2017 Statutory Developments in Arbitration

Wells Fargo, like many financial institutions, requires customers to give up their right to sue in court and to sue in a representative or class capacity when they sign up for personal accounts and other services. In 2013, it was revealed that at least 3,500 Wells Fargo employees had opened approximately 1.5 million bank accounts and over 500,000 credit card accounts using existing customers’ names and personal identification information, and that they had done so without the account holders’ knowledge or consent. Investigations revealed that the targets of this conduct were often young adults opening their first bank account, small businesses, non-English speaking immigrants and the unsophisticated or infirm elderly. When customers attempted to sue over fees and other damages incurred as a result of the bank’s conduct concerning these unauthorized accounts, Wells Fargo successfully argued in state and federal courts across the country that the private arbitration agreements contained in the agreements pertaining to the customers’ legitimate accounts were applicable to their claims arising from the fraudulently created accounts. Consumer advocates and others believed that by forcing these matters into arbitration, Wells Fargo was able to

• • (a) keep the scandal out of the public view,
  • (b) allow the fraud to be further perpetrated, and
  • (c) enable the bank to continue profiting from the fraudulent accounts.

In response to the disclosure of the bogus account scheme and Wells Fargo’s strategic use of arbitration to keep this problem out of public view, Senator Bill Dodd (D-Napa) and California Treasurer John Chiang proposed SB 33 to amend Code of Civil Procedure section 1281.2 to preclude forced arbitration in lawsuits against financial institutions for claims arising out of accounts created by fraudulent, illegal or otherwise surreptitious means.

The proposed amendment became law in October 2017 and becomes effective January 1, 2018. As amended, Code of Civil Procedure § 1281.2 allows a court to deny enforcement of an arbitration agreement if it determines that the petitioning party is a state or federally chartered depository institution seeking to apply a consensual arbitration agreement to a purported contractual relationship with the respondent consumer that was “created by the petitioner fraudulently without the respondent consumer’s consent and by unlawfully using the respondent consumer’s personal identifying information….”

Several bank and business trade groups opposed SB 33, arguing that the FAA preempts state laws that single out arbitration agreements for special treatment and that SB 33 is such a law. Given the currently popularity of arbitration in many state and federal courts of appeal, I anticipate that we will see litigation concerning the amended statute in the near future, but probably will not receive a definitive statement from the United States Supreme Court for several years to come, if at all.

For companies with headquarters outside of California and with a work force in California, as well as other states, forum-selection and choice-of-law provisions are were a common practice. Some would say that the practice is in an effort to have uniformity and consistency in administering litigated disputes with employees. Others would say that the practice is aimed at avoiding California courts and dodging California employment law, such as California’s prohibition of covenants not to compete. Whatever the case, with the passage of SB 1241 and the addition of Section 925 to the California Labor Code, an employer is prohibited from requiring an employee who resides and works primarily in California to agree, as a condition of employment, to out-of-state choice of law and/or forum selection clauses, except in the case where the clause has been negotiated with an employee “individually represented by legal counsel.” New Section 925 does not affect employment agreements already in effect. It also does not affect post-employment agreements such as severance agreements or agreements in existence as of January 1, 2017. By its terms, the new law applies only to contracts entered into, modified, or extended on or after January 1, 2017.

The enactment of SB 1241 followed Governor Brown’s veto of AB 465 in 2015. AB 465 attempted to ban mandatory employment arbitration agreements. Governor Brown’s veto message explained that purported employment abuses “should be specified and solved by targeted legislation, and not a blanket prohibition.” New Section 925 is one such piece of targeted legislation, attacking contractual provisions that are hostile to California law, whether they appear in an arbitration clause or elsewhere within an employment agreement required as a condition of employment.

Section 925 in a nut shell:

The proposed amendment became law in October 2017 and becomes effective January 1, 2018. As amended, Code of Civil Procedure § 1281.2 allows a court to deny enforcement of an arbitration agreement if it determines that the petitioning party is a state or federally chartered depository institution seeking to apply a consensual arbitration agreement to a purported contractual relationship with the respondent consumer that was “created by the petitioner fraudulently without the respondent consumer’s consent and by unlawfully using the respondent consumer’s personal identifying information….”

Several bank and business trade groups opposed SB 33, arguing that the FAA preempts state laws that single out arbitration agreements for special treatment and that SB 33 is such a law. Given the currently popularity of arbitration in many state and federal courts of appeal, I anticipate that we will see litigation concerning the amended statute in the near future, but probably will not receive a definitive statement from the United States Supreme Court for several years to come, if at all.

But see the Ninth Circuit’s February 3, 2017 rulings in Poublon v. C. H. Robinson, 846 F.3d 1251 (9th Cir. 2017), in which the Court did not find out-of-state forum selection clauses to be substantively unconscionable for purposes of defeating the enforceability of an arbitration clause included in an employment adhesion contract – relying on its October 13, 2016 decision in Tompkins v. 23andMe, Inc., 840 F.3d 1016 (9th Cir. 2016), in which the Court addressed the validity / conscionability of including an out-of-state forum selection clause in the arbitration provisions of an online consumer contract (i.e., making no distinction or adjustment for adhesion contracts required in the employment vs. consumer context).

New Code of Civil Procedure § 1282.5 specifies that a party to arbitration has the right to have a certified shorthand reporter transcribe any deposition, proceeding or hearing. The request for a reporter must be made either in a demand, response, answer, or counterclaim related to the arbitration, or at a pre-hearing scheduling conference. If the arbitration agreement does not provide for a court reporter, the cost of the reporter is borne by the parting requesting the reporter (except in the case of an indigent consumer in a consumer arbitration). A party whose request for a reporter is refused may petition the court for an order to compel the arbitrator to grant the party’s request. The Court may stay any hearing, deposition or proceeding in the arbitration pending the decision on the petition for a court reporter.

Practice Note:

It is fairly common place for the court reporter issue to be included on the agenda for the initial preliminary hearing. The agenda description looks something like the following as pertains to the evidentiary hearing:

At the time of the initial preliminary hearing, parties frequently have not made a decision with regard to whether or not to have a court reporter at the evidentiary hearing. It is fairly common place for the court reporter issue to nevertheless be included in the Scheduling Order with a provision along the following lines: