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Letter to the California Assembly Regarding Five Arbitration Bills

These bills were approved by the Assembly Judiciary Committee on with strong majorities

Assembly Members
California State Assembly
P.O. Box 942849
Sacramento, CA 94249-0001

Re: Support for AB 2504 (Jackson), AB 2574 (Harman),
AB 2656 (Corbett), AB 3029 (Steinberg),
AB 3030 (Corbett)
Assembly Floor
Dear Assembly Member,

Consumers Union, the nonprofit publisher of Consumer Reports magazine, asks for your AYE vote on five bills coming to the Assembly floor as a package of measures to improve the experience of consumers who are forced by contract into mandatory arbitration to resolve a dispute with a business. These bills were approved by the Assembly Judiciary Committee on with strong majorities:

AB 2504 10-1
AB 2574 10-0
AB 2656 11-0
AB 3029 9-0
AB 3030 10-1

AB 2574, AB 2656, AB 3029 and AB 3030 are each supported by Consumers Union, Consumer Federation of California, California Congress of Seniors, Consumer Attorneys of California, the California Employment Lawyers Association, and the Older Women’s League of California. No opposition was registered in the Committee analysis for AB 2574, AB 2656, AB 3029, AB 3030. There was opposition only to AB 2504.

Consumers Union believes strongly that federal and state law should permit consumers to choose whether to use arbitration or the courts after a dispute arises. However, federal court decisions suggest a strong policy favoring arbitration, and place some limits on the ability of state legislatures to regulate pre-dispute consumer arbitration clauses outside the areas of employment and healthcare. For many types of consumer issues, California consumers may continue to be faced with mandatory arbitration as their only form of redress unless or until Congress amends the Federal Arbitration Act.

Arbitration providers are in the business of arranging for private judges to resolve disputes, and administering the resulting arbitrations. This package of bills will begin to make arbitration provider organizations as least partly accountable to the public. Arbitrators replace judges and juries in the court system. Arbitration provider organizations, called “private judging companies” in the bills, make key decisions that are made for the court system through public processes. These decisions include setting the fees for justice, writing the rules of procedure, and selecting the pool of available judges or other decision makers. In making these decisions, private arbitration providers assume roles held by the Legislature, the Judicial Council, and the voters.

This six bill package will help to make arbitration fairer for consumers by adding standards of conduct and rules applicable to private judging companies in consumer arbitrations, such as:

· Requiring sunshine in the form of greater disclosure;

· Addressing the “repeat player” issue with greater consumer choice;

· Prohibiting financial conflicts of interest and promises of favoritism;

· Prohibiting conflicts of interest caused by consulting for one party in an arbitration;

· Reducing some fees and costs,

· Clarifying that private judging companies are not immune from liability; and

· Addressing employment of judges by private judging firms.

AB 2656 (Corbett) will provide greater accountability for arbitration provider organizations by requiring them to plainly disclose to the public information such as the number of arbitrations handled for a particular business and the outcome of those arbitrations. Consumers deserve to know how many other cases a private judging company such as the American Arbitration Association has handled for a particular business, such as a bank, and whether the business or the consumer won most of those cases.

Public disclosure of arbitration results is particularly important because of the risk that a business which is a “repeat player” in arbitration might receive more favorable treatment in the arbitration than an individual consumer who may only have one arbitration with a private judging company. This might occur as a result of the manner in which the arbitration procedure is structured.

AB 3029 (Steinberg) further addresses the “repeat player” issue, by allowing a consumer to choose a different private judging company than the one which the business pre-selected in the form contract. This choice should combine with the greater available information provided by AB 2656 to give consumers a chance to avoid those private judging companies with the most lopsided records of poor outcomes for consumers in the arbitrations administered by those private judging companies.

AB 3029 will prohibit arbitration providers from administering arbitrations for companies with which they have other business relationships, such as consulting. The Enron accounting scandal has shown us that multiple business relationships can compromise institutional independence and integrity. Arbitration provider organizations receive contracts to provide consulting services to the very same entities for which they are administering a dispute, which is a conflict of interest. This bill also contains an important rule against types of marketing by private judging companies which imply favoritism for one party, type of party, or industry.

AB 2574 (Harman) addresses another important conflict of interest issue, financial entanglements between private judging companies and the companies whose disputes they administer. This was the subject of extensive scrutiny by the San Francisco Chronicle in its three part series, Private Justice, October 7-9, 2001. As long as the law permits consumers to be relegated to a private system of justice, these restrictions are needed to remove financial conflicts of interest likely to tilt that system against consumers.

AB 3030 (Corbett) clarifies that private judging companies cannot use their contracts to immunized themselves from the legal consequences of their actions in consumer arbitrations. At least one major arbitration provider has an immunity clause in its contract.

AB 2504 (Jackson), partially addresses the movement of judges directly from public judging to private judging. This issue was discussed last year in the San Francisco Chronicle. R. Holding, Judge’s Action Casts Shadow on Court’s Integrity; Lure of High-paying Jobs as Arbitrations May Compromise Impartiality, S. F. Chronicle, Oct. 9, 2001, p. A13.

AB 2915 (Wayne) is also part of this package, but it is on a different schedule, as Assembly Member Wayne has not yet presented it for consideration in Policy Committee. That bill addresses some elements of the cost of consumer arbitrations.

This group of bills is carefully crafted to reach only consumer arbitrations. These bills do not affect business to business arbitrations. Where arbitration takes the place of the court system for consumers, these rules add essential openness and accountability, and they take steps toward improved fairness and affordability.

Very truly yours,

Gail Hillebrand