Assemblyman calls hearings on mandatory arbitration

The San Francisco Chronicle

After three years championing schools, diversity and the disabled, Assemblyman Darrell Steinberg is about to confront a legislator’s nightmare.

It is mandatory arbitration, a private system of resolving disputes without laws or juries or constitutional rights. Despite mounting criticism of the system, its defenders have humbled some of the most powerful legislators to walk the halls of Sacramento.

On Feb. 12, Steinberg, D-Sacramento, the respected but untested chairman of the Assembly’s judiciary committee, will hold hearings on charges that mandatory arbitration unfairly deprives workers, patients and consumers of their fundamental legal rights. But his hopes for significant reform face daunting opposition:

— A coalition of employers, manufacturers, banks, health care providers and other businesses are so determined to stay out of court that, over the past eight years, they have killed dozens of legislative proposals to weaken mandatory arbitration.

— U.S. Supreme Court decisions that dramatically narrowed the power of states to regulate arbitration agreements and hearings.

— Gov. Gray Davis, who discouraged legislation against mandatory arbitration while privately acknowledging the system’s serious conflicts of interest.

Critics of the governor’s stance on arbitration, people like Jamie Court of the Foundation for Taxpayer and Consumer Rights, call him a “threat to the constitutional right to trial.”

Davis declined repeated requests to comment for this story, but spokeswoman Hilary McLean says he “has done more to strengthen civil rights in California than any of his predecessors.”

In any case, opponents of mandatory arbitration know they must deal with the governor and the Assembly’s pro-business Democrats to win substantial change. That task has fallen to Steinberg, a legislator short on name recognition but possessed, according to colleagues, of a tenacity and patience that may help him succeed where better-known predecessors have failed.

“We have got to expose these problems,” he says, “because, bottom line, people have got to have access to a fair system of justice.”

FLAWED SYSTEM

Voluntary arbitration has a long history of efficiently resolving disputes between adversaries of equal strength. But over the past two decades, companies have imposed mandatory arbitration on the public as a condition of doing business and provoked serious doubts about the system’s fairness.

Since joining the Legislature in 1998, Steinberg has listed among his accomplishments bills addressing mental health, low-performing schools and community diversity. None has provoked the controversy and political gamesmanship that would surround a bill to reform mandatory arbitration.

Still, legislative veterans consider Steinberg well suited to the issue. He served 10 years as an employees’ rights attorney before practicing as an arbitrator and mediator, and sat on the Sacramento City Council for six years. He is, in the words of one lobbyist, “a policy wonk and good at trying to bring people together.”

Steinberg scheduled the Feb. 12 hearings after The Chronicle reported how tens of millions of Americans must agree to resolve disputes through binding arbitration as a condition of getting a job, health care and various goods and services.

While supporters stress the speed, savings and efficiency of arbitration, consumers have discovered that arbitration fees can be prohibitively expensive, awards severely limited and decisions immune from appeal — even when they are legally dubious.

FINANCIAL INCENTIVES

Several arbitration firms have created conflicts of interest, by investing in companies whose cases their arbitrators hear. And studies suggest that arbitrators favor corporations and other frequent clients over individuals.

Sitting judges, meanwhile, have sometimes tailored their behavior on the bench to impress arbitration firms and land lucrative arbitration practices after their retirement.

“The Chronicle put the issues out there,” says Steinberg, “and now we have to address them.”

That is easier said than done.

Attorney General Bill Lockyer — who, as president pro tem, was the most powerful state senator of his time — succeeded seven years ago in passing a measure that forced arbitrators to disclose their past dealings with Kaiser Permanente and other frequent clients.

But in 1996, Lockyer’s bill allowing courts to reverse wrongly decided arbitration cases foundered on intense opposition from Kaiser, the California Chamber of Commerce, the California Manufacturers Association and other pro-business groups. And when Lockyer tried again the next year, opponents gutted the proposal.

“If you were able to kill a bill of Lockyer’s,” says state Sen. John Burton, D-San Francisco, “you were able to kill a bill of anybody’s. Because he was like Genghis Khan back then.”

In 1995 and again in 1996, the U.S. Supreme Court pressed its agenda for reducing litigation and struck down state laws regulating mandatory arbitration. The high court ruled that the Federal Arbitration Act’s preference for arbitration over litigation trumped state attempts to limit the system.

UNANSWERED QUESTIONS

But the ruling left two potential loopholes: arbitration involving employment and medical coverage.

So on Feb. 25, 1997, Assemblyman Antonio Villaraigosa, D-Los Angeles, introduced a bill prohibiting mandatory arbitration in employment. A week later, Assemblyman Martin Gallegos, D-Irwindale, sponsored legislation barring arbitration agreements as a condition of joining a HMO.

The sweeping proposals — backed by plaintiffs’ lawyers and numerous consumer advocates — ran into resistance from Kaiser, the California Chamber of Commerce and a host of industry groups in health care and commerce.

“The opposition,” recalls Gallegos, “was furious.”

Then, in June 1997, the California Supreme Court dealt mandatory arbitration a serious blow. The justices ruled that Kaiser had committed “fraud” in manipulating its arbitration system, in a case where a patient died before his complaint could be heard.

