certified shorthand reporter, for violations of the following: a) Chapter 9 of Title 4 of Part 4 (commencing with Section 2025.010) of the Code of Civil Procedure; b) Part 4 of Division 3 of Title 1 (commencing with Section 13400) of the Corporations Code; c) Chapter 12 of Division 3 (commencing with Section 8000) of the Business and Professions Code; and d) Section 2475 of Title 16 of the California Code of SB 270 Page 4 Regulations. 2)Provides that nothing in this bill shall be construed to authorize the provision of shorthand reporting services by a foreign corporation in violation of Section 13401(c) of the Corporations Code or to authorize violations of Section 8044 of the Business & Professions Code. EXISTING LAW: 1)Provides for the regulation and certification of shorthand reporters by the CRB within the Department of Consumer Affairs (DCA). (Business and Professions Code (BPC) Section 8000 et seq. All further references are to this code unless otherwise stated.) 2)Prohibits a person from engaging in the practice of shorthand reporting, as specified, unless that person is the holder of a certificate in full force and effect issued by the CRB unless he or she is a salaried, full-time employee of any department or agency of the state who is employed as a hearing reporter. (Section 8016.) 3)Defines the "practice of shorthand reporting" as the making, by means of written symbols or abbreviations in shorthand or machine shorthand writing, of a verbatim record of any oral court proceeding, deposition, court ordered hearing or arbitration or proceeding before any grand jury, referee, or court commissioner and the accurate transcription, thereof. (Section 8017.) 4)Defines a "shorthand reporting corporation" as a corporation which is authorized to render professional services, as SB 270 Page 5 specified in the Corporations Code Section 13401, as long as that corporation and all of its shareholders, officers, directors, and employees rendering professional services who are certified shorthand reporters are in compliance with specified requirements in the Corporations Code. (Section 8040.) 5)Requires, except as specified, that each director, shareholder, and officer of a shorthand reporting corporation shall be a licensed professional. (Section 8044.) 6)Prohibits a shorthand reporting corporation from doing or failing to do any act which would constitute unprofessional conduct under any statute, rule, or regulation which pertains to shorthand reporters or shorthand reporting. Requires a shorthand reporting corporation in conducting its practice to observe and be bound by statutes, rules, and regulations to the same extent as a person holding a license. (Section 8046.) 7)Defines "foreign professional corporation" to mean a corporation organized under the laws of a state of the United States other than this state that is engaged in a profession of a type for which there is authorization in the BPC for the performance of professional services by a foreign professional corporation. (Corporations Code Section 13401 (c).) 8)Provides that a professional corporation or a foreign professional corporation qualified to render professional services in this state shall be subject to the applicable rules and regulations adopted by, and all the disciplinary provisions of the Business and Professions Code expressly governing the practice of the profession in this state, and to the powers of, the governmental agency regulating the profession in which such corporation is engaged. SB 270 Page 6 (Corporations Code Section 13410 (a).) 9)Requires every person under the jurisdiction of the CRB who holds a license or certificate, or temporary license or certificate, or business that renders professional services, namely shorthand reporting services, within the meaning of Corporations Code Section 13401, to comply with professional standards of practice, as specified. (California Code of Regulations Title 16 (16 CCR) Section 2475.) FISCAL EFFECT: As currently in print this bill is keyed fiscal. COMMENTS: This bill, sponsored by the California Court Reporters Association (CCRA), seeks to strengthen the authority of the Court Reporters Board (CRB) to impose penalties and fines on entities rendering court reporting services in California in violation of the Board's professional and ethical rules for certified shorthand reporters. As proposed to be amended, this bill now seeks to expand the Board's enforcement to enforce virtually all applicable existing statutes and regulations governing court reporters, and, consistent with the author's longstanding intent, seeks to create a level playing field where corporations or other entities that offer or arrange for the provision of shorthand court reporting services are required to follow the same laws and obligations that certified shorthand reporters themselves already must follow. Need for the bill. According to the author: SB 270 addresses a complex problem that pits California Court Reporting firms and licensed court reporters against out-of-state corporations. These corporations not only arrange for shorthand reporting services, they also determine the fees charged to parties and set timelines SB 270 Page 7 for the delivery of transcripts, among other things. All of these activities are strictly regulated to ensure impartiality in the handling of transcripts, legal documents, that are essentially an extension of a court proceeding. Corporations, either foreign or domestic, that are not headed by a licensed court reporter believe they can ignore and violate ethical rules, and laws of impartiality and objectivity when they are arranging for court reporting services. These corporations have interpreted current law to mean they are not