New law creates additional cause for courts to keep cases out of arbitration

2017 LEGISLATIVE SESSION

This week, Gov. Jerry Brown signed into law Senate Bill 33. The bill amends Code of Civil Procedure Section 1281.2 to provide an additional instance when a court can make a determination that a civil dispute should not go to arbitration, but rather to court. SB 33 was the subject of vigorous debate during the 2017 legislative session between proponents and opponents of arbitration in this state.

Under existing California law, a court is generally required to order parties to arbitrate a dispute when a party alleges the existence of a written agreement to arbitrate a controversy and a party to that agreement refuses to arbitrate. The court must order arbitration if the court determines that an agreement to arbitrate exists, unless one of three exceptions apply.

Pursuant to SB 33, a fourth exception is now available in which a state or federally chartered depository institution is seeking to apply a written agreement to arbitrate, which is contained in a contract consented to by a respondent consumer, to a purported contractual relationship with that consumer that was created by the petitioner fraudulently without the consumer's consent and by unlawfully using the consumer's personal identifying information.

The other three exceptions apply when (1) the right to compel arbitration has been waived by the petitioner; (2) grounds exist for the revocation of the agreement; or (3), a party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.

SB 33 added new subdivision (d) to Section 1281.2 to read: "The petitioner is a state or federally chartered depository institution that, on or after January 1, 2018, is seeking to apply a written agreement to arbitrate, contained in a contract consented to by a respondent consumer, to a purported contractual relationship with that 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, as defined in Section 1798.92 of the Civil Code."

This bill was heard in just two legislative committees, the Assembly and Senate Judiciary Committees, even though it could result in increased civil court litigation as the intent of the bill is to remove these cases from binding arbitration. However, the Legislative Counsel's Office who drafts bills for the Legislature has consistently determined that court-related bills rarely have fiscal consequences.

SB 33 was sponsored by the Consumer Attorneys of California, Consumer Federation of California, and State Treasurer John Chiang. Listed as a "Job Killer" by the California Chamber of Commerce, it was opposed by the California Bankers Association, the Civil Justice Association of California, and several other groups.

The sponsors and proponents of SB 33 argued that the bill was narrowly drafted to address only the Wells Fargo-type disputes where fraudulently created accounts occurred so that the depository institution will have to resolve any disputes in a civil court in California, rather than using private arbitration.

The opponents argued that the bill has ambiguous terms, such as "purported contractual relationship," which will lead to additional litigation, as well as that consumer arbitration is beneficial to both businesses and individuals, and that this bill, by targeting arbitration, is likely preempted by the Federal Arbitration Act considering the U.S. Supreme Court's consistent view of state laws or court decisions that treat arbitration agreements differently than other contracts.

This bill undoubtedly will result in litigation over whether the state can carve out such an exception only related to disputes involving depository institutions and involving written agreements to arbitrate. Regardless of the views of the proponents and opponents of SB 33, it is likely that this new law will eventually be subject to a federal court determination concerning the FAA claim.