Existing law requires a court, on petition of a party to an arbitration agreement alleging (1) the existence of a written agreement to arbitrate a controversy and (2) that a party to the agreement refuses to arbitrate the controversy, to order the petitioner and the respondent to arbitrate the controversy if the court determines that an agreement to arbitrate exists, unless the court makes other determinations.

This bill would add to these determinations instances in which a state or federally chartered depository institution 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 consumer that was created by the petitioner fraudulently without the consumers consent and by unlawfully using the consumers personal identifying information, as defined.

Existing law requires a court, on petition of a party to an arbitration agreement alleging (1) the existence of a written agreement to arbitrate a controversy and (2) that a party to the agreement refuses to arbitrate the controversy, to order the petitioner and the respondent to arbitrate the controversy if the court determines that an agreement to arbitrate exists, unless the court makes other determinations.

This bill would add to these determinations instances in which a state or federally chartered depository institution 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 consumer that was created by the petitioner fraudulently without the consumers consent and by unlawfully using the consumers personal identifying information, as defined.

Existing law requires a court, on petition of a party to an arbitration agreement alleging (1) the existence of a written agreement to arbitrate a controversy and (2) that a party to the agreement refuses to arbitrate the controversy, to order the petitioner and the respondent to arbitrate the controversy if the court determines that an agreement to arbitrate exists, unless the court makes other determinations.

This bill would add to these determinations instances in which a financial institution, as defined, state or federally chartered depository institution 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 consumer that was created by the petitioner fraudulently without the consumers consent and by unlawfully using the consumers personal identifying information, as defined.

Existing law requires a court, on petition of a party to an arbitration agreement alleging (1) the existence of a written agreement to arbitrate a controversy and (2) that a party to the agreement refuses to arbitrate the controversy, to order the petitioner and the respondent to arbitrate the controversy if the court determines that an agreement to arbitrate exists, unless the court makes other determinations.

This bill would add to these determinations instances in which a financial institution, as defined, seeks is seeking to apply a written agreement to arbitrate, contained in a contract consented to by a consumer, to a purported contractual relationship with that consumer that was created fraudulently by the petitioner fraudulently without the consumers consent and by unlawfully using the consumers personal identifying information, as defined.

Existing law requires a court, on petition of a party to an arbitration agreement alleging (1) the existence of a written agreement to arbitrate a controversy and (2) that a party to the agreement refuses to arbitrate the controversy, to order the petitioner and the respondent to arbitrate the controversy if the court determines that an agreement to arbitrate exists, unless the court makes other determinations.

This bill would add to these determinations instances in which a financial institution, as defined, seeks to apply a written agreement to arbitrate, contained in a contract consented to by a consumer, to a purported contractual relationship with that consumer created fraudulently by the petitioner without the consumers consent and by unlawfully using the consumers personal identifying information, as defined.

Existing law requires a court, on petition of a party to an arbitration agreement alleging (1) the existence of a written agreement to arbitrate a controversy and (2) that a party to the agreement refuses to arbitrate the controversy, to order the petitioner and the respondent to arbitrate the controversy if the court determines that an agreement to arbitrate exists, unless the court makes other determinations.

This bill would add to these determinations instances in which a financial institution, as defined, seeks to apply a written agreement to arbitrate, contained in a contract consented to by a consumer, to a purported contractual relationship with that consumer created fraudulently by the petitioner without the consumers consent and by unlawfully using the consumers personal identifying information, as defined.

Existing law requires a court, on petition of a party to an arbitration agreement alleging (1) the existence of a written agreement to arbitrate a controversy and (2) that a party to the agreement refuses to arbitrate the controversy, to order the petitioner and the respondent to arbitrate the controversy if the court determines that an agreement to arbitrate exists, unless the court makes other determinations.

This bill would add to these determinations instances in which a financial institution, as defined, seeks to apply a written agreement to arbitrate, contained in a contract consented to by a consumer, to a relationship with that consumer created fraudulently by the petitioner without the consumers consent or and by unlawfully using the consumers personal identifying information, as defined.

Existing law generally regulates the formation, terms, conditions, and enforcement of contracts, including what constitutes an unlawful contract. Existing law declares all persons capable of contracting, except minors, persons of unsound mind, and persons deprived of civil rights. Existing law restricts the use and enforcement of waivers of certain rights for specified contracts. Existing law makes it a crime for a person to willfully obtain personal identifying information, as defined, of another person, and use that information for any unlawful purpose, as specified.

This bill would prohibit a person from requiring require that, in any contract between a person and a financial institution, a waiver of a legal right that arises as a result of fraud, identity theft, and any other act related to related to a claim of fraud arising out of the wrongful use of personal identifying information as a condition of entering into a contract for the provision of goods or services. The bill would require any waiver of these rights to or identity theft committed by a party to a contract or its agents or employees be knowing and voluntary, express and in writing, and not a condition of entering into the contract or a condition of providing or receiving goods or services. The bill would assign any person seeking the enforcement of a waiver of these protections the burden of proving that the waiver was knowing and voluntary and not made as a condition of the contract or of providing or receiving goods or services. The bills provisions would apply to consumer contracts between a person and a financial institution entered into, altered, modified, renewed, or extended on and after January 1, 2018. The bill would authorize a court to award a plaintiff enforcing her or his rights under these provisions reasonable attorneys fees.

Existing law generally regulates the formation, terms, conditions, and enforcement of contracts, including what constitutes an unlawful contract. Existing law declares all persons capable of contracting, except minors, persons of unsound mind, and persons deprived of civil rights. Existing law restricts the use and enforcement of waivers of certain rights for specified contracts. Existing law makes it a crime for a person to willfully obtain personal identifying information, as defined, of another person, and use that information for any unlawful purpose, as specified.

This bill would prohibit a person from requiring a waiver of a legal right that arises as a result of fraud, identity theft, and any other act related to the wrongful use of personal identifying information as a condition of entering into a contract for the provision of goods or services. The bill would require any waiver of these rights to be knowing and voluntary, express and in writing, and not a condition of entering into the contract or a condition of providing or receiving goods or services. The bill would assign any person seeking the enforcement of a waiver of these protections the burden of proving that the waiver was knowing and voluntary and not made as a condition of the contract or of providing or receiving goods or services. The bills provisions would apply to contracts entered into, altered, modified, renewed, or extended on and after January 1, 2018. The bill would authorize a court to award a plaintiff enforcing her or his rights under these provisions reasonable attorneys fees.

 UNFINISHED BUSINESS  

Bill No: SB 33

Author:

:

Vote:

SENATE JUDICIARY COMMITTEE: 5-2, 5/2/17

AYES: Jackson, Hertzberg, Monning, Stern, Wieckowski

NOES: Moorlach, Anderson

SENATE FLOOR: 26-13, 5/30/17

AYES: Allen, Atkins, Beall, Bradford, De León, Dodd, Galgiani, Glazer, Hernandez, Hertzberg, Hill, Hueso, Jackson, Lara, Leyva, McGuire, Mendoza, Mitchell, Monning, Pan, Portantino, Roth, Skinner, Stern, Wieckowski, Wiener

NOES: Anderson, Bates, Berryhill, Cannella, Fuller, Gaines, Moorlach, Morrell, Nguyen, Nielsen, Stone, Vidak, Wilk

NO VOTE RECORDED: Newman

ASSEMBLY FLOOR: 46-23, 9/5/17 - See last page for vote

SUBJECT:

SOURCE: Treasurer John Chiang

Consumer Attorneys of California

Consumer Federation of California

DIGEST:

This bill adds an additional determination to the list of exclusions from compelled arbitration. This bill provides arbitration is not compelled when the court determines that a petitioner is a specified financial institution that seeks to apply a written agreement to arbitrate, contained in a contract consented to by a consumer, to a purported contractual relationship with that consumer created fraudulently by the petitioner without the consumer’s consent and by unlawfully using the consumer’s personal identifying information.

Assembly Amendments

narrow the types of financial institutions to which the bill applies to only include state or federally chartered depository institutions. The amendments also require the consumer to be the respondent on the petition.

ANALYSIS:

Existing law:

1. Governs, through the California Arbitration Act (CAA), arbitrations in California, including the enforcement of arbitration agreements, rules for neutral arbitrators, the conduct of arbitration proceedings, and the enforcement of arbitration awards. (Code Civ. Proc. Sec. 1280 et. seq.)
2. Provides, through the Federal Arbitration Act (FAA), that a written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. (9 U.S.C. Sec. 2.)
3. Provides that on petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless the court determines that:

• the right to compel arbitration has been waived by the petitioner;
• grounds exist for the revocation of the agreement; or
• 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. A pending court action or special proceeding includes an action or proceeding initiated by the party refusing to arbitrate after the petition to compel arbitration has been filed, but on or before the date of the hearing on the petition. (Code Civ. Proc. Sec. 1281.2.)

1. Defines “personal identifying information,” for purposes of Title 1.81.3 of Part 4 of Division 3 of the Civil Code, as a person’s name, address, telephone number, driver’s license number, social security number, place of employment, employee identification number, mother’s maiden name, demand deposit account number, savings account number, or credit card number. (Civ. Code Sec. 1798.92.)

This bill adds an additional determination to the list of exclusions from compelled arbitration. A court is required to compel arbitration unless it determines that 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 consumer created by the petitioner fraudulently without the consumer’s consent and by unlawfully using the consumer’s personal identifying information, as defined in Section 1798.92 of the Civil Code.

Background

This bill arises in response to a now infamous scheme carried out by employees of Wells Fargo Bank. Much of the bank growth that was occurring was through banking institutions cross-selling customers on more products and services. As part of this trend, Wells Fargo built an incentive-compensation program but failed to properly monitor or limit the program. These circumstances allowed and encouraged employees to pursue underhanded sales practices. Thousands of bank employees found ways to game the system by secretly signing up existing clients for new services that were never requested.

The Wells Fargo employees misused consumer names and personal information to create new checking and credit card accounts to inflate their sales figures to meet their sales targets and claim higher bonuses without the customers’ knowledge or consent. According to the bank’s own analysis, employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers. Employees funded the deposit accounts by transferring funds from existing accounts. Wells Fargo employees also requested and activated debit cards without consumers’ knowledge or consent, going so far as to create PINs for consumers without telling them. Some employees concocted email addresses that did not belong to their customers and used those new addresses to enroll people in online-banking services without their knowledge or consent. Wells Fargo employees targeted Mexican immigrants who spoke little English, older adults with memory problems, college students opening their first bank accounts, and small-business owners with several lines of credit.

