Job Killer Creates More Litigation at Expense of Job Creation

A California Chamber of Commerce-opposed job killer bill that provides the perfect pleading pathway for class action attorneys to avoid arbitration awaits action by the Assembly.

SB 33 (Dodd; D-Napa) will negatively impact employers with unnecessary and costly class action litigation that benefits trial attorneys, not consumers.

Contains Ambiguous Terms; Will Create Further Litigation

The bill has been amended eight times and still contains ambiguous terms that will create further litigation. Ambiguity, inconsistencies and confusion serve only to benefit trial attorneys and their ability to pursue costlier litigation with high attorney fee recoveries, not consumers.

SB 33 is not limited to the fraudulent creation of financial accounts, as the proponents claim. SB 33 states that a respondent cannot be compelled to arbitration regarding a “purported contractual relationship.” This term is undefined and will create significant litigation over what relationships are included or excluded.

SB 33 seems to create a third option of “purported contractual relationship” that was created fraudulently without the consumer’s consent and with the unlawful use of the consumer’s personal identifying information. It is unclear what “purported contractual relationship” means or how it differs from existing law. Existing law already invalidates contracts that are created fraudulently. This third contractual option of a “purported contractual relationship” that is “created fraudulently” will create significant confusion over how this law applies and ultimately will lead to additional litigation, leaving the courts to determine what was intended.

Creates Confusion Between Who Is Respondent and Respondent Consumer

SB 33 proposes to amend a section of the Code of Civil Procedure that refers to “petitioners” and “respondents” of a motion to compel arbitration, meaning the parties to the litigation.

Instead of applying and utilizing these same terms, recent amendments to SB 33 include undefined terms, therefore adding another layer of ambiguity and concern to this bill that will create further litigation.

Applies to Existing Contracts

As amended, SB 33 specifies that the provisions of the bill do not go into effect until January 1, 2018. The bill does not limit its application, however, only to those contracts created after January 1, 2018, thereby invalidating all existing consumer contracts with a financial institution that include an arbitration provision which requires the arbitration of any and all disputes arising from the relationship and is applied after January 1, 2018.

Creates Costly Litigation Benefit for Class Action Trial Attorneys, Not Consumers

SB 33 precludes the enforcement of a valid arbitration agreement for claims of fraud with a depository institution. SB 33 is sponsored and supported by trial attorneys who would prefer class action litigation as opposed to arbitration because it provides a significantly higher financial recovery for trial attorneys.

Recent examples of attorney fee awards in consumer class actions illustrate 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.
  • A case in which it was alleged personal identifying information of customers was compromised. The case settled for $3 million; the funds were divided as follows: $2,500 for named plaintiffs; up to $3,000 per class member for unreimbursed losses as a result of the identity theft or up to $1,000 for unreimbursed expenses as a result of the identity theft; and $652,340 for attorney’s fees.

By precluding the enforcement of a valid arbitration agreement, consumer attorneys, the sponsors and supporters of SB 33 can pursue more costly class action litigation where they recover higher fee awards.

Preempted Under the Federal Arbitration Act

On May 15, 2017, the U.S. Supreme Court struck down a Kentucky decision that invalidated an arbitration agreement with a nursing home which 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 7-1 decision written by Justice Elena Kagan, the U.S. high court emphatically rejected this decision.

SB 33 suffers from the same fatal flaw.

SB 33 acknowledges a valid agreement, but basically refuses to enforce the terms of that agreement for certain claims, which the Supreme Court just indicated on May 15, 2017, is preempted.

Forcing employers impacted 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 these businesses’ ability to thrive in California.

Action Needed

SB 33 is awaiting a vote on the Assembly Floor. CalChamber is urging members to contact their Assembly representatives and ask them to oppose SB 33 as a job killer.

Staff Contact: Jennifer Barrera