The California legislature is considering controversial amendments to arbitration laws

There are currently two bills proceeding through the California Legislature that substantially affect alternate dispute resolution.

One of the bills is part of AB 3281, the 2024 Assembly omnibus bill. An omnibus bill generally modernizes existing legislation in a minor, technical, and non-controversial manner. AB 3281 is a 43-page bill that amends quite a few statutes. On page 39, the bill contains an amendment to Code of Civil Procedure Section 1281, the statute that creates the California Arbitration Act (CAA). The presumed purpose of the amendment is to "align" the statute with the Federal Arbitration Act (FAA).

However, the CAA is already aligned in large part with the FAA. The CAA begins with Section 1281, which states: "A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract." That mimics the language in the FAA.

AB 3281 redesignates Section 1281 as subsection (a), makes some minor adjustments to it, and adds a new subsection (b) which states: "Subsection (a) only applies if the arbitration agreement is valid, enforceable, and irrevocable under the Federal Arbitration Act."

In its analysis of the amendment, the Assembly Judiciary Committee states that the amendment is a reaction to the arguments made by the defendant before the Second Circuit in Bissonnette v. LePage Bakeries Park St. LLC (2022). Bissonnette was a class action alleging violation of federal and state wage laws filed by individuals who purportedly were independent contractors and who distributed goods baked by the defendant to retail stores. The defendant moved to compel arbitration, based on an arbitration agreement that stated that the FAA applied. The plaintiffs argued that they were transportation workers and thus exempt from coverage by the FAA pursuant to Section 1 of that Act. The District Court disagreed and granted the motion. Plaintiffs appealed. The defendant argued that even if plaintiffs were exempt, the dispute was arbitrable because the state arbitration act also applied, and it did not contain an exemption for transportation workers. The argument proved to be moot, because the Second Circuit found that the exemption covered only workers in the transportation industry and did not apply to the plaintiffs because they were employed in the bakery industry. The Supreme Court granted plaintiffs' petition for a writ of certiorari and reversed, holding that the exemption applied to persons whose function was to transport goods, no matter what industry in which they were employed. It remanded the matter to the District Court to determine if the tasks in which plaintiffs engaged qualified them as transportation workers. See 2024 US LEXIS 1576 (2024).

However, in the interim, the Ninth Circuit bought the argument raised by the defendant in the Second Circuit. In Ortiz v. Randstad Inhouse Services LLC, 2024 US App LEXIS 5865 (2024) it ruled that even though it determined that plaintiff Ortiz was a transportation worker and exempt from arbitrating under the FAA, his dispute was arbitrable under the CAA. Ortiz is not mentioned in the Assembly's bill analysis.

It appears that the amendment was designed to stop employers of transportation workers from avoiding the FAA exemption by requiring their employees to arbitrate disputes under the CAA. The amendment is neither minor nor technical and it is controversial because it will have consequences.

Its most devastating consequence may be on real estate contracts. Code of Civil Procedure Section 1298 sets forth the language and type that must be used for arbitration clauses in real estate contracts and requires that the clause be initialed to be effective. If the contract does not contain the required language and type and is not initialed, it cannot be enforced. Although Section 1298 is preempted by the FAA, most real estate contracts are in intrastate commerce and contracts that comply with Section 1298 are now standard fare in the real estate industry. But a contract without Section 1298's requirements is nevertheless "valid and enforceable" under the FAA. The passage of the amendment set forth on page 39 of AB 3281 will negate Section 1298, even though Section 1298 is an aid to consumers because it makes them more likely to be aware of the arbitration clause.

Another bill that substantively affects alternate dispute resolution is SB 940, introduced by Senator Tom Umberg, chair of the Senate Judiciary Committee.

The bill is in two parts. The first part authorizes the State Bar to create a voluntary certification program for "alternative dispute resolution firms." In order to be eligible for certification, a firm engaged in arbitration must require its arbitrators to comply with the Ethical Standards for Neutral Arbitrators in Contractual Arbitration and a firm engaged in mediation must require its mediators to comply with ethical standards that are equivalent to the Rules of Conduct for Mediators in Court-Connected Mediation Programs in Civil Cases. In addition, the firm must have procedures in place for people to make complaints regarding the failure of an arbitrator or mediator of the firm to comply with the standards and to remedy such failure.