But the opposition recovered quickly. It delayed Gallegos’ bill until a “blue ribbon panel” could recommend changes to the Kaiser arbitration system. The legislation eventually died in the Senate appropriations committee chaired by Sen. Patrick Johnston, D-Stockton, who received thousands of dollars from the political committees of Blue Cross of California, the California Association of Health Plans, the California Chamber of Commerce and other health care and business groups.

Villaraigosa’s bill, meanwhile, passed both houses of the Legislature before reaching Gov. Pete Wilson’s desk on Sept. 15, 1998.

“This bill,” said Wilson as he vetoed the measure, “is a bad precedent, bad law and bad policy.”

EXPECTATIONS DON’T PAN OUT

Gray Davis followed Wilson as governor, and critics of mandatory arbitration believed the Democrat would back their cause as a matter of civil rights.

And at times, he did.

On a visit to The Chronicle last summer, for example, the governor candidly acknowledged that “everyone knows” certain arbitration firms favor institutional clients over individuals and said he would support a narrowly tailored bill to preserve an employee’s right to sue.

But Davis — with moderate Assembly members known as business Democrats — also blocked arbitration bills opposed by corporate interests that had contributed heavily to his gubernatorial campaign.

When Sheila Kuehl, D-Santa Monica, sponsored legislation in 1999 to stop employers from conditioning job offers on arbitration agreements, dozens of Sacramento’s most powerful industry lobbies — including the California Association of Professional Liability Insurers, the California Medical Association and Blue Cross of California — objected.

Within weeks, Davis told Kuehl he didn’t “want to see that bill on my desk,” Kuehl says, and it was withdrawn.

Last year, Kuehl sponsored a measure to bar mandatory arbitration in health care plans. A slightly different but no less influential group of opponents protested. Again, the governor demurred, and the bill died.

On Sept. 10, 2000, Davis vetoed a prohibition on mandatory arbitration clauses in trailer-park agreements, arguing that anyone who objected to such a clause could simply “choose not to reside in that park.”

HIGH COURT ARBITRATION SUPPORT

In March, the U.S. Supreme Court further limited state regulation of employment arbitration. The ruling may still permit the kind of narrowly tailored bill that Davis suggested he would back, such as Kuehl’s proposal allowing workers to avoid arbitration by filing complaints with the state Fair Employment and Housing Agency.

But the governor has declined to comment on Kuehl’s bill, and those who consider mandatory arbitration a violation of civil rights despair of his support.

“Gray Davis has betrayed the women and the workers who helped get him elected,” says Cliff Palefsky, a San Francisco employment attorney who has led the fight against mandatory arbitration. “He is presiding over the repeal of the California civil rights laws that he claims to believe in so strongly.”

In September, Davis signed a bill requiring new ethics rules for arbitrators. It was the kind of incremental reform for which Steinberg may have to settle.

Steinberg does not rule out addressing mandatory arbitration’s core issue: whether consumers should have the choice of going to court after a dispute has arisen.

But he says the hearings will focus on “the arbitration industry itself,” the questionable financial relationships between arbitration firms such as the American Arbitration Association and JAMS, formerly Judicial Arbitration and Mediation Service, and their most valued clients. He also wants to examine how the firms recruit judges off the bench.

Like tighter ethics rules, higher standards for arbitration firms and for their recruiting tactics constrain mandatory arbitration without prohibiting it. Though less than his ideal, the approach may find favor among opponents who could leave Steinberg — like his predecessors — empty-handed.

“These are very serious concerns needing a full hearing,” warns Steinberg. “Let’s just see what comes out of that.”

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MANDATORY PROCESS RESISTS CHALLENGES

Assemblyman Darrell Steinberg, chairman of the Assembly judiciary committee, will hold hearings beginning Feb. 12 on charges that mandatory arbitration unfairly deprives workers, patients and consumers of their fundamental legal rights.

— 1995 and 1996: The U.S. Supreme Court twice struck down state laws regulating mandatory arbitration in favor of the Federal Arbitration Act.

— 1996: Then Senate president pro tem Bill Lockyer’s bill allowing courts to reverse wrongly decided arbitration cases foundered under intense lobbying opposition.

— 1997: Assemblyman Antonio Villaraigosa introduced a bill prohibiting mandatory arbitration in employment. It was eventually vetoed by Gov. Pete Wilson.

— 1997: Assemblyman Martin Gallegos sponsored legislation barring arbitration agreements as a condition of joining an HMO. It died in the Senate appropriations committee.

— 1997: In a rare blow to mandatory arbitration, the California Supreme Court ruled that Kaiser had committed “fraud” in its arbitration system so that a patient died before his complaint could be heard.

— 1997: Lockyer’s second attempt at allowing courts to reverse wrongly decided cases was gutted by opponents.

— 1999: Assemblywoman Sheila Kuehl‘s bill to stop employers from conditioning job offers on arbitration agreements was withdrawn after Gov. Gray Davis told her he didn’t “want to see that bill on my desk.”

— 2000: Kuehl again backed off after a lack of support from the governor, this time on a measure to bar mandatory arbitration in health care plans.

— 2000: Davis vetoed a prohibition on mandatory arbitration clauses in trailer-park agreements.

— 2000: Davis signed a bill requiring new ethics rules for arbitrators.