As a result of these illegal deposit and credit card practices, many consumers were hit with annual fees, overdraft-protection charges, finance charges, late fees, and other costs. The Consumer Financial Protection Bureau levied a fine against Wells Fargo of $100 million for this widespread practice and ordered Wells Fargo to refund fees and charges that were paid because of these unauthorized accounts. However, when customers attempted to assert their rights against Wells Fargo in state and federal courts across the country, the bank responded by repeatedly and successfully compelling arbitration. Some media reports indicate that Wells Fargo may have been moving these disputes regarding unauthorized accounts into arbitration for years, which may have kept the overall fraudulent scheme from coming into wider public view sooner.

This bill seeks to prevent this litigation strategy. It creates an exception to the general requirement that a court enforce valid arbitration agreements when such agreements are being applied to purported contractual relationships between the parties that were created fraudulently without the consumers’ consent and by unlawfully using the consumers’ personal identifying information.

Comments

The author writes:

It’s been tough to avoid news stories about the Wells Fargo fraud scandal. Starting in 2011, the bank’s employees opened more than 2 million phony bank and credit card accounts without the knowledge or consent of customers across the nation. Customers learned of the scheme only when they started getting socked by fees for those phony accounts or they noticed their credit was inexplicably being affected. But when they sought to hold Wells Fargo accountable, their path to the courthouse was blocked. Arbitration clauses were hidden in the fine print of the original, legitimate contracts they had signed, sometimes years before, to open a bank account. So instead of fighting Wells Fargo in the fairer and public forum of a courthouse, the bank’s customers were forced into secret, binding arbitrations overseen by an arbitrator hired by the bank. Most disturbing of all, Wells Fargo was able to successfully argue that the arbitration clauses hidden in the original, legitimate banking contracts could be used to force disputes over the fictitious accounts into closed-door arbitration. With the fraud cases locked behind closed doors, Wells Fargo kept the scheme hidden from broader public disclosure, allowing it to mushroom.

SB 33 will help prevent such a rampant campaign of deception from ever happening again in California. It is a simple and very direct bill. It covers only the activities of banks and financial institutions like Wells Fargo. It’s not anti-arbitration. It only prohibits arbitrations in cases involving fraud or identity theft. SB 33 will also act as a deterrent against future fraud. Companies will be on notice that if they commit fraud against a customer, they will lose any legal advantage they might have enjoyed in arbitration. Instead, they will have to fight it out in the far more equitable forum of a public courtroom.

Narrowly tailored measure to address an identified issue.

Despite fraudulently creating millions of accounts in its customers’ names without their consent or knowledge, Wells Fargo was consistently successful in keeping its customers’ claims out of courts. As a general matter, arbitrations provide an alternative method of dispute resolution, outside of the courts, wherein a neutral third party, known as the arbitrator, renders a decision after a hearing to which both parties have had an opportunity to be heard. Under California law, there are two distinguishable types of arbitration: judicial arbitration (also known as court-annexed arbitration, governed under Code of Civil Procedure Sections 1141.10 -1141.31) and private arbitrations (also commonly known as “contractual,” “voluntary,” or “nonjudicial” arbitrations; governed under the California Arbitration Act, Code of Civil Procedure Section 1280 et seq.).

In regards to private arbitration, the increased use of mandatory arbitration clauses in consumer contracts has been highly controversial for a variety of reasons, including alleged issues surrounding concerns of “repeat players,” whereby a repeat defendant, such as a corporate defendant, may, conspicuously or not, receive preferential treatment or rulings from arbitrators who rely on being selected by the corporate defendant to earn a living as an arbitrator. As is generally the custom in the industry, Wells Fargo’s consumer contracts included these sorts of private arbitration agreements that required the parties to arbitrate their disputes.

In connection with the scheme discussed above, when customers sought to bring claims arising from the fraudulent accounts opened in their names, Wells Fargo successfully asserted that the arbitration agreements contained in the customers’ original contracts should be enforced with respect to the claims arising from the fraudulent accounts. Despite widespread condemnation in the media, the litigation tactic was incredibly successful and kept these cases from being litigated publicly and on a class basis.

In order to ensure that consumers are more thoroughly protected against this sort of fraud in the future and that they will have their day in court, this bill makes clear that such arbitration agreements cannot be applied to these types of relationships.

Currently, when a plaintiff brings suit against a defendant based upon claims covered by an arbitration agreement, the defendant may petition the court to compel the plaintiff to arbitrate the controversy. The court is required to order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists. Although there are currently several exceptions, none directly address the circumstances posed by a Wells Fargo-type situation. Under the circumstances of those cases, a valid arbitration agreement, created with the consent of the customer in connection with the initiation of a valid account with a financial institution, exists. The financial institution can then point to this valid and existing agreement between the parties in its petition to compel arbitration, even when the underlying claims arise from an entirely fraudulent relationship between the parties that only came into being through the unlawful use of the consumer’s personal identifying information.

This bill narrowly targets this specific situation with precise language. Pursuant to this bill, a court is not required to compel arbitration even if a petition by a state or federally chartered depository institution adequately establishes that an existing, written agreement to arbitrate, contained in a contract consented to by a consumer, exists, if the petitioner is seeking to apply such an agreement to a relationship between the parties fraudulently created by the institution, without the consumer’s consent and through the unlawful use of the consumer’s personal identifying information.

Therefore, as written, this exception to the enforcement of arbitration agreements applies only to state or federally chartered depository institutions and only when they have (1) unlawfully used a respondent customer’s personal information; (2) fraudulently created the relevant relationship with the consumer; and (3) done so without the consumer’s consent. Furthermore, the institutions to which this applies have been drastically narrowed since the bill was introduced to now only include state or federally chartered depository institutions.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 9/5/17)

John Chiang, Treasurer, State of California (co-source)

Consumer Attorneys of California (co-source)

Consumer Federation of California (co-source)

ACCE Action

Alameda County Democratic Party

Bet Tzedek Legal Services

Cal Berkeley Democrats

California Advocates for Nursing Home Reform

California Alliance for Retired Americans

California Climate and Agriculture Network

California College Democrats

California Commission on Aging

California Conference Board of the Amalgamated Transit Union

California Conference of Machinists

California Dispute Resolution Council

California Employment Lawyers Association

California Labor Federation

California Low-Income Consumer Coalition

California Professional Firefighters

California Public Interest Research Group

California Reinvestment Coalition

California Teamsters Public Affairs Council

Center for Responsible Lending

Central Coast Alliance United for a Sustainable Economy

Centro Legal de La Raza

Coalition for Humane Immigrant Rights

Community Alliance with Family Farmers

Consumer Action

Consumer Federation of America

Consumer Federation of California

Consumer Watchdog

Consumers for Auto Reliability and Safety

Consumers Union

Courage Campaign

Cruz Reynoso Bar Association

Del Norte County Democratic Central Committee

Democratic Party of Orange County

Democratic Party of Sacramento County

East Bay Community Law Center

Engineers & Scientists of California, IFPTE Local 20, AFL-CIO

Evolve California

Fontana Democratic Club

Fresno County Democratic Central Committee

Fresno County Democratic Party

Harry S. Truman Democratic Club of Greater Sacramento

Housing and Economic Rights Advocates

International Longshore and Warehouse Union

The Justice & Diversity Center

Law Foundation of Silicon Valley

Legal Aid Society of San Bernardino

National Association of Consumer Advocates

National Consumer Law Center

Our Family Coalition

Privacy Rights Clearinghouse

Professional & Technical Engineers, IFPTE Local 21, AFL-CIO

Public Counsel

Public Law Center

ReFund America Project

Riverside Legal Aid

San Diego County Democratic Party

San Francisco Democratic County Central Committee

San Francisco Latino Democratic Club

South Asian Network

South Lake Tahoe Democratic Club

Student Senate for California Community Colleges

Tenth AD Democrats

Utility Workers Union of America

Veterans Democratic Club Sacramento County

Voices for Progress Education Fund

Watsonville Law Center

Wellstone Progressive Democrats of Sacramento

West LA Democratic Club

OPPOSITION: (Verified 9/5/17)

Association of California Life & Health Insurance Companies

California Bankers Association

California Business Roundtable

California Chamber of Commerce

California Community Banking Network

California Credit Union League

California Delivery Association

California Hospital Association

California Land Title Association

California Retailers Association

Camarillo Chamber of Commerce

Civil Justice Association of California

Claremont Chamber of Commerce

Consumer Data Industry Association

Culver City Chamber of Commerce

El Centro Chamber of Commerce

Electronic Transactions Association

First American Corporation

Greater Conejo Valley Chamber of Commerce

Internet Coalition

Investment Company Institute

Long Beach Area Chamber of Commerce

NAIOP Commercial Real Estate Development Association Inland Empire and SoCal Chapters

National Federation of Independent Business

Orange County Business Council

Oxnard Chamber of Commerce

Redondo Beach Chamber of Commerce

Santa Maria Valley Chamber of Commerce Visitor & Convention Bureau

Securities Industry and Financial Markets Association

Simi Valley Chamber of Commerce and Visitor Center

South Bay Association of Chambers of Commerce

Southwest California Legislative Council

ARGUMENTS IN SUPPORT: Writing in support, California State Treasurer John Chiang states that although his office took action against Wells Fargo for the widespread fraud by suspending all relationships with the bank, the actions did not provide relief for the customers who had already been defrauded. He, along with many of the organizations in support, argue that this bill will rectify this problem by giving customers their day in court when a financial institution commits fraud or identity theft against them.

ARGUMENTS IN OPPOSITION: The California Chamber of Commerce and a coalition of other groups state that the bill is likely preempted under the FAA; is ambiguous in its application; and allows class actions favoring attorneys over consumers. They also argue that the definition of “financial institution” is too broad.