subject to the jurisdiction of the board because they are not licensees. This has created an un-fair playing field within the industry. Most disturbing is that under current law, licensed court reporters find themselves liable for the ethical violations of these companies; even if the reporter has no knowledge of or involvement in the violation. Any entity, whether foreign or domestic, that is arranging for these services should be required to follow the same laws in California. These are ethical laws to ensure no one involved in a lawsuit is disadvantaged by the impartiality of anyone handling the transcript. This bill will bring out-of-state corporations, which arrange for court reporting services within California, under the jurisdiction of the court reporters board when it comes to gift giving and discriminatory practices, ensuring that California business are not placed at an unfair disadvantage and encouraging healthy competition in this industry. According to the California Court Reporters Association: SB 270 Page 8 SB 270 provides specific authority for the board to seek injunctive relief to stop individuals and corporations that are providing services in California without having ever been licensed in our state, or to impose penalties if they are also in violation of California's professional standards. Court reporters ensure the integrity of judicial records and are unmatched in their ability to produce a real-time transcript of court proceedings. The board should have undisputed authority to ensure that any entity rendering court reporting services in California is upholding the state's professional and ethical standards. Background on the Court Reporters Board. The Court Reporters Board (CRB) is responsible for licensing and disciplining certified shorthand reporters, currently numbering approximately 7,000 in California. Currently, in California, certified shorthand reporters work in two separate capacities: 1) as an "official reporter" who works as a court reporter employed by a state court, or 2) as a "freelance reporter" who is hired privately by court reporting businesses, firms, or attorneys to report depositions. Both official and freelance reporters are required to meet the same educational and examination qualifications, which are established by the CRB. In order to qualify for licensure as a certified shorthand reporter, an individual must have a high school education, twelve months (or 1,400 hours) of full-time work experience related to making records of hearings, a passing score on the California State Hearing Reporters Examination, and completion of a course from an approved court-reporting school. In addition to the licensing and discipline functions, the CRB specifies the professional standards of practice (16 CCR Section 2475) for professionals, which include acting without bias toward, or prejudice against, any parties and/or their attorneys; not entering into, arranging, or participating in a relationship that compromises the impartiality of the certified shorthand reporter, including but not limited to a relationship SB 270 Page 9 in which compensation for reporting services is based upon the outcome of the proceeding; and maintaining confidentiality of information, among others. This bill is a response to an issue highlighted by recent case law. According to the author, the need for this bill stems from the inability of the CRB to take appropriate disciplinary action against a foreign (out-of-state) corporation that was accused of operating in violation of the CRB's professional standards of practice-a problem identified by a Santa Clara Superior Court decision in Court Reporters Board of California v. U.S. Legal Support, Inc. (2012), Santa Clara Superior Court, Case No. 1-11-CV 197817. In that case, the Board issued a citation to defendant U.S. Legal, assessing a fine of $2,500 for violation of professional standards, specifically the prohibition on gift-giving. U.S. Legal refused to pay the fine, and challenged in court the Board's jurisdiction to issue the citation under California law. (Id., p. 3.) The Board argued that the defendant was a foreign corporation as defined under the Moscone-Knox Professional Corporations Act (Corporations Code Section 13401 (c)), and therefore a "shorthand reporting corporation" as otherwise defined under the Business and Professions Code which is subject to the regulation. The court noted, however, that "The problem with this argument is foundational. [The Moscone-Knox Act provision, Section 13401(c)] defines a foreign professional corporation as a corporation 'organized under the laws of a state . . . other than this State that is engaged in a profession of a type for which there is authorization in the Business and Professions Code for the performance of professional services by a foreign professional corporation.'" In holding for the defendant, the court found that neither the Moscone-Knox Act nor the Business and Professions Code extended authority to the CRB to issue citations to foreign corporations like U.S. Legal that do not meet the statutory definition of "foreign professional corporation," by virtue of the fact that SB 270 Page 10 they do not actually hold a license or certificate in this state. As proposed to be amended, this bill would specifically authorize the Board to issue citations and take other action to enforce existing laws against foreign corporations that offer or arrange for court reporter services. According to proponents, foreign corporations operating in California employ or contract with California-licensed court reporters to render professional court reporting services. These corporations and their owners are not themselves licensed or certified under