Senate Bill 707 is directed at employers who force employees into arbitration then refuse to pay the fees

On May 28, 2019, the California Senate passed Senate Bill 707 (“SB 707”), otherwise referred to as the Forced Arbitration Accountability Act. SB 707 seeks to end an abusive tactic that employers use to deny their employees justice—forcing them to arbitrate their legal claims and then suspending the process by refusing to pay the arbitration fees. The bill pulls employees out of this legal limbo by giving them options that allow them to proceed with their cases despite employer non-cooperation. SB 707 also aims to examine the alarming lack of diversity in the arbitration industry. It requires arbitration service providers to collect and share demographic data about the self-reported ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of all arbitrators, as California judges are required to do.

1. OVERVIEW OF ARBITRATION

To understand the potential impact of SB 707, it is helpful to start with an overview of arbitration.

Arbitration is a form of private dispute resolution that takes place outside of the court system.  In arbitration, an arbitrator—often a retired judge or lawyer—acts as both the judge and jury and renders a decision, which is generally final and binding. Employers are increasingly requiring employees to sign arbitration agreements and waive their right to a jury trial as a condition of employment. According to estimates from the Economic Policy Institute and the Center for Popular Democracy, almost 83% or 95 million of the country’s private, non-unionized employees will be subject to arbitration by 2024. These arbitration agreements are often buried in the fine print of job applications, employment agreements, or employee handbooks, and employees often only learn that they have signed arbitration agreements after-the-fact.

Arbitration generally favors employers. When employees are forced into arbitration, they are less likely to win their claims, and even when they do, they receive lower awards than employees who had jury trials.

One reason for this is that employers get to choose the rules governing the proceedings. The rules often make the process less favorable to employees, including by restricting discovery, limiting appeal rights, and prohibiting class actions. Discovery is the process by which each side formally obtains information from the other, including depositions (in which a party’s lawyer can examine witnesses under oath), interrogatories (written questions), requests for admissions, and requests for production of documents. In cases where an employee must prove that an employer acted with wrongful intent or discriminatory bias, the lack of meaningful discovery (for example, being denied the ability to take a sufficient number of depositions) can be fatal to an employee’s claim. (In some states, employers also use the rules to shorten the time that employees have to file their statutory claims (the statute of limitations) and to restrict legal remedies; this is not permissible in California.)

Another reason that the process favors employers is that they get to designate the arbitration company, which then provides a roster of potential arbitrators. Employers (and their counsel) end up hiring the same arbitrators over and over. (In contrast, and employee in arbitration is usually filing an employment case for the first and only time.) Arbitrators know that if they disappoint the employer parties, they will not get selected again and, whether conscious or not, this tends to skew case outcomes. Indeed, the research has demonstrated a repeat player effect, in which employers win more often when they are repeat players, and are required to pay less even when they lose. Employers that repeatedly use the same arbitrators and firms tend to receive more favorable outcomes than those who are appearing before a particular arbitrator for the first time.

In addition, the lack of diversity among arbitrators is deeply troubling. According to a 2015 survey of practicing employment arbitrators, 74% of those surveyed were male and 92% were white. (While California’s judiciary is also not representative of the population, it is more diverse: about 64% male and 66% white.) Given concerns about unconscious bias influencing the process, California’s diverse workers have good reason to be concerned about the lack of diversity among arbitrators.

Finally, arbitration decisions—including obviously unjust ones—are incredibly difficult to appeal in court, with limited bases to do so. This means that even clearly incorrect legal decisions will not be reviewed by courts, such that employees have little recourse if there has been a miscarriage of justice. (For example, in Moncharsh v. Heily & Blase, 3 Cal.4th 1, 33 (1992), the California Supreme Court held that “[t]he existence of an error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review.”)

2. HOW EMPLOYERS GAME THE SYSTEM

Despite the deck already being stacked in their favor, employers continue to seek out new methods of exploiting the arbitration process for their own tactical advantage. There has been an emerging trend where employers are simply refusing to pay the initial arbitration filing fees to prevent the process from ever getting off the ground. SB 707’s Senate Judiciary Committee bill analysis quoted the California Employment Lawyers Association (CELA), one of the bill’s sponsors, describing how this stall tactic causes “costly delays that jeopardize an employee’s ability to find evidence and witnesses . . . .” Employers are also strategically withholding payments at the end of an arbitration to prevent the release of favorable judgments to employees. The bill analysis, quoting CELA, explained that “this scenario can be even more damaging and prejudicial, as the employee or consumer has likely already invested significant resources to develop their case.”

Indeed, SB 707’s bill analysis described how large corporations such as Uber, Lyft, and Chipotle are stifling workers’ access to arbitration by refusing to pay initiation or case-management fees. In the case involving Uber, the United States Court of Appeals for the Ninth Circuit disallowed a class-action lawsuit and ordered 12,500 drivers to proceed with their wage-and-hour claims against the company in individual arbitrations. Of the 12,500 arbitration demands that were then filed, Uber only paid the initial filing fees for 296 cases. Thereafter, Uber’s competitor Lyft refused to pay the initial arbitration fee for 3,420 arbitration demands filed by drivers also alleging wage-and-hour claims. Chipotle has also employed similarly tactics in an attempt to stave off arbitration.

3. HOW SB 707 HELPS

3.1 Punishment for failure to pay arbitration fees

Under SB 707, if an employer fails to pay the required fees to initiate arbitration within 30 days of its due date, the employer will be deemed to have materially breached the arbitration contract. The employee can then either withdraw from arbitration and file their claims in court, or compel arbitration under the contract.

Similarly, if an employer fails to pay the required fees during the arbitration proceedings within 30 days of their due date, it will be found in material breach of the arbitration provision. The employee then has the following options:

1. Withdraw the claims from arbitration and proceed in court;
2. Continue in arbitration, provided that the arbitration company agrees to continue administering it (the arbitration company would be able to collect the unpaid fees at the end of the proceeding);
3. Petition the court to compel the employer to pay arbitration fees under the contract; or
4. Pay the unpaid fees in order to continue the arbitration, and recover such fees from the employer at the end of the proceedings, regardless of whether the employee prevails on the underlying claims.

To deter companies like Uber, Lyft, and Chipotle from obstructing the arbitration process, SB 707 imposes mandatory monetary sanctions on any drafting party who fails to timely pay arbitration costs and fees, and permits the imposition of additional evidentiary, terminating, or contempt sanctions, as the court or arbitrator sees fit.

3.2 Disclosure of demographic information

With respect to the lack of diversity in the arbitration industry, SB 707 requires arbitration companies to begin reporting demographic data relative to ethnicity, race, disability, veteran status, gender, gender identity, and sexual orientation of all arbitrators as self-reported by the arbitrators. This would bring arbitrators in line with California judges, who are already required to report this demographic data under California Government Code section 12011.5(n).

4. CONCLUSION

“Businesses and employers should not be allowed to force Californians into arbitration and then flout the system by stalling or stopping payment to the arbitrator when a case is not going their way.”

The above statement by Senator Bob Wieckowski (SB 707’s co-author) could not ring truer for many California workers facing the already-daunting process of mandatory arbitration. SB 707—which is sponsored by CELA and the Consumer Attorneys of California (CAOC), and has widespread support from various labor organizations—could bring much-needed procedural safeguards to the arbitration process. While by no means a complete fix, SB 707 is a significant step towards leveling the playing field for employees forced into arbitration.

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Written by Ramit Mizrahi with John L. Schwab, Esq. and Peyton Jones.