ASSEMBLY FLOOR: 46-23, 9/5/17

AYES: Aguiar-Curry, Berman, Bloom, Bocanegra, Bonta, Burke, Caballero, Calderon, Cervantes, Chau, Chiu, Chu, Cooley, Dababneh, Eggman, Frazier, Friedman, Cristina Garcia, Gipson, Gloria, Gonzalez Fletcher, Holden, Irwin, Jones-Sawyer, Kalra, Levine, Limón, Low, McCarty, Medina, Mullin, Muratsuchi, Nazarian, O'Donnell, Quirk, Quirk-Silva, Reyes, Rodriguez, Rubio, Santiago, Mark Stone, Thurmond, Ting, Weber, Wood, Rendon

NOES: Acosta, Travis Allen, Bigelow, Chávez, Chen, Choi, Cunningham, Dahle, Flora, Fong, Gallagher, Gray, Harper, Kiley, Lackey, Maienschein, Mathis, Mayes, Melendez, Obernolte, Patterson, Salas, Voepel

NO VOTE RECORDED: Arambula, Baker, Brough, Cooper, Daly, Eduardo Garcia, Grayson, Ridley-Thomas, Steinorth, Waldron

Prepared by:

9/5/17 21:18:28

**** END ****

SENATE THIRD READING

STR Bill Id:SB 33

Author:(Dodd)

As Amended Ver:August 24, 2017

Majority vote

SENATE VOTE: 26-13

SUMMARY: Prohibits the court from granting a motion to compel made by a state or federally chartered depository institution when the valid agreement to arbitrate is seeking to cover a purported contractual relationship fraudulently created unlawfully with the consumer's personal identifying information and without the consumer's consent. Specifically, this bill provides that the court shall not grant a motion to compel if 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 consumer, to a purported contractual relationship with that consumer that was fraudulently created by the petitioner without the consumer's consent and by unlawfully using the consumer's personal identifying information, as defined in Civil Code Section 1798.92.

FISCAL EFFECT: None

COMMENTS: It is widely known that beginning as early as 2005, Wells Fargo Bank imposed on its employees sales quotas to open more client accounts and sell more add-on bank services. (Cowley, At Wells Fargo, Complaints About Fraudulent Accounts Since 2005, N.Y. Times (Oct. 11, 2016).) Under the pressure to meet these quotas, over 3,500 Wells Fargo employees fraudulently opened ghost or sham accounts. (Reckard, Wells Fargo's Pressure-Cooker Sales Culture Comes at a Cost, L.A. Times (Dec. 21, 2013).) The toxic sales culture at the bank was illustrated by one former employee's testimony about his manager's directive on his sales goals: "I don't care how you do it — but do it, or else you're not going home. (Ibid.)

Over a span of almost a decade, it is estimated that over two million deposit and credit card accounts were opened without customer authorization or knowledge by Wells Fargo. (Cowley, At Wells Fargo, Complaints About Fraudulent Accounts Since 2005, N.Y. Times (Oct. 11, 2016).) Indeed, many customers didn't even know about the bank's tactics until "they were charged unexpected fees, received credit or debit cards in the mail that they did not request, or started hearing from debt collectors about accounts they did not recognize." (Corkery, Wells Fargo Fined $185 Million for Fraudulently Opening Accounts, N.Y. Times (Sept. 8, 2016).)

As a result of this fraudulent activity, the Consumer Financial Protection Bureau (CFPB) ordered Wells Fargo to pay $185 million in penalties to several governmental entities, including the City and County of Los Angeles. (Ibid. See also In re Wells Fargo Bank, N.A. (2016) 2016 CFPB 0015.) Additionally, Congress and the Legislature held several hearings on the issue (including a hearing by the Assembly Committee on Banking and Finance last October), reprimanding and criticizing the Bank for its conduct.

While it appears that Wells Fargo has been bruised by its public relations disaster, it appears that it has triumphed in court, successfully guarding against claims made by consumers injured by the Bank. In individual consumer and class action suits against the bank, Wells Fargo has relied on its arbitration clause to send claims to arbitration. Essentially, Wells Fargo argued that their "arbitration clause included in the legitimate contracts customers signed to open bank accounts also [covered] disputes relating to the false ones set up in their names." (Ibid.) In other words, Wells Fargo contends that the terms of one legitimate contract can control a wholly separate account — even if that second account was never agreed to by the consumer. While surprising to some, it appears that this strategy has been upheld in the courts. In a civil class action filed against Wells Fargo for its fraudulent tactics, a California federal court granted the Bank's motion to compel arbitration. The parties in that class action have announced a settlement agreement of $142 million. The proposed settlement still needs to be approved by the court. (Stipulation and Agreement of Class Action Settlement and Release at 20, Jabbari v. Wells Fargo & Company, No. 3:15-cv-02159-VC (N.D. Cal. 2017).)

This bill appears to be a response to Wells Fargo litigation strategy. This bill seeks to limit state or federally chartered depository institutions from being able to assert that an arbitration clause in a legitimate contract also applies to a purported contractual relationship fraudulently created by the institution without the consumer's consent and created by unlawfully using the consumer's personal identifying information. This bill narrowly applies to motions to compel filed on or after January 1, 2018.

Courts and arbitration. Justice Brennan once said that, "courts are the central dispute-setting institutions of our society. They are bound to do equal justice under the law, to rich and poor alike." It comes as no surprise then that the phrase, "Equal Justice Under Law," is engraved above the entrance to our nation's highest court. And so it seems, we put a great deal of faith in our courts—but would we expect any less? We anticipate our courts to apply the law in a fair, neutral, and open manner. We hold judges to high standards, and ask that they avoid even the appearance of impropriety. We count on our judiciary to advance the law, issue orders, and render written opinions. And yet, we acknowledge that our system isn't perfect and that despite their best efforts, courts sometimes get it wrong. Acknowledging the imperfection of our justice system is undoubtedly one reason why it has safeguards. We remember that decisions of courts are reviewed by appellate courts and indeed, reviewed by our elected branches. In order to facilitate the right to appeal, we provide a record of the proceedings, in criminal matters at least. And so, when our families, friends, and neighbors are injured, wronged, or have a dispute, we rely upon that faith that our courts — the institution we trust upon to promote fairness — will deliver equal justice under the law.

In contrast, arbitration is a form of alternative dispute resolution held outside of court where a third-party (rather than a judge) makes a binding (and rarely appealable) award. Because most arbitration is created by entering into a contract (usually a contract that is adhesive or take-it-or-leave-it), the arbitration agreement will set-forth the procedures of the arbitration proceeding and the claims that the arbitration proceeding will capture. Additionally, arbitration agreement may provide that the award need not be written or justified (unlike in court), and that the entire process be kept in secret (rather than in public view). Arbitrators do not need to be lawyers, nor do they need to be trained in the law. Arbitrators who issue favorable awards to a particular company can be repeatedly-hired by that same company to serve as the arbitration-neutral without ever notifying the public about that award history.

Background on a motion to compel. When a legal dispute arises between two parties involving a contract that contains an arbitration clause, and one of the parties files a lawsuit in state court, the opposing party may file a motion to compel: a procedural motion that, if granted, orders the parties to move the lawsuit to arbitration. Existing law provides several grounds for why a court might deny a motion to compel, including but not limited to grounds on waiver or invalidity of the contract.

This bill adds a narrow reason for when a court may deny a motion to compel. This bill provides another ground—albeit a narrow one—for when the court may deny a motion to compel. For instance, this bill only applies to motions to compel filed on or after January 1, 2018 by a state or federally chartered depository institution. Additionally, this bill only denies the motion to compel if the institution is asserting that a consumer-consented written agreement to arbitrate (i.e., a valid arbitration clause) also covers a purported contractual relationship fraudulently created unlawfully with the consumer's personal identifying information and without the consumer's consent.

Analysis Prepared by: Eric Dang / JUD. / (916) 319-2334 FN: 0001317

SENATE THIRD READING

STR Bill Id:SB 33

Author:(Dodd)

As Amended Ver:July 3, 2017

Majority vote

SENATE VOTE: 26-13

SUMMARY: Prohibits the court from granting a motion to compel made by a financial institution when the valid agreement to arbitrate is seeking to cover a purported contractual relationship fraudulently created unlawfully with the consumer's personal identifying information and without the consumer's consent. Specifically, this bill:

1. Provides that the court shall not grant a motion to compel if the petitioner is a financial 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 consumer, to a purported contractual relationship with that consumer that was fraudulently created by the petitioner without the consumer's consent and by unlawfully using the consumer's personal identifying information, as defined in Civil Code Section 1798.92.
2. Defines "financial institution" to mean a person who is licensed pursuant to Division 1.1 (commencing with Section 1000), Division 5 (commencing with Section 14000), or Division 7 (commencing with Section 18000) of the Financial Code, or Division 1 (commencing with Section 25000) of Title 4 of the Corporations Code; is a federally chartered depository institution; or is a broker, dealer, or investment advisor required to register with the Securities and Exchange Commission.

FISCAL EFFECT: None

COMMENTS: It is widely known that beginning as early as 2005, Wells Fargo Bank imposed on its employees sales quotas to open more client accounts and sell more add-on bank services. (Cowley, At Wells Fargo, Complaints About Fraudulent Accounts Since 2005, N.Y. Times (Oct. 11, 2016).) Under the pressure to meet these quotas, over 3,500 Wells Fargo employees fraudulently opened ghost or sham accounts. (Reckard, Wells Fargo's Pressure-Cooker Sales Culture Comes at a Cost, L.A. Times (Dec. 21, 2013).) The toxic sales culture at the bank was illustrated by one former employee's testimony about his manager's directive on his sales goals: "I don't care how you do it — but do it, or else you're not going home. (Ibid.)

Over a span of almost a decade, it is estimated that over two million deposit and credit card accounts were opened without customer authorization or knowledge by Wells Fargo. (Cowley, At Wells Fargo, Complaints About Fraudulent Accounts Since 2005, N.Y. Times (Oct. 11, 2016).) Indeed, many customers didn't even know about the bank's tactics until "they were charged unexpected fees, received credit or debit cards in the mail that they did not request, or started hearing from debt collectors about accounts they did not recognize." (Corkery, Wells Fargo Fined $185 Million for Fraudulently Opening Accounts, N.Y. Times (Sept. 8, 2016).)

As a result of this fraudulent activity, the Consumer Financial Protection Bureau (CFPB) ordered Wells Fargo to pay $185 million in penalties to several governmental entities, including the City and County of Los Angeles. (Ibid. See also In re Wells Fargo Bank, N.A. (2016) 2016 CFPB 0015.) Additionally, Congress and the Legislature held several hearings on the issue (including a hearing by the Assembly Committee on Banking and Finance last October), reprimanding and criticizing the Bank for its conduct.