California law, creating a situation where licensees must adhere to California laws regulating court reporting services while the corporate owners or operators seemingly do not. Proponents contend that, as a result of this discrepancy, some foreign corporations engage in unfair practices, such as illegal gift giving or so-called "penny invoicing" (in which a shorthand reporting firm will charge a penny per invoice to assist a law firm with its litigation costs while charging full price to that law firm's opposition). Proponents further contend that when the CRB has sought to issue citations and fines against these foreign corporations that purportedly do not adhere to California statutes and regulations regarding professional conduct (such as rules requiring the impartiality of court reporters and thereby prohibiting gift giving or incentives in exchange for business), the courts have found that CRB does not have the authority to impose citations and fines over unlicensed corporations. (See Court Reporters Board of California v. U.S. Legal Support, Inc. (2012), discussed above.) Accordingly, this bill would provide such enforcement authority to the CRB. Specifically, as proposed to be amended, this bill provides that the Court Reporters Board, the Director of Consumer Affairs, and the Attorney General may seek injunctive relief or issue citations, fines, and other penalties against corporations, persons or entities, whether foreign or domestic, that for a fee or other financial consideration, offer, offer to arrange for, SB 270 Page 11 render, or provide the services of a certified shorthand reporter, for violations of specified areas of law. Enforcement of specified laws and regulations relating to court reporting. The Committee notes that the authority granted by the bill is quite broad. First, it allows the CRB to take enforcement actions for violations of the following areas of law, which comprise virtually all of the applicable statutes and regulations governing court reporters: (1) Chapter 9 of Title 4 of Part 4 (commencing with Section 2025.010) of the Code of Civil Procedure [governing the taking of oral depositions within the Civil Discovery Act.] (2) Part 4 of Division 3 of Title 1 (commencing with Section 13400) of the Corporations Code [the Moscone-Knox Professional Corporations Act, governing the rendering of shorthand reporting services by professional corporations.] (3) Chapter 12 of Division 3 (commencing with Section 8000) of the Business and Professions Code [the licensing law for shorthand reporters]; and (4) Section 2475 of Title 16 of the California Code of Regulations [Professional Standards of Practice for shorthand reporters] Enforcement against corporations and entities, foreign or domestic. Second, the bill authorizes enforcement action against "corporations, persons or entities, whether foreign or domestic." According to the author, this is intended not only SB 270 Page 12 to capture foreign (out-of-state) corporations who employ or contract with licensed court-reporters in California to render services, as has been documented in previous litigation, but also less well-known domestic (in-state) corporations who are similarly unlicensed and follow the same business model. In addition to not distinguishing between foreign and domestic corporations, the bill makes no distinction between professional corporations or other non-professional corporations, who would not be required to comply with the Moscone-Knox Act. The bill also captures "persons or entities", which would continue to allow enforcement against an entity that, for example, reorganized as an LLP instead of a corporation. Enforcement against corporations that "offer", "render", or "provide" court reporter services. Third, the bill applies to corporations, persons or entities that "offer, offer to arrange for, render, or provide" the services of a certified shorthand reporter. Whether an entity "offers" or "arranges" or "renders" services of a court reporter is a key issue because these terms carry specific meaning under different statutes. For example, professional corporations are said to "render" professional services, not provide them. (See, e.g. Corporations Code Section 13401 (b) stating "'Professional corporation' means a corporation organized under the General Corporation Law . . . that is engaged in rendering professional services in a single profession.") Thus this bill would apply to professional corporations who render the services of a certified shorthand reporter. Code of Civil Procedure Section 2025.320, for example, provides that "no service or product may be offered or provided by the deposition officer or by the entity providing the services of the deposition officer to any party or any party's attorney or third party who is financing all or part of the action unless the service or product is offered or provided to all parties or their attorneys attending the deposition." The bill applies to entities offering or providing court reporting services subject SB 270 Page 13 to similarly worded provisions in the Code of Civil Procedure, and could be used by the board to enforce violation of these obligations. In addition, as proposed to be amended, the bill provides that the board may seek injunctive relief or penalties against an entity that for a fee or other financial consideration, offers, offers to arrange for, renders, or provides services, as specified. (italics added.) According to the author, this proposed amendment is intended to clarify that the bill is not intended to authorize the board, Attorney General, or Director to seek relief or penalties against a law firm or any of its employees. When a law firm offers or offers to arrange for shorthand