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Proposed California Legislation Would Restrict Arbitration of Employment-Related Disputes

June 27, 2002

The California Legislature is considering several bills that would drastically change the manner in which employment disputes are resolved in the state. The Assembly Judiciary Committee recently proposed a six-bill package aimed at reforming the private arbitration industry following a spate of publicity about alleged abuses. If passed, two of these bills will directly affect employers and require significant changes in existing and future arbitration agreements. Another bill passed by the State Senate and pending in the Assembly would prohibit employers from requiring pre-dispute agreements to arbitrate claims under the Fair Employment and Housing Act as a condition of employment. While none of these bills has yet reached the Governor's desk, employers should keep a watchful eye on their progress.

Assembly Bills

The bills proposed by the Assembly Judiciary Committee (AB 2504, AB 2574, AB 2656, AB 2915, AB 3029, and AB 3030) address a variety of perceived deficiencies in the private arbitration process, and include requirements that private arbitration companies collect and disseminate data about the outcomes of the arbitrations they administer, waive fees for indigent clients, and disclose their efforts to recruit judges for employment. Of these, AB 3029 and AB 3030 are the most troubling for employers.

AB 3029 would apply to all "consumer arbitrations" conducted in the state. The bill defines "consumer arbitrations" broadly enough to include disputes between employees or applicants for employment and employers. It excludes disputes arising out of collective bargaining agreements. Under the proposed law, employees could not be required to use the arbitrators, private arbitration companies, or self-regulatory organizations ("SRO") specified in the arbitration agreement. Instead, within 75 days of service of an arbitration demand, an employee could unilaterally veto an arbitrator selected in the agreement and select a new arbitrator without the employer's input or consent. Additional provisions of AB 3029 prohibit private arbitration providers from making solicitations or performing consulting and marketing services for parties to consumer arbitrations, and set forth new rules to prevent perceived or actual favoritism toward any party.

The provision of AB 3029 allowing consumers to select a new arbitrator is purportedly designed to discourage the influence of "repeat players" in the arbitration industry, and for this reason the bill's author insists that the employer cannot have a say in selecting the new arbitrator. However, it creates a substantial risk that employees will be able to designate arbitrators who are not neutral. In fact, according to the analysis prepared by the Assembly Judiciary Committee, the ultimate goal of AB 3029 is to eliminate pre-dispute binding arbitration provisions from all consumer contracts. The bill was passed by the Assembly in May and the Senate Judiciary Committee in June, and now awaits a floor vote in the Senate.

AB 3030 invalidates contractual provisions in which arbitration providers seek to limit their liability. Under this bill, a private arbitration provider is immune from the acts or omissions of an arbitrator only to the extent that the arbitrator is immune. In addition, the bill provides that when a court vacates a consumer arbitration award, the arbitrator or private arbitration company involved may not conduct or administer any further arbitration of the dispute. AB 3030 was also passed by the Assembly in May and the Senate Judiciary Committee in June, and awaits a floor vote in the Senate.

Senate Bill 1538

SB 1538, sponsored by the California Department of Fair Employment and Housing, seeks to invalidate pre-dispute arbitration agreements as they relate to claims under the Fair Employment and Housing Act ("FEHA"). The only time an employee could be required to arbitrate FEHA claims would be if he or she knowingly and voluntarily agreed to do so after the dispute arose. The employer would have the burden of proving that an arbitration agreement was entered into knowingly, voluntarily, and not as a condition of employment. SB 1538 passed the Senate in May and is presently before the Assembly Appropriations Committee.

Effect of Federal Preemption

With all of the proposed changes to pre-dispute arbitration in California, it may appear that arbitration is on the wane for employers, even if their agreements comply with the requirements articulated by California courts. See California Supreme Court Provides Guidance on Mandatory Employment Arbitration Agreements (Aug. 29, 2000). But California's flurry of anti-arbitration legislation is at odds with the strong federal policy favoring arbitration of employment and other disputes reflected in the Federal Arbitration Act ("FAA"), 9 U.S.C. ยง 1 et seq. The U.S. Supreme Court ruled last year in Circuit City Stores, Inc. v. Adams that the FAA generally preempts state laws purporting to limit the effectiveness of agreements to arbitrate disputes. See Staying Out of Court: Mandatory Arbitration of Employment Claims (Dec. 31, 2001). As a result, even if all or some of these bills pass, it may take years before the courts resolve whether they improperly infringe upon areas reserved for Congress.

Employers with arbitration programs should pay close attention to developments in this area. Persons interested in tracking the progress of these bills through the Legislature can subscribe to electronic updates at http://www.leginfo.ca.gov after clicking "Bill Information" and entering the appropriate bill number. Those interested in expressing their views to the bills' sponsors can contact them as follows:

Assemblyman Darrell Steinberg (AB 3029)
Room 5136, State Capitol
Sacramento, CA 94249-0001
(916) 319-2009
E-mail: Assemblymember.Steinberg@assembly.ca.gov

Assemblymember Ellen Corbett (AB 3030)
Room 4126, State Capitol
Sacramento, CA 94249-0001
(916) 319-2018
E-mail: Assemblymember.Corbett@assembly.ca.gov

Senator John Burton (SB 1538)
Room 205, State Capitol
Sacramento, CA 94249-0001
(916) 445-1412

Please contact any of the attorneys in our San Francisco office if you have questions concerning these issues.