The certification that the bill envisions may mislead the public and will not aid the users of arbitration and mediation. It may mislead the public because certification usually means that the certified business is more experienced and more reputable than a business that is not certified. But SB 940 will allow a newly formed firm to become certified, even if it never conducts an arbitration or mediation, so long as it states that it will require its arbitrators and mediators to comply with the standards and have a complaint procedure in place. Nor does the certification process aid users because arbitrators and mediators are hired by the parties' attorneys, who are usually aware of or have the means to become aware of the reputation of an arbitrator mediator whom they might retain.

The second part of the bill makes substantive changes to consumer contracts and to the CAA. These changes, by and large, are helpful to consumers, but nevertheless the bill needs some tweaking.

The bill creates Civil Code Section 1799.208, which prohibits a seller from requiring a consumer to "adjudicate outside of California a claim arising in California" and depriving the consumer "of the substantive protection of California law with respect to a controversy arising in California." This section of the bill is identical to Labor Code Section 925 with the exception that it substitutes "consumer" for "employee." Subsection (d) states that "adjudication" includes "arbitration" and the bill applies to all contracts and so it will not be affected by the holding in Bradley v. Harris Research, 275 F. 3d 884 (2001) that Bus. & Prof Code Section 20040.5, which prohibited franchisors from requiring franchisees to litigate or arbitrate disputes outside of California, was preempted by the FAA because it only applied to franchise agreements and not contracts generally.

Proposed new Civil Code Section 1799.209 gives consumers who have signed arbitration agreements the option of filing their claims in court pursuant to the Small Claims Act, if the claim meets the Act's jurisdictional requirements. This part of the bill is probably preempted but given the relatively small amounts in dispute in these claims, sellers may be disinclined to spend their money raising the issue of preemption.

Proposed new Code of Civil Procedure Section 1281.65(a) prohibits a dispute resolution neutral from accepting an offer of employment as a lawyer, expert witness, or consultant from a party or lawyer for a party while the arbitration is pending. Proposed new Section 1281.65(b) prohibits the neutral, in a consumer case, from accepting an offer of employment as a dispute resolution neutral in another case involving a party or lawyer for a party in a pending arbitration unless all the parties and lawyers in the pending arbitration have agreed in writing, prior to solicitation of the arbitrator, to allow such offers.

Under current law, an arbitrator in a consumer case must disclose whether he or she will accept offers from parties or lawyers in the pending arbitration to serve as an arbitrator in another case involving such parties or lawyers. If there is no objection to the arbitrator's service, then the arbitrator can accept such offers and not disclose this to the other parties and lawyers in the case. The new proposal is an improvement over current law, but there is a problem with mass actions. Mass actions often involve hundreds of cases and there would not be enough arbitrators to conduct these cases if each arbitrator were limited to one case. Nor could the Superior Court handle these cases if the lack of arbitrators pushed them into that court. Hence, the bill needs to be amended to exclude mass actions from its coverage.

Proposed new Section 1281.9(a)(7)(A) requires an arbitrator in a consumer case to disclose any solicitation made in the prior two years by the private arbitration company to a party or a lawyer for a party in the pending arbitration. It would be impossible for an arbitrator to provide this disclosure because arbitration providers do not inform arbitrators if they are included on lists of proposed arbitrators in a case and arbitrators are only made aware of their inclusion on the lists if they are selected. In addition, proposed new Section 1281.9(c)(4)(A)(ii) defines "solicitation" to include "oral or written discussions, meetings, or negotiations to designate the private arbitration company...as the arbitration provider...for a party in specific contracts." Again, arbitrators are not privy to attempts by providers to include themselves in arbitration agreements.

The bill repeals Code of Civil Procedure Section 1283.1. That section modified Code of Civil Procedure Section 1283.05, which allows arbitration discovery, by stating that the discovery permitted by Section 1283.05 would only be available if the arbitration agreement so provided. SB 940 will allow the broader discovery permitted in Superior Court to be permitted in all arbitrations. Although proper discovery is a necessary element of arbitration, a broad rule of this nature may negate the advantages that arbitration offers. Arbitration is more efficient than litigation because it is usually less expensive and quicker than litigation. One reason for this is that the arbitrator can control discovery. That system works because arbitrators are often former litigators who are experts in the subject matter of the case at hand and thus more likely to recognize what is relevant in the pending case.

The concern created by the repeal of Section 1283.1 can be easily remedied. Current subsection (e) of Section 1283.05 states that "depositions for discovery" can only be taken with leave granted by the arbitrator or arbitrators. An amendment eliminating the words "depositions for" cures the problem.

Paul Dubow is an arbitrator and mediator, focusing on employment, ERISA withdrawal liability, commercial law, legal malpractice and securities matters. He can be reached at pdubow2398@aol.com.