Anti-Arbitration Bill Continues to Advance; Will Create Costly Litigation for Many

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The Assembly Judiciary Committee this week approved a California Chamber of Commerce-opposed job killer that will worsen the litigation environment and hurt job creation if passed into law.

CalChamber has identified SB 33 (Dodd; D-Napa) as a job killer because it unfairly discriminates against arbitration agreements contained in consumer contracts for goods or services with a financial institution, as broadly defined.

The bill also is likely preempted by the Federal Arbitration Act (FAA), violates the rules of the Financial Industry Regulatory Authority (FINRA), and will have a negative impact on “financial institutions” with unnecessary and costly class action litigation that does not ultimately benefit the consumer.

Applies Broadly

Despite recent amendments, SB 33 still applies to more industries than just banks. Its broad definition of “financial institution” includes securities and insurance brokers/agents.

Attorneys Win, Not Consumers

SB 33 precludes the enforcement of a valid arbitration agreement for claims of fraud with a financial institution. The bill is sponsored and supported by trial attorneys who prefer class action litigation over arbitration because the former provides them significantly higher financial recovery.

One recent example of attorney fee awards illustrates this issue—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.

Unnecessary Litigation

SB 33 creates unnecessary litigation for affected industries to establish that it is preempted under the FAA, as emphasized by a recent U.S. Supreme Court opinion.

On May 16, the U.S. Supreme Court struck down a Kentucky decision that invalidated an arbitration agreement with a nursing home that was executed by family members who had a power of attorney for the patient in Kindred Nursing Centers Ltd. Partnership v. Clark, 2017 WL 2039160.

The Kentucky court determined that arbitration was such a significant issue that, in order for the agreement to be valid, the power of attorney form must specifically allow the individual to agree to arbitration on behalf of the principal or, in this case, the patient.

In a 7 to 1 decision written by Justice Elena Kagan, the U.S. high court emphatically rejected the Kentucky court decision. In the opinion, the U.S. Supreme Court re-emphasized that “The FAA preempts any state rule discriminating on its face against arbitration—for example, a ‘law prohibit[ing] outright the arbitration of a particular type of claim.’”

SB 33 suffers from the same fatal flaw.

Forcing employers affected by SB 33 to challenge the constitutionality of this law will create further unnecessary litigation. The Kindred Nursing Centers case took approximately eight years to finally be resolved by the Supreme Court. Requiring California businesses to exhaust financial resources and time in costly litigation to establish that SB 33 is similarly preempted is unnecessary and will only harm the ability of these businesses to thrive in California.

Conflict with Financial Rules

FINRA is a quasi-governmental, independent regulatory organization that was created and registered with the Securities and Exchange Commission (SEC) in 1938 to protect investors and preserve the integrity of the securities marketplace by regulating, examining, and taking enforcement action against its members, which include nearly 4,000 broker-dealer firms and nearly 650,000 individual brokers.

Specific FINRA Rules require the arbitration of all claims arising out of the business activities of the brokerage firm or broker. There is no exception or exclusion under FINRA Rules for claims of fraud or unlawful use of personal identifying information. Consequently, SB 33 is in direct conflict with FINRA Rules and likely preempted.

Applies to Existing Contracts

SB 33 specifies that its provisions do not go into effect until January 1, 2018. The bill does not limit its application, however, to only those contracts created after January 1, 2018.

This retroactive application of SB 33 to existing contracts with a financial institution that include an arbitration provision will create significant costs and potential litigation for financial institutions.

Key Vote

SB 33 passed the Assembly Judiciary Committee on June 27, 8-3:

Ayes: Chau (D-Monterey Park), Chiu (D-San Francisco), C. Garcia (D-Bell Gardens), Holden (D-Pasadena), Kalra (D-San Jose), Reyes (D-Grand Terrace), M. Stone (D-Scotts Valley), Ting (D-San Francisco).

Noes: Cunningham (R-Templeton), Kiley (R-Granite Bay), Maienschein (R-San Diego).

Action Needed

SB 33 will be considered next by the Assembly Appropriations Committee. The CalChamber is urging members to contact their Assembly representatives and committee members to ask them to oppose SB 33 as a job killer.

Staff Contact: Jennifer Barrera

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Jennifer Barrera
About Jennifer Barrera
Jennifer Barrera, senior policy advocate, works with the executive vice president in developing policy strategy and represents the CalChamber on labor and employment, taxation and legal reform issues. Before joining the CalChamber in September 2010, she worked at a statewide law firm that specializes in labor/employment defense. She also advised small and large businesses on compliance issues, presented seminars on employment-related topics, and authored articles in human resources publications. Barrera earned a B.A. in English from California State University, Bakersfield, and a J.D. with high honors from California Western School of Law.