reporting services, the author contends, it is not doing so for a separate fee or financial consideration, but simply through its representation of the client and the client's interest. The author may wish to further clarify this concept in a separate sentence in order to be more transparent about his intent to not subject lawyers and law firms to possible penalties under this bill. The bill is opposed by a group of national firms that contract with California certified shorthand reporters to provide court reporters services for depositions in California. These opponents charge that the bill "effectively creates a new quasi- licensing program for companies 'offering' court reporting services, regulating activities which courts have expressly concluded do not constitute the practice of court reporting." Although not cited by the opponents, the Committee notes that in a May 2016 decision, the Santa Clara Superior Court found that defendant U.S. Legal Support, Inc. was not engaged in the practice of shorthand reporting when performing activities such as copying, binding, delivering deposition transcripts and billing, because these tasks, in the words of the court, are "administrative and business practices incident to shorthand reporting" and "do not change or influence the recording or transcription of the words spoken at a deposition or court SB 270 Page 14 proceeding." (Moose v. U.S. Legal Support, Inc. (2016) Santa Clara Superior Court, Case No. 1-14-CV 28886, p.5.) Range of enforcement tools available. As proposed to be amended, the bill provides that the Board may seek injunctive relief or issue citations, fines, and other penalties in its enforcement efforts against entities committing violations of specified laws. With respect to injunctive relief, the bill is not intended to change, limit, or alter any existing authority of the Board to seek injunctive relief. It should also be noted that existing regulations, 16 CCR § 2480, specify current rules for the CRB to issue administrative citations and fines and orders of abatement. In order to issue citations or fines pursuant to this bill not already covered by existing regulations, the Board would have to promulgate new regulations because the bill does not on its face specify what the fines and penalties are. In other words, the expansion of enforcement and corresponding penalties sought by this bill remains subject to the promulgation of new regulations by the Board, which would trigger the due process protections of the Administrative Procedures Act. Although the bill also grants authority to the Attorney General and the Director of Consumer Affairs, it should be noted that the latter is authorized by extension of the fact that the CRB lies within the Department of Consumer Affairs, under the leadership of the Director, and that the Attorney General is inherently authorized to enforce any and all laws of this state. Accordingly, the central focus of discussion is the authority placed with the CRB. Author's amendment clarifies that this bill does not authorize foreign corporations to offer or provide reporting services in this state. The author notes that even though the superior court in Court Reporters Board of California v. U.S. Legal Support, Inc. (2012) held that the CRB lacked jurisdiction to SB 270 Page 15 issue a citation against U.S. Legal, the court also noted that, despite the undisputed fact that U.S. Legal was organized under Texas law, "it is also clear that there is no express authorization in the Business and Professions Code for the performance of court reporting services by a foreign professional corporation. (Santa Clara Superior Court, Case No. 1-11-CV 197817, at 4-5.) Thus, as proposed to be amended, this bill clarifies that nothing in its provisions should be construed to authorize foreign professional corporations to provide court reporting services in California, which the author contends would violate Section 13401 (c) of the Corporations Code. ARGUMENTS IN OPPOSITION: A coalition of deposition service companies remains strongly opposed to the bill, even as proposed to be amended. These companies are Esquire Deposition Services, LLC; Magna Legal Services; U.S. Legal Support, Inc. and Veritext Corp. They state: As proposed for amendment, the bill effectively creates a new quasi- licensing program for companies "offering" court reporting services, regulating activities which courts have expressly concluded do not constitute the practice of court reporting. The bill illogically and inappropriately attempts to apply regulations applicable to the practice of court reporting to the business of deposition services companies, thereby disrupting perfectly legitimate business relationships, and leaving companies completely unsure of which activities are permitted and which are not. Further, the bill would give the Court Reporters Board unfettered authority to issue citations and penalties against companies which will not even enjoy the protections of a property interest in a license. The effect will be to drive business out of the state and make litigation more costly and less efficient. SB 270 Page 16 REGISTERED SUPPORT / OPPOSITION: Support California Court Reporters Association (CCRA) (sponsor) San Diego Superior Court Reporters Association Los Angeles County Reporters Association Orange County Superior Court Reporters Association American Reporting Services, LLC Alvarado Court Reporters Northern California Court Reporters Association Kelty & Scott, Certified Shorthand Reporters Opposition (as proposed to be amended) Esquire Deposition Services, LLC SB 270 Page 17 Magna Legal Services U.S. Legal Support, Inc. Veritext Corp. Analysis Prepared by:Anthony Lew / JUD. / (916) 319-2334