Bill to boost international arbitration in California advances in Legislature

A bill that would allow out-of-state and foreign attorneys to represent international arbitration clients in California moved one step closer to becoming law on Tuesday.

Supporters say the state is missing out on these lucrative proceedings and failing to capitalize on California's status as the gateway to economic powers across the Pacific.

The Assembly Judiciary Committee passed SB 766 without debate. The bill would implement the main recommendation made last year by the state Supreme Court's International Arbitration Working Group.

SB 766 is supported by the American Bar Association and several other groups. It would require outside attorneys to comply with the State Bar's Rules of Professional Conduct and the Rules of Procedure governing attorney complaints.

It would also address a 20-year-old court decision that has resulted in California becoming a disfavored jurisdiction for international arbitration.

The state Supreme Court ruled 6-1 that a New York firm was illegally practicing law when it represented a California company in arbitration inside the state. Birbrower's more than $1 million fee in the case was found to be unenforceable. Birbrower, Montalbano, Condon & Frank PC v. Superior Court, 17 Cal. 4th 119 (1998).

Howard B. Miller, a JAMS neutral and a past president of the State Bar, called SB 766 "an economic development bill."

"There are huge financial and trade connections between California and all countries in the Pacific Rim," Miller said. "All of those international arbitrations go to Singapore, Hong Kong or other Pacific venues. We now have the opportunity to capture them in California."

International arbitration comes in two main types, Miller said, and California is poised to capitalize on both. One is contractual disputes between companies, while the other is disagreements over what is allowed under treaties.

While he declined to speculate about the potential size of the international arbitration market in California, Miller said it would be a boon not just for law firms and ADR providers but for hotels, restaurants and other industries serving business travelers.

A 2013 survey by American Lawyer magazine found there were 121 separate international arbitrations that year with at least $1 billion at stake in each.

Miller said he is not directly involved with SB 766. But he did work with the bill's author, Sen. William Monning, D-Carmel, on similar legislation in 2014. SB 907 lacked many of the specifics of the current bill. It died in the Assembly Judiciary Committee.

Cliff Palefsky, a partner with McGuinn Hillsman & Palefsky in San Francisco and one of the most outspoken critics of forced arbitration in California, said he has no issues with SB 766. He noted that Monning is an attorney and a frequent ally of progressive legal causes.

"Bill Monning would not be doing something that would undermine the rights of workers and consumers," Palefsky said.

In fact, SB 766 exempts employment, consumer and health care disputes "to ensure that average Californians are not forced into commercial arbitration as the result of everyday transactions," according to an Assembly Judiciary analysis. The bill is intended only to "resolve disputes between sophisticated, multi-jurisdictional business entities."

In its April 2017 report, the Supreme Court's 11-member working group recommended rules based on the ABA's Model Rule of Temporary Practice by Foreign Lawyers, which allows foreign attorneys to represent clients without a pro hac vice application.

It rejected conforming international arbitrations to the state's rules for domestic arbitration. That system, which requires out-of-state lawyers to file an application and pay a fee, "would continue to deter parties from selecting California."

"International commercial arbitration agreements are usually freely negotiated by sophisticated parties who have a range of venues to choose from," the report said.

The leading U.S. venue, New York, had captured over 40 percent of international arbitrations conducted in the U.S. in 2015, according to the International Centre for Dispute Resolution -- almost three times California's share.

But New York still lagged far behind Europe's commercial arbitration powerhouses, Paris and London. The London Court of International Arbitration reported that only one in five parties in litigation there were based in the United Kingdom.