While it appears that Wells Fargo has been bruised by its public relations disaster, it appears that it has triumphed in court, successfully guarding against claims made by consumers injured by the Bank. In individual consumer and class action suits against the bank, Wells Fargo has relied on its arbitration clause to send claims to arbitration. Essentially, Wells Fargo argued that their "arbitration clause included in the legitimate contracts customers signed to open bank accounts also [covered] disputes relating to the false ones set up in their names." (Ibid.) In other words, Wells Fargo contends that the terms of one legitimate contract can control a wholly separate account — even if that second account was never agreed to by the consumer. While surprising to some, it appears that this strategy has been upheld in the courts. In a civil class action filed against Wells Fargo for its fraudulent tactics, a California federal court granted the Bank's motion to compel arbitration. The parties in that class action have announced a settlement agreement of $142 million. The proposed settlement still needs to be approved by the court. (Stipulation and Agreement of Class Action Settlement and Release at 20, Jabbari v. Wells Fargo & Company, No. 3:15-cv-02159-VC (N.D. Cal. 2017).)

This bill appears to be a response to Wells Fargo litigation strategy. This bill seeks to limit financial institutions from being able to assert that an arbitration clause in a legitimate contract also applies to a purported contractual relationship fraudulently created by the financial institution without the consumer's consent and created by unlawfully using the consumer's personal identifying information. This bill narrowly applies to motions to compel filed on or after January 1, 2018.

Courts and arbitration. Justice Brennan once said that, "courts are the central dispute-setting institutions of our society. They are bound to do equal justice under the law, to rich and poor alike." It comes as no surprise then that the phrase, "Equal Justice Under Law," is engraved above the entrance to our nation's highest court. And so it seems, we put a great deal of faith in our courts—but would we expect any less? We anticipate our courts to apply the law in a fair, neutral, and open manner. We hold judges to high standards, and ask that they avoid even the appearance of impropriety. We count on our judiciary to advance the law, issue orders, and render written opinions. And yet, we acknowledge that our system isn't perfect and that despite their best efforts, courts sometimes get it wrong. Acknowledging the imperfection of our justice system is undoubtedly one reason why it has safeguards. We remember that decisions of courts are reviewed by appellate courts and indeed, reviewed by our elected branches. In order to facilitate the right to appeal, we provide a record of the proceedings, in criminal matters at least. And so, when our families, friends, and neighbors are injured, wronged, or have a dispute, we rely upon that faith that our courts — the institution we trust upon to promote fairness — will deliver equal justice under the law.

In contrast, arbitration is a form of alternative dispute resolution held outside of court where a third-party (rather than a judge) makes a binding (and rarely appealable) award. Because most arbitration is created by entering into a contract (usually a contract that is adhesive or take-it-or-leave-it), the arbitration agreement will set-forth the procedures of the arbitration proceeding and the claims that the arbitration proceeding will capture. Additionally, arbitration agreement may provide that the award need not be written or justified (unlike in court), and that the entire process be kept in secret (rather than in public view). Arbitrators do not need to be lawyers, nor do they need to be trained in the law. Arbitrators who issue favorable awards to a particular company can be repeatedly-hired by that same company to serve as the arbitration-neutral without ever notifying the public about that award history.

Background on a motion to compel. When a legal dispute arises between two parties involving a contract that contains an arbitration clause, and one of the parties files a lawsuit in state court, the opposing party may file a motion to compel: a procedural motion that, if granted, orders the parties to move the lawsuit to arbitration. Existing law provides several grounds for why a court might deny a motion to compel, including but not limited to grounds on waiver or invalidity of the contract.

This bill adds a narrow reason for when a court may deny a motion to compel. This bill provides another ground—albeit a narrow one—for when the court may deny a motion to compel. For instance, this bill only applies to motions to compel filed on or after January 1, 2018 by a financial institution. Additionally, this bill only denies the motion to compel if the financial institution is asserting that a consumer-consented written agreement to arbitrate (i.e., a valid arbitration clause) also covers a purported contractual relationship fraudulently created unlawfully with the consumer's personal identifying information and without the consumer's consent.

Background on the Concepcions & federal preemption. In 2002, Vincent and Liza Concepcion entered into a mobile phone contract that had an arbitration clause. (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 336.) The arbitration clause required that all claims be brought in an "individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding." (Ibid.) When a dispute arose between the Concepcions and AT&T, the Concepcions challenged the arbitration clause, relying on a previous California Supreme Court decision that held that an arbitration clause in an adhesive contract that required the consumer to waive class claims was unconscionable. (Discovery Bank v. Superior Court (2005) 36 Cal. 4th 148, 159.)

Citing Section 2 of the Federal Arbitration (FAA) — which provides that arbitration clauses are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract," — the United States Supreme Court struck down the Discovery Bank rule. The Court held that although an agreement to arbitrate may be invalidated on grounds "generally applicable to contract defenses," it cannot be invalidated for grounds that only apply to arbitration. (Concepcion, supra, at 339.) Additionally, the Court reaffirmed the principle that a "state law [that] prohibits outright the arbitration of a particular type of claim," is preempted. (Id. at 340.) The Court also suggested that if a state law got into "interference" with the "fundamental attribute of arbitration" (e.g., lower costs, greater efficiency and speed), those rules would also be preempted. For example, a rule that required arbitration agreements and proceedings to provide judicially-monitored discovery, or to follow the Federal Rules of Evidence would violate the FAA. (Id. at 342.)

Undoubtedly, the proponents and the opponents of this bill have strong opinions about whether this bill is preempted by the FAA. The author and sponsors of the bill argue that this bill is not preempted because if a financial institution creates fraudulent accounts, those accounts should be construed as a purported contract — and accordingly, must contain an independent and valid arbitration clause in order for legal claims against those fraudulent accounts to be conducted in arbitration.

The opponents — a coalition of business groups, banks, civil defense, and insurance interests led by the California Chamber of Commerce — argue otherwise. Specifically, they write:

On its face, SB 33 prohibits the arbitration of specific claims—i.e., those arising from a "purported contractual relationship" created fraudulently by the "unlawful use of personal identifying information" with a financial institution. As indicated by Kindred Nursing Centers, a state law that seeks to limit arbitration in this manner is preempted by the FAA….SB 33 acknowledges a valid agreement, but basically refuses to enforce the terms of that agreement for certain claims, which the Court has indicated on May 16, 2017, is preempted.

In response, the Consumer Attorneys of California argue the following:

The FAA only requires courts to enforce agreements to arbitrate, and SB 33 merely clarifies the requirements for such entering such agreement. SB 33 is narrowly tailored to address a fraudulent contract, not a valid arbitration agreement. Long standing contract law dating back to the 1800s requires consent from both parties in order to create a valid contract. Contracts entered into based on a company's fraud instead of a consumer's consent are fraudulent and therefore unenforceable under California law.

Analysis Prepared by: Eric Dang / JUD. / (916) 319-2334 FN: 0001105

Date of Hearing: June 27, 2017

ASSEMBLY COMMITTEE ON

, Chair

SBPCA Bill Id:SB 33

Author:(Dodd) – As Amended Ver:June 13, 2017

As Proposed to be Amended

SENATE VOTE:

SUBJECT:

KEY ISSUE: IN ORDER TO DETER FINANCIAL INSTITUTIONS FROM ENGAGING IN FRAUDULENT ACTIVITY THAT INJURES CONSUMERS, SHOULD CERTAIN PROCEDURAL MOTIONS BE PROHIBITED WHEN THE FINANCIAL INSTITUTION IS SEEKING TO COMPEL A HARM TO BE RESOLVED IN ARBITRATION, WHEN THAT HARM iS CAUSED BY THE FINANCIAL INSTITUTION FRAUDULENTLY CREATing A PURPORTED CONTRACT BY USING A CONSUMER’s PERSONAL INFORMATION WITHOUT A CONSUMER’S KNOWLEDGE?

SYNOPSIS

It is widely known that beginning as early as 2005, Wells Fargo Bank imposed on its employees sales quotas to open more client accounts and sell more add-on bank services that led to over two million deposit and credit card accounts opened without customer authorization or knowledge. In the wake of this scandal, the Consumer Financial Protection Bureau (CFPB) ordered Wells Fargo to pay $185 million in penalties for its fraudulent activities. While it appears that Wells Fargo has been bruised by its public relations disaster, it appears that it has triumphed in court, successfully guarding against claims made by consumers injured by the bank. In individual consumer and class action suits against the bank, Wells Fargo has relied on its arbitration clause to send those claims to arbitration. Essentially, Wells Fargo has argued that their arbitration clause allowed them to send the dispute over fraudulent accounts into arbitration.

This bill—sponsored by the Consumer Attorneys of California, Consumer Federation of California, and State Treasurer John Chiang—is aimed at curbing that litigation strategy. This bill would limit a financial institution from being able to assert, in a motion to compel arbitration, that a legitimate arbitration clause also covered a purported contractual relationship fraudulently created by the financial institution without the consumer’s consent and created by unlawfully using the consumer’s personal identifying information. This bill narrowly applies to motions to compel filed on or after January 1, 2018.

The bill is supported by a wide coalition of labor advocates, low-income rights organizations, and consumer interest groups—who believe that binding arbitration has allowed Wells Fargo to shield its activities from the public. The opponents—a coalition of business interests, civil defense, and banking institutions led by the California Chamber of Commerce—argue that this bill is preempted by the Federal Arbitration Act and would result in costly litigation. In response, the author and sponsor argue that this bill is consistent with existing contract law principles that limit contracting parties’ ability to engage in fraud. The author has agreed to accept technical and clarifying amendments in this Committee, which are reflected in this analysis.

SUMMARY: Prohibits the court from granting a motion to compel made by a financial institution when the valid agreement to arbitrate is seeking to cover a purported contractual relationship fraudulently created unlawfully with the consumer’s personal identifying information and without the consumer’s consent. Specifically, this bill:

1. Provides that the court shall not grant a motion to compel if the petitioner is a financial 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 consumer, to a purported contractual relationship with that consumer that was fraudulently created by the petitioner without the consumer’s consent and by unlawfully using the consumer’s personal identifying information, as defined in Section 1798.92 of the Civil Code.
2. Defines “financial institution” to mean a person who is licensed pursuant to Division 1.1 (commencing with Section 1000), Division 5 (commencing with Section 14000), or Division 7 (commencing with Section 18000) of the Financial Code, or Division 1 (commencing with Section 25000) of Title 4 of the Corporations Code; is a federally chartered depository institution; or is a broker, dealer, or investment advisor required to register with the Securities and Exchange Commission.

