By Paul J. Dubow
In February, Senator Hannah-Beth Jackson of Santa Barbara introduced Senate Bill 1078, pertaining to consumer arbitration in California. Consumer arbitration in California includes employment and medical malpractice disputes. It does not include securities arbitration. The bill initially had three parts. It prohibited arbitrators in consumer arbitrations from accepting employment, including service as an arbitrator or mediator, from the parties or lawyers or law firms in an arbitration so long as the arbitration was pending unless the parties and lawyers agreed in writing prior to the arbitrator’s appointment that future employment would be permitted; it provided for a refund of fees to all parties in a consumer arbitration if one party successfully moved to vacate an arbitration award for any reason other than exceeding powers or failure to postpone a hearing; and it prohibited providers from making solicitations (with a few limited exceptions) to parties or lawyers or law firms in a consumer arbitration so long as the arbitration was pending and required an arbitrator to disclose any such solicitations that had occurred in the two years prior to the arbitrator’s appointment.

The provision that required a refund in the case of a vacatur directly affected arbitrators, even though fees in an administered arbitration usually are paid to the provider, because it would be expected that providers would require arbitrators to indemnify them if the bill were enacted. After pressure from the CCA and other organizations, Senator Jackson withdrew this portion of the bill. But she declined to make any other significant amendments. In her testimony before the Assembly and Senate Judiciary Committees, she described consumer arbitrationsas“thewild West” wherearbitratorsregularly did not follow the law and favored “repeat players”, i.e., the corporate parties. She also testified that providers sometimes solicited the business of corporate parties by offering to assist them in winning their cases against consumers. Not surprisingly, the bill was approved by both committees and was passed by the Legislature.

Fortunately, the Governor vetoed the bill on September 25.

The bill had significant flaws. It would have been impossible for arbitrators to disclose the “solicitations” because they are normally not made aware of them. And it would have been impossible for providers to monitor the “solicitations”. For example, suppose a New

York attorney drafting a contract involving intellectual property contacted the New York office of a provider and inquired about the intellectual property experience of the provider’s local arbitrators. If the staffer answered that question, and a member of the attorney’s firm was then currently a lawyer in a California consumer arbitration, then the provider would have violated the statute, even though the conversation had absolutely nothing to do with or had any effect on the California arbitration.

If the Governor signed the bill, national providers were expected to cease administering consumer arbitrations in California. Yet, contracts which required arbitration of disputes but listed them as the provider would have still been enforceable. That meant that commencement of an arbitration would no longer be self-executing. A party to such a contract would have had to file a petition for arbitration in court. If the court granted the petition and the parties did not agree on an arbitrator, they would have had to return to the court to ask it to appoint the arbitrator. This would have placed an undue burden on the courts. In addition, the arbitration would have been non-administered and so the consumer parties would not have been protected by the ABA Consumer Due Process Protocols, which are adhered to by the national providers.

The provision which prohibited arbitrators from obtaining employment from parties or lawyers while an arbitration was pending also would have placed a burden on the courts. This was so because the bill did not amend Code of Civil Procedure Section 1281.85, which requires an arbitrator to comply with the Ethical Standards for Neutral Arbitrators. The Ethical Standards allow an arbitrator to accept future employment, provided that he or she discloses this intent upon appointment and is not disqualified by a party following the disclosure. This would have led to confusion, which the courts would have had to resolve.

In his veto message, the Governor made no mention of the anti-solicitation provision. He based his veto solely on the future employment provision, stating that the disclosure requirements for arbitrators in California were the strictest in the nation and that any tweaking of these requirements should be done by the Judicial Council. This was an implied message to the Legislature to stay out of the arbitration business. That remains to be seen.•


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