EXISTING LAW:

1. Establishes that trial by jury is an inviolate right and shall be secured to all. (Cal. Const., art. I, Section 16.)
2. Establishes the California Arbitration Act which provides that agreements to arbitrate shall be valid, irrevocable, and enforceable, except such grounds as exist at law or in equity for the revocation of any contract. (Code of Civil Procedure Section 1280 et seq.)
3. Similarly establishes the Federal Arbitration Act (FAA) which provides that agreements to arbitrate shall be valid, irrevocable, and enforceable, except such grounds as exist at law or in equity for the revocation of any contract. (9 U.S.C. Section 1 et seq.)
4. Provides that on petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that:
5. The right to compel arbitration has been waived by the petitioner.
6. Grounds exist for the revocation of the agreement.
7. 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, as provided. (Code of Civil Procedure Section 1281.2 (a)-(c).)
8. Provides that if the court determines that there are other issues between the petitioner and the respondent which are not subject to arbitration and which are the subject of a pending action or special proceeding between the petitioner and the respondent and that a determination of such issues may make the arbitration unnecessary, the court may delay its order to arbitrate until the determination of such other issues or until such earlier time as the court specifies. (Code of Civil Procedure Section 1281.2 (c).)
9. Provides that a party to a contract may rescind the contract in the following cases:
10. If the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake, or obtained through duress, menace, fraud, or undue influence, exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such party.
11. If the consideration for the obligation of the rescinding party fails, in whole or in part, through the fault of the party as to whom he rescinds.
12. If the consideration for the obligation of the rescinding party becomes entirely void from any cause.
13. If the consideration for the obligation of the rescinding party, before it is rendered to him, fails in a material respect from any cause.
14. If the contract is unlawful for causes which do not appear in its terms or conditions, and the parties are not equally at fault.
15. If the public interest will be prejudiced by permitting the contract to stand. (Civil Code Section 1689.)
16. Establishes the Banking Law. (Financial Code Section 1000 et seq.)
17. Establishes the California Credit Union Law. (Financial Code Section 14000 et seq.)
18. Establishes the Industrial Loan Law, the Industrial Banking Law, or the Thrift and Loan Law. (Financial Code Section 18000 et seq.)
19. Establishes the Corporate Securities Law of 1968. (Corporations Code Section 25000 et seq.)
20. Allows a person to bring against a claimant to establish that the person is a victim of identity theft in connection with the claimant’s claim against that person. (Civil Code Section 1798.93.)
21. Defines a victim of identity theft to mean a person whose personal identifying information was used without authorization by another to obtain credit, goods, services, money, or property, and did not use or possess the credit, goods, services, money, or property obtained by the identity theft, and filed a police report. (Civil Code Section 1798.92 (d).)
22. Defines personal identifying information to mean a person’s name, address, telephone number, driver’s license number, social security number, place of employment, employee identification number, mother’s maiden name, demand deposit account number, savings account number, or credit card number. (Civil Code Section 1798.92 (c).)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: It is widely known that beginning as early as 2005, Wells Fargo Bank imposed on its employees sales quotas to open more client accounts and sell more add-on bank services. (Cowley, At Wells Fargo, Complaints About Fraudulent Accounts Since 2005, N.Y. Times (Oct. 11, 2016).) Under the pressure to meet these quotas, over 3,500 Wells Fargo employees fraudulently opened ghost or sham accounts. (Reckard, Wells Fargo’s Pressure-Cooker Sales Culture Comes at a Cost, L.A. Times (Dec. 21, 2013).) The toxic sales culture at the bank was illustrated by one former employee’s testimony about his manager’s directive on his sales goals: “I don’t care how you do it—but do it, or else you’re not going home. (Ibid.)

Over a span of almost a decade, it is estimated that over two million deposit and credit card accounts were opened without customer authorization or knowledge by Wells Fargo. (Cowley, At Wells Fargo, Complaints About Fraudulent Accounts Since 2005, N.Y. Times (Oct. 11, 2016).) Indeed, many customers didn’t even know about the bank’s tactics until “they were charged unexpected fees, received credit or debit cards in the mail that they did not request, or started hearing from debt collectors about accounts they did not recognize.” (Corkery, Wells Fargo Fined $185 Million for Fraudulently Opening Accounts, N.Y. Times (Sept. 8, 2016).)

But all is not lost. The Consumer Financial Protection Bureau (CFPB)—the federal bureau created by the Dodd-Frank Wall Street Reform and Consumer Protection Act to protect consumers—found that Wells Fargo violated multiple federal laws. The CFPB ordered Wells Fargo to pay $185 million in penalties to several governmental entities, including the City and County of Los Angeles. (Ibid. See also In re Wells Fargo Bank, N.A. (2016) 2016 CFPB 0015.) Additionally, Congress and the Legislature held several hearings on the issue (including a hearing by the Assembly Committee on Banking and Finance last October), reprimanding and criticizing the Bank for its conduct.

While it appears that Wells Fargo has been bruised by its public relations disaster, it appears that it has triumphed in court, successfully guarding against claims made by consumers injured by the Bank:

The bank has sought to kill lawsuits that its customers have filed over the creation of as many as two million sham accounts by moving the cases into private arbitration—a secretive legal process that often favors corporations. Lawyers for the bank’s customers say the legal motions are an attempt to limit the bank’s accountability for the widespread fraud and deny its customers their day in open court. (Corkery & Cowley, Wells Fargo Killing Sham Account Suits by Using Arbitration, N.Y. Times (Dec. 6, 2016).)

Litigation strategy. In individual consumer and class action suits against the bank, Wells Fargo has relied on its arbitration clause to send claims to arbitration. Essentially, Wells Fargo argued that their “arbitration clause included in the legitimate contracts customers signed to open bank accounts also [covered] disputes relating to the false ones set up in their names.” (Ibid.) In other words, Wells Fargo contends that the terms of one legitimate contract can control a wholly separate account—even if that second account was never agreed to by the consumer. While surprising to some, it appears that this strategy has been upheld in the courts. In a civil class action filed against Wells Fargo for its fraudulent tactics, a California federal court granted the Bank’s motion to compel arbitration. The parties in that class action have announced a settlement agreement of $142 million. The proposed settlement still needs to be approved by the court. (Stipulation and Agreement of Class Action Settlement and Release at 20, Jabbari v. Wells Fargo & Company, No. 3:15-cv-02159-VC (N.D. Cal. 2017).)

Wells Fargo Arbitration Clause. When a consumer enters into a contract with Wells Fargo that contains an arbitration clause, it is likely that the terms of the arbitration clause say something like this:

You and Wells Fargo Bank, N.A. (the "Bank") agree that if a Dispute arises between you and the Bank, upon demand by either you or the Bank, the Dispute shall be resolved by the following arbitration process. The foregoing notwithstanding, the Bank shall not initiate an arbitration to collect a consumer debt, but reserves the right to arbitrate all other disputes with its consumer customers. A "Dispute" is any unresolved disagreement between you and the Bank. It includes any disagreement relating in any way to the Card or related services, Accounts, or matters; to your use of any of the Bank's banking locations or facilities; or to any means you may use to access the Bank. It includes claims based on broken promises or contracts, torts, or other wrongful actions. It also includes statutory, common law, and equitable claims. A Dispute also includes any disagreements about the meaning or application of this Arbitration Agreement. This Arbitration Agreement shall survive the payment or closure of your Account. (Wells Fargo, Consumer Account Agreement,https://www08.wellsfargomedia.com/downloads/pdf/online_disclosures/CAA/CAA-EN.pdf (April 24, 2017.) [emphasis added]

This bill appears to be a response to Wells Fargo litigation strategy. This bill seeks to limit financial institutions from being able to assert that an arbitration clause in a legitimate contract also applies to a purported contractual relationship fraudulently created by the financial institution without the consumer’s consent and created by unlawfully using the consumer’s personal identifying information. This bill narrowly applies to motions to compel filed on or after January 1, 2018.

Author’s statement. In support of the bill, the author writes:

It’s been tough to avoid news stories about the Wells Fargo fraud scandal. Starting in 2011, the bank’s employees opened more than 2 million phony bank and credit card accounts without the knowledge or consent of customers across the nation. Customers learned of the scheme only when they started getting socked by fees for those phony accounts or they noticed their credit was inexplicably being affected. But when they sought to hold Wells Fargo accountable, their path to the courthouse was blocked. Arbitration clauses were hidden in the fine print of the original, legitimate contracts they had signed, sometimes years before, to open a bank account. So instead of fighting Wells Fargo in the fairer and public forum of a courthouse, the bank’s customers were forced into secret, binding arbitrations overseen by an arbitrator hired by the bank. Most disturbing of all, Wells Fargo was able to successfully argue that the arbitration clauses hidden in the original, legitimate banking contracts could be used to force disputes over the fictitious accounts into closed-door arbitration. With the fraud cases locked behind closed doors, Wells Fargo kept the scheme hidden from broader public disclosure, allowing it to mushroom.

SB 33 will help prevent such a rampant campaign of deception from ever happening again in California. It is a simple and very direct bill. It covers only the activities of banks and financial institutions like Wells Fargo. It’s not anti-arbitration. It only prohibits arbitrations in cases involving fraud or identity theft. SB 33 will also act as a deterrent against future fraud. Companies will be on notice that if they commit fraud against a customer, they will lose any legal advantage they might have enjoyed in arbitration. Instead, they will have to fight it out in the far more equitable forum of a public courtroom.

Courts and arbitration. Justice Brennan once said that, “courts are the central dispute-setting institutions of our society. They are bound to do equal justice under the law, to rich and poor alike.” It comes as no surprise then that the phrase, “Equal Justice Under Law,” is engraved above the entrance to our nation’s highest court. And so it seems, we put a great deal of faith in our courts—but would we expect any less? We anticipate our courts to apply the law in a fair, neutral, and open manner. We hold judges to high standards, and ask that they avoid even the appearance of impropriety. We count on our judiciary to advance the law, issue orders, and render written opinions. And yet, we acknowledge that our system isn’t perfect and that despite their best efforts, courts sometimes get it wrong. Acknowledging the imperfection of our justice system is undoubtedly one reason why it has safeguards. We remember that decisions of courts are reviewed by appellate courts and indeed, reviewed by our elected branches. In order to facilitate the right to appeal, we provide a record of the proceedings, in criminal matters at least. And so, when our families, friends, and neighbors are injured, wronged, or have a dispute, we rely upon that faith that our courts—the institution we trust upon to promote fairness—will deliver equal justice under the law.

In contrast, arbitration is a form of alternative dispute resolution held outside of court where a third-party (rather than a judge) makes a binding (and rarely appealable) award. Because most arbitration is created by entering into a contract (usually a contract that is adhesive or take-it-or-leave-it), the arbitration agreement will set-forth the procedures of the arbitration proceeding and the claims that the arbitration proceeding will capture. Additionally, arbitration agreement may provide that the award need not be written or justified (unlike in court), and that the entire process be kept in secret (rather than in public view). Arbitrators do not need to be lawyers, nor do they need to be trained in the law. Arbitrators who issue favorable awards to a particular company can be repeatedly-hired by that same company to serve as the arbitration-neutral without ever notifying the public about that award history.

Background on a motion to compel. When a legal dispute arises between two parties involving a contract that contains an arbitration clause, and one of the parties files a lawsuit in state court, the opposing party may file a motion to compel: a procedural motion that, if granted, orders the parties to move the lawsuit to arbitration.

There are many reasons under existing law why a court might deny a motion to compel.

Waiver. Commonly, the court may deny a motion to compel if the right to compel has been waived. Although there is no single test that specifies what conduct constitutes waiver (and indeed, the court considers multiple factors to assess waiver), in many cases, a party waives the right to compel if the moving party has caused unreasonable delay. (Wagner Construction Co. v. Pacific Mechanical Corp. (2007) 41 Cal.4th 19, 30-31.) For example, a party litigating a case up until discovery, and then filing a motion to compel during the case may have waived its right to compel arbitration.

Invalid. The court may also deny a motion to compel because “grounds exist for the revocation of the agreement.” (Section 1281.2 (b).) In other words, an agreement to arbitrate (i.e., the arbitration clause) could be held to be unenforceable on grounds available to revoke or rescind a contract. Stated another way, if there are contract grounds to rescind the arbitration clause, the court may deny a motion to compel. (See Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 973.) Under general California contract principles, a contract may be rescinded if the consent of the rescinding party is procured by fraud or menace. (Civil Code Section 1689.) A contract may also be rescinded “if the public interest will be prejudiced by permitting the contract to stand.” (Ibid.) Accordingly, a court could deny a motion to compel if there is sufficient evidence to show that the arbitration clause was procured by fraud. Moreover, it could be argued that a court could deny a motion to compel if the public would be prejudiced by allowing the arbitration clause to stand.

Unenforceable. An agreement to arbitrate (i.e., the arbitration clause) may be unenforceable if it is unconscionable. In California, the unconscionability doctrine—which requires a procedural and substantive element—ensures that contracts are not “overly harsh, unduly oppressive, so one-sided as to shock the conscience, or unfairly one-sided.” (Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 910-911.) [citations omitted]. Accordingly, the court may deny a motion to compel if it found that the arbitration clause was unconscionable.

Specifically, this bill adds a narrow reason for when a court may deny a motion to compel. This bill provides another ground—albeit a narrow one—for when the court may deny a motion to compel. For instance, this bill only applies to motions to compel filed on or after January 1, 2018 by a financial institution. Additionally, this bill only denies the motion to compel if the financial institution is asserting that a consumer-consented written agreement to arbitrate (i.e., a valid arbitration clause) also covers a purported contractual relationship fraudulently created unlawfully with the consumer’s personal identifying information and without the consumer’s consent.

Background on the Concepcions & federal preemption. In 2002, Vincent and Liza Concepcion entered into a mobile phone contract that had an arbitration clause. (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 336.) The arbitration clause required that all claims be brought in an “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” (Ibid.) When a dispute arose between the Concepcions and AT&T, the Concepcions challenged the arbitration clause, relying on a previous California Supreme Court decision that held that an arbitration clause in an adhesive contract that required the consumer to waive class claims was unconscionable. (Discovery Bank v. Superior Court (2005) 36 Cal. 4th 148, 159.)

Citing Section 2 of the Federal Arbitration (FAA)—which provides that arbitration clauses are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,”—the United States Supreme Court struck down the Discovery Bank rule. The Court held that although an agreement to arbitrate may be invalidated on grounds “generally applicable to contract defenses,” it cannot be invalidated for grounds that only apply to arbitration. (Concepcion, supra, at 339.) Additionally, the Court reaffirmed the principle that a “state law [that] prohibits outright the arbitration of a particular type of claim,” is preempted. (Id. at 340.) The Court also suggested that if a state law got into “interference” with the “fundamental attribute of arbitration” (e.g., lower costs, greater efficiency and speed), those rules would also be preempted. For example, a rule that required arbitration agreements and proceedings to provide judicially-monitored discovery, or to follow the Federal Rules of Evidence would violate the FAA. (Id. at 342.)

Subsequent FAA cases. This year, the Supreme Court reaffirmed its position that the FAA requires courts to place arbitration agreements “on equal footing with all other contracts.” (581 U.S. ___ (2017).) In Kindred Nursing Centers v. Clark, Beverly Wellner and Janice Clark—acting as powers of attorney for their respective family members, Joe Wellner and Olive Clark —signed an arbitration agreement in a contract for nursing home services at Kindred Nursing Centers. When Joe and Olive died, their respective estates sued Kindred Nursing Center in court, alleging substandard care. Kindred Nursing Center moved to dismiss the case—arguing that the arbitration clause governed the dispute. The Kentucky Supreme Court allowed the case to proceed in court, holding that the arbitration agreements were invalid because the power of attorney agreements for Joe Wellner and Olive Clark did not specifically authorize Beverly and Janice to enter into an arbitration agreement. The Supreme Court overruled the Kentucky Supreme Court, finding that Kentucky Supreme Court’s decision violated the FAA. In its decision, the Court stated: A rule selectively finding arbitration contracts invalid because improperly formed fares no better under the Act than a rule selectively refusing to enforce those agreements once properly made. (Ibid.)

Notwithstanding the existing case law on the issue, California may still regulate issues involving arbitration. Based on this line of federal cases, some have argued that anything that interferes with arbitration is automatically preempted by the FAA—however, this argument is mistaken. To be sure, the federal preemption principles are broad. However, states are permitted to set rules that regulate arbitration as long as those rules are consistent with general contract principles. Additionally, states may establish specific arbitration rules that may be adopted in those states. As the Supreme Court has stated, “parties are generally free to structure their arbitration agreements as they see fit…[Where] parties have agreed to abide by state rules of arbitration, enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA.” (Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ. (1989) 489 U.S. 468, 479.) Accordingly, states can enact legislation that affects arbitration without offending the FAA. With that said, any legislation affecting arbitration generally requires an analysis of whether the proposed solution runs afoul of the FAA.

Undoubtedly, the proponents and the opponents of this bill have strong opinions about whether this bill is preempted by the FAA. The author and sponsors of the bill argue that this bill is not preempted because if a financial institution creates fraudulent accounts, those accounts should be construed as a purported contract—and accordingly, must contain an independent and valid arbitration clause in order for legal claims against those fraudulent accounts to be conducted in arbitration.

The opponents—a coalition of business groups, banks, civil defense, and insurance interests led by the California Chamber of Commerce—argue otherwise. Specifically, they write:

On its face, SB 33 prohibits the arbitration of specific claims—i.e., those arising from a “purported contractual relationship” created fraudulently by the “unlawful use of personal identifying information” with a financial institution. As indicated by Kindred Nursing Centers, supra, a state law that seeks to limit arbitration in this manner is preempted by the FAA….SB 33 acknowledges a valid agreement, but basically refuses to enforce the terms of that agreement for certain claims, which the Court has indicated on May 16, 2017, is preempted.

In response, the Consumer Attorneys of California argue the following:

The FAA only requires courts to enforce agreements to arbitrate, and SB 33 merely clarifies the requirements for such entering such agreement. SB 33 is narrowly tailored to address a fraudulent contract, not a valid arbitration agreement. Long standing contract law dating back to the 1800s requires consent from both parties in order to create a valid contract. Contracts entered into based on a company’s fraud instead of a consumer’s consent are fraudulent and therefore unenforceable under California law.

Ambiguous terms? The coalition of opponents also believes this bill has ambiguous terms that will result in costly litigation. They argue:

SB 33 will create further litigation regarding the ambiguous terminology utilized and the uncertainty regarding how courts will interpret such ambiguity. Ambiguity, inconsistency, and confusion, only serves to benefit trial attorneys and their ability to pursue more costly litigation with higher attorney fee provisions, not consumers. [If this bill were to become law], forcing employers impacted by SB 33 to challenge the constitutionality of this [bill] will create further unnecessary litigation. The Kindred Nursing Centers case took approximately eight years to finally be resolved by the Supreme Court. Requiring California business to exhaust financial resources and time in costly litigation to establish that SB 33 is similarly preempted is unnecessary and will only harm these businesses ability to thrive in California.

For example, the opponents argue that since “purported contractual relationship” is undefined, it will create significant litigation over its meaning. Committee staff notes that while purported contractual relationship is not specifically defined in the bill, it is a commonly understood term, referring to a relationship that purports to be contractual in which one party claims that a contract does not exist (e.g., a ghost account).

The opponents also argue that there is confusion about whether a respondent to a motion to compel would mean a “consumer.” In a motion to compel, the party that files the motion is called the petitioner, and the party that opposes the motion is called a respondent. This bill only limits a financial institution—the petitioner—from filing a motion to compel in certain circumstances. This bill does not contemplate what happens when the motion is opposed, and therefore, does not contemplate a respondent—whether the respondent is a consumer or someone else. Presumably, the respondent to a motion to compel would be a consumer in this instance. However, since this bill simply prohibits the motion from occurring, it seems appropriate that a respondent is not included in the language of the bill.

Substantive, dispositive motion? The coalition of opponents argues that this bill would require a court to make several factual determinations (e.g., whether there was a purported contractual relationship, whether it was created fraudulently, and whether there was unlawful use of personal identifying information) before it could grant or deny a financial institution’s motion to compel. The opponents contend that this would turn a motion to compel into a substantive and dispositive motion on the validity of the claims asserted. Committee staff notes that while some motions to compel are straightforward, many motions to compel are substantively litigated based on the grounds mentioned above (e.g., waiver, unconscionable, revocation, rescission, etc.) that require factual findings of the court. To be sure, in those instances, many of the factual findings probably do not also resolve the specific claim at issue. However, it would seem that the factual questions required by this bill are not intended to resolve the specific claim, but are meant to address the question of whether the arbitration clause should apply to a contract procured by fraud.

Existing contracts? The coalition of opponents argues that this bill is not limited to contracts created after January 1, 2018. To be sure, this bill applies to motions filed on or after January 1, 2018. Accordingly, this bill could affect contracts entered into before January 1, 2018. However, it should be noted that the pending Wells Fargo class action may preclude a number of individuals from relying on this bill—should it become law—due to the release of claims provided in the proposed settlement. Accordingly, while this bill could affect those Wells Fargo contracts, it is possible that a substantial percentage of claims would be precluded due to the terms of the class action.

Technical Amendment. The author has agreed to accept the following technical and clarifying amendment in Committee:

On page 2, line 24, delete “seeks” and insert “seeking”

On page 2, line 26, delete “created fraudulently,” and insert “that was fraudulently created”

REGISTERED SUPPORT / OPPOSITION:

Support

Consumer Attorneys of California (co-sponsor)

Consumer Federation of California (co-sponsor)

State Treasurer John Chiang (co-sponsor)

10th AD Democrats

ACCE Action

Black Women Organized for Political Action

Cal Berkeley Democrats

California Advocates for Nursing Home Reform

California Alliance for Retired Americans

California College Democrats

California Commission on Aging

California Conference of Machinists

California Dispute Resolution Council

California Employment Lawyers Association

California Labor Federation

California Low-Income Consumer Coalition

California Professional Firefighters

California Public Interest Research Group

California Teamsters Public Affairs Council

California Reinvestment Coalition

Coalition for Humane Immigrant Rights

Consumer Action

Consumer Federation of America

Consumer Watchdog

Consumers for Auto Reliability and Safety

Consumers Union

Courage Campaign

East Bay Community Law Center

Engineers & Scientists of California, IFPTE Local 20, AFL-CIO

Evolve California

Housing and Economic Rights Advocates

International Longshore and Warehouse Union

Mexican American Bar Association of Los Angeles

National Association of Consumer Advocates

National Consumer Law Center

Law Foundation of Silicon Valley

Our Family Coalition

Public Counsel

Public Law Center

Privacy Rights Clearinghouse

Professional & Technical Engineers, IFPTE Local 21, AFL-CIO

Refund America Project

San Francisco Latino Democratic Club

South Asian Network

South Lake Tahoe Democratic Club

Student Senate for California Community Colleges

UNITE-HERE, AFL-CIO

Utility Workers Union of America

Voices for Progress Education Fund

Wellstone Progressive Democrats of Sacramento

West LA Democratic Club

Opposition

California Chamber of Commerce

American Insurance Association

California Ambulance Association

California Apartment Association

California Bankers Association

California Building Industry Association

California Business Roundtable

California Community Banking Network

California Credit Union League

California Employment Law Council

California Forestry Association

California Land Title Association

California Restaurant Association

California Retailers Association

Camarillo Chamber of Commerce

Civil Justice Association of California

Claremont Chamber of Commerce

Computing Technology Industry Association

Consumer Data Industry Association

Culver City Chamber of Commerce

El Centro Chamber of Commerce

Electronic Transactions Association

Financial Services Institute

First American Corporation

Greater Conejo Valley Chamber of Commerce

Internet Coalition

Investment Company Institute

Long Beach Area Chamber of Commerce

National Federation of Independent Business

Orange County Business Council

Oxnard Chamber of Commerce

Redondo Beach Chamber of Commerce

Santa Maria Valley Chamber of Commerce Visitor & Convention Bureau

Securities Industry and Financial Markets Association

Simi Valley Chamber of Commerce and Visitor Center

South Bay Association of Chambers of Commerce

Southwest California Legislative Council

Analysis Prepared by:

 THIRD READING  

Bill No: SB 33

Author:

Amended: 5/16/17

Vote:

SENATE JUDICIARY COMMITTEE: 5-2, 5/2/17

AYES: Jackson, Hertzberg, Monning, Stern, Wieckowski

NOES: Moorlach, Anderson

SUBJECT:

SOURCE: John Chiang, Treasurer, State of California

Consumer Attorneys of California

Consumer Federation of California

DIGEST: This bill adds an additional determination to the list of exclusions from compelled arbitration. This bill provides arbitration is not compelled when the court determines that a petitioner is a financial institution that seeks to apply a written agreement to arbitrate, contained in a contract consented to by a consumer, to a purported contractual relationship with that consumer created fraudulently by the petitioner without the consumer’s consent and by unlawfully using the consumer’s personal identifying information.

Senate Floor Amendments of 5/16/17 refine the types of relationships that are considered by the bill and narrow the types of financial institutions to which the bill applies.

ANALYSIS:

Existing law:

1. Governs, through the California Arbitration Act (CAA), arbitrations in California, including the enforcement of arbitration agreements, rules for neutral arbitrators, the conduct of arbitration proceedings, and the enforcement of arbitration awards. (Code Civ. Proc. Sec. 1280 et. seq.)
2. Provides, through the Federal Arbitration Act (FAA), that a written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. (9 U.S.C. Sec. 2.)
3. Provides that on petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless the court determines that:

• the right to compel arbitration has been waived by the petitioner;
• grounds exist for the revocation of the agreement; or
• 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. A pending court action or special proceeding includes an action or proceeding initiated by the party refusing to arbitrate after the petition to compel arbitration has been filed, but on or before the date of the hearing on the petition. (Code Civ. Proc. Sec. 1281.2.)

1. Defines “personal identifying information,” for purposes of Title 1.81.3 of Part 4 of Division 3 of the Civil Code, as a person’s name, address, telephone number, driver’s license number, social security number, place of employment, employee identification number, mother’s maiden name, demand deposit account number, savings account number, or credit card number. (Civ. Code Sec. 1798.92.)

This bill:

1. Adds an additional determination to the list of exclusions from compelled arbitration. A court is required to compel arbitration unless it determines that the petitioner is a financial institution that, on or after January 1, 2018, seeks to apply a written agreement to arbitrate, contained in a contract consented to by a consumer, to a purported contractual relationship with that consumer created fraudulently by the petitioner without the consumer’s consent and by unlawfully using the consumer’s personal identifying information, as defined in Section 1798.92 of the Civil Code.
2. Defines “Financial institution” as:
   1. a federally chartered depository institution;
   2. a broker, dealer, or investment advisor required to register with the SEC; or
   3. a person who is licensed or regulated pursuant to Division 1.1 (commencing with Section 1000), Division 5 (commencing with Section 14000), or Division 7 (commencing with Section 18000) of the Financial Code, or Division 1 (commencing with Section 25000) of Title 4 of the Corporations Code.

Background

This bill arises in response to a now infamous scheme carried out by employees of Wells Fargo Bank. Much of the bank growth that was occurring was through banking institutions cross-selling customers on more products and services. As part of this trend, Wells Fargo built an incentive-compensation program but failed to properly monitor or limit the program. These circumstances allowed and encouraged employees to pursue underhanded sales practices. Thousands of bank employees found ways to game the system by secretly signing up existing clients for new services that were never requested.

The Wells Fargo employees misused consumer names and personal information to create new checking and credit card accounts to inflate their sales figures to meet their sales targets and claim higher bonuses without the customers’ knowledge or consent. According to the bank’s own analysis, employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers. Employees funded the deposit accounts by transferring funds from existing accounts. Wells Fargo employees also requested and activated debit cards without consumers’ knowledge or consent, going so far as to create PINs for consumers without telling them. Some employees concocted email addresses that did not belong to their customers and used those new addresses to enroll people in online-banking services without their knowledge or consent. Wells Fargo employees targeted Mexican immigrants who spoke little English, older adults with memory problems, college students opening their first bank accounts, and small-business owners with several lines of credit.

As a result of these illegal deposit and credit card practices, many consumers were hit with annual fees, overdraft-protection charges, finance charges, late fees, and other costs. The Consumer Financial Protection Bureau levied a fine against Wells Fargo of $100 million for this widespread practice and ordered Wells Fargo to refund fees and charges that were paid because of these unauthorized accounts. However, when customers attempted to assert their rights against Wells Fargo in state and federal courts across the country, the bank responded by repeatedly and successfully compelling arbitration. Some media reports indicate that Wells Fargo may have been moving these disputes regarding unauthorized accounts into arbitration for years, which may have kept the overall fraudulent scheme from coming into wider public view sooner.

This bill seeks to prevent this litigation strategy. It creates an exception to the general requirement that a court enforce valid arbitration agreements when such agreements are being applied to purported contractual relationships between the parties that were created fraudulently without the consumers’ consent and by unlawfully using the consumers’ personal identifying information.

Comments

The author writes:

It’s been tough to avoid news stories about the Wells Fargo fraud scandal. Starting in 2011, the bank’s employees opened more than 2 million phony bank and credit card accounts without the knowledge or consent of customers across the nation. Customers learned of the scheme only when they started getting socked by fees for those phony accounts or they noticed their credit was inexplicably being affected. But when they sought to hold Wells Fargo accountable, their path to the courthouse was blocked. Arbitration clauses were hidden in the fine print of the original, legitimate contracts they had signed, sometimes years before, to open a bank account. So instead of fighting Wells Fargo in the fairer and public forum of a courthouse, the bank’s customers were forced into secret, binding arbitrations overseen by an arbitrator hired by the bank. Most disturbing of all, Wells Fargo was able to successfully argue that the arbitration clauses hidden in the original, legitimate banking contracts could be used to force disputes over the fictitious accounts into closed-door arbitration. With the fraud cases locked behind closed doors, Wells Fargo kept the scheme hidden from broader public disclosure, allowing it to mushroom.

SB 33 will help prevent such a rampant campaign of deception from ever happening again in California. It is a simple and very direct bill. It covers only the activities of banks and financial institutions like Wells Fargo. It’s not anti-arbitration. It only prohibits arbitrations in cases involving fraud or identity theft. SB 33 will also act as a deterrent against future fraud. Companies will be on notice that if they commit fraud against a customer, they will lose any legal advantage they might have enjoyed in arbitration. Instead, they will have to fight it out in the far more equitable forum of a public courtroom.

Narrowly tailored measure to address an identified issue.

Despite fraudulently creating millions of accounts in its customers’ names without their consent or knowledge, Wells Fargo was consistently successful in keeping its customers’ claims out of courts. As a general matter, arbitrations provide an alternative method of dispute resolution, outside of the courts, wherein a neutral third party, known as the arbitrator, renders a decision after a hearing to which both parties have had an opportunity to be heard. Under California law, there are two distinguishable types of arbitration: judicial arbitration (also known as court-annexed arbitration, governed under Code of Civil Procedure Sections 1141.10 -1141.31) and private arbitrations (also commonly known as “contractual,” “voluntary,” or “nonjudicial” arbitrations; governed under the California Arbitration Act, Code of Civil Procedure Section 1280 et seq.).

In regards to private arbitration, the increased use of mandatory arbitration clauses in consumer contracts has been highly controversial for a variety of reasons, including alleged issues surrounding concerns of “repeat players,” whereby a repeat defendant, such as a corporate defendant, may, conspicuously or not, receive preferential treatment or rulings from arbitrators who rely on being selected by the corporate defendant to earn a living as an arbitrator. As is generally the custom in the industry, Wells Fargo’s consumer contracts included these sorts of private arbitration agreements that required the parties to arbitrate their disputes.

In connection with the scheme discussed above, when customers sought to bring claims arising from the fraudulent accounts opened in their names, Wells Fargo successfully asserted that the arbitration agreements contained in the customers’ original contracts should be enforced with respect to the claims arising from the fraudulent accounts. Despite widespread condemnation in the media, the litigation tactic was incredibly successful and kept these cases from being litigated publicly and on a class basis.

In order to ensure that consumers are more thoroughly protected against this sort of fraud in the future and that they will have their day in court, this bill makes clear that such arbitration agreements cannot be applied to these types of relationships.

Currently, when a plaintiff brings suit against a defendant based upon claims covered by an arbitration agreement, the defendant may petition the court to compel the plaintiff to arbitrate the controversy. The court is required to order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists. Although there are currently several exceptions, none directly address the circumstances posed by a Wells Fargo-type situation. Under the circumstances of those cases, a valid arbitration agreement, created with the consent of the customer in connection with the initiation of a valid account with a financial institution, exists. The financial institution can then point to this valid and existing agreement between the parties in its petition to compel arbitration, even when the underlying claims arise from an entirely fraudulent relationship between the parties that only came into being through the unlawful use of the consumer’s personal identifying information.

This bill narrowly targets this specific situation with precise language. Pursuant to this bill, a court is not required to compel arbitration even if a petition by a financial institution adequately establishes that an existing, written agreement to arbitrate, contained in a contract consented to by a consumer, exists, if the petitioner is seeking to apply such an agreement to a relationship between the parties fraudulently created by the financial institution, without the consumer’s consent and through the unlawful use of the consumer’s personal identifying information.

Therefore, as written, this exception to the enforcement of arbitration agreements applies only to financial institutions and only when the financial institutions have (1) unlawfully used a customer’s personal information; (2) fraudulently created the relevant relationship with the consumer; and (3) done so without the consumer’s consent. Furthermore, “financial institution” has been defined to include a narrow list of organizations. These include federally chartered depository institutions; a broker, dealer, or investment advisor required to register with the SEC; and certain state-regulated financial entities such as corporations engaging in commercial banking or trust business, credit unions, and industrial loan companies.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 5/16/17)

John Chiang, Treasurer, State of California (co-source)

Consumer Attorneys of California (co-source)

Consumer Federation of California (co-source)

ACCE Action

Bet Tzedek Legal Services

California Advocates for Nursing Home Reform

California Alliance for Retired Americans

California Commission on Aging

California Conference Board of the Amalgamated Transit Union

California Conference of Machinists

California Dispute Resolution Council

California Employment Lawyers Association

California Labor Federation

California Low-Income Consumer Coalition

California Professional Firefighters

California Public Interest Research Group

California Reinvestment Coalition

California Teamsters Public Affairs Council

Coalition for Humane Immigrant Rights

Center for Responsible Lending; Centro Legal de La Raza

Consumer Action

Consumer Federation of America

Consumer Watchdog

Consumers for Auto Reliability and Safety

Consumers Union

Courage Campaign

East Bay Community Law Center

Engineers & Scientists of California, IFPTE Local 20, AFL-CIO

Housing and Economic Rights Advocates

International Longshore and Warehouse Union

The Justice & Diversity Center

Law Foundation of Silicon Valley

Legal Aid Society of San Bernardino

National Association of Consumer Advocates

National Consumer Law Center

Our Family Coalition

Privacy Rights Clearinghouse

Professional & Technical Engineers, IFPTE Local 21, AFL-CIO

Public Counsel

Public Law Center

ReFund America Project

South Asian Network

Riverside Legal Aid

Student Senate for California Community Colleges

Utility Workers Union of America

Voices for Progress Education Fund

Watsonville Law Center

OPPOSITION: (Verified 5/18/17)

American Insurance Association

Association of California Insurance Companies

Association of California Life & Health Insurance Companies

California Ambulance Association

California Apartment Association

California Bankers Association

California Building Industry Association

California Business Property Association

California Business Roundtable

California Chamber of Commerce

California Community Banking Network

California Credit Union League

California Delivery Association

California Employment Law Council

California Forestry Association

California Hospital Association

California Land Title Association

California Restaurant Association

California Retailers Association

Camarillo Chamber of Commerce

Civil Justice Association of California

Claremont Chamber of Commerce

Computing Technology Industry Association

Consumer Data Industry Association

Culver City Chamber of Commerce

El Centro Chamber of Commerce

Electronic Transactions Association

First American Corporation

Greater Conejo Valley Chamber of Commerce

Internet Coalition

Investment Company Institute

Long Beach Area Chamber of Commerce

NAIOP Commercial Real Estate Development Association Inland Empire and SoCal Chapters

National Federation of Independent Business

Orange County Business Council

Oxnard Chamber of Commerce

Redondo Beach Chamber of Commerce

Santa Maria Valley Chamber of Commerce Visitor & Convention Bureau

Securities Industry and Financial Markets Association

Simi Valley Chamber of Commerce and Visitor Center

South Bay Association of Chambers of Commerce

Southwest California Legislative Council

ARGUMENTS IN SUPPORT: Writing in support, California State Treasurer John Chiang states that although his office took action against Wells Fargo for the widespread fraud by suspending all relationships with the bank, the actions did not provide relief for the customers who had already been defrauded. He, along with many of the organizations in support, argue that this bill will rectify this problem by giving customers their day in court when a financial institution commits fraud or identity theft against them.

ARGUMENTS IN OPPOSITION: The California Chamber of Commerce and a coalition of other groups state that the bill is likely preempted under the FAA; is ambiguous in its application; and allows class actions favoring attorneys over consumers. They also argue that the definition of “financial institution” is too broad.

Prepared by:

5/18/17 14:50:39

**** END ****

 THIRD READING  

Bill No: SB 33

Author:

Amended: 5/9/17

Vote:

SENATE JUDICIARY COMMITTEE: 5-2, 5/2/17

AYES: Jackson, Hertzberg, Monning, Stern, Wieckowski

NOES: Moorlach, Anderson

SUBJECT:

SOURCE: John Chiang, Treasurer, State of California

Consumer Attorneys of California

Consumer Federation of California

DIGEST: Upon petition by a party, courts are required to order parties to arbitrate controversies if an agreement to arbitrate the controversy exists unless it determines certain exceptions apply. This bill adds another exception to this list. This bill provides arbitration is not compelled when the court determines that a petitioner is a financial institution that seeks to apply a written agreement to arbitrate, contained in a contract consented to by a consumer, to a relationship with that consumer created fraudulently by the petitioner without the consumer’s consent or by unlawfully using the consumer’s personal identifying information.

ANALYSIS:

Existing law:

1. Governs, through the California Arbitration Act (CAA), arbitrations in California, including the enforcement of arbitration agreements, rules for neutral arbitrators, the conduct of arbitration proceedings, and the enforcement of arbitration awards. (Code Civ. Proc. Sec. 1280 et. seq.)
2. Provides, through the Federal Arbitration Act (FAA), that a written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. (9 U.S.C. Sec. 2.)
3. Provides that on petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless the court determines that:

• the right to compel arbitration has been waived by the petitioner;
• grounds exist for the revocation of the agreement; or
• 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. A pending court action or special proceeding includes an action or proceeding initiated by the party refusing to arbitrate after the petition to compel arbitration has been filed, but on or before the date of the hearing on the petition. (Code Civ. Proc. Sec. 1281.2.)

1. Provides that for purposes of the California Financial Information Privacy Act, “financial institution” means any institution the business of which is engaging in financial activities as described in Section 1843(k) of Title 12 of the United States Code and doing business in this state. An institution that is not significantly engaged in financial activities is not a financial institution. The term “financial institution” does not include any institution that is primarily engaged in providing hardware, software, or interactive services, provided that it does not act as a debt collector, as defined in 15 U.S.C. Section 1692a, or engage in activities for which the institution is required to acquire a charter, license, or registration from a state or federal governmental banking, insurance, or securities agency. The term “financial institution” does not include the Federal Agricultural Mortgage Corporation or any entity chartered and operating under the Farm Credit Act of 1971 (12 U.S.C. Sec. 2001 et seq.), provided that the entity does not sell or transfer nonpublic personal information to an affiliate or a nonaffiliated third party. The term “financial institution” does not include institutions chartered by Congress specifically to engage in a proposed or actual securitization, secondary market sale, including sales of servicing rights, or similar transactions related to a transaction of the consumer, as long as those institutions do not sell or transfer nonpublic personal information to a nonaffiliated third party. The term “financial institution” does not include any provider of professional services, or any wholly owned affiliate thereof, that is prohibited by rules of professional ethics and applicable law from voluntarily disclosing confidential client information without the consent of the client. The term “financial institution” does not include any person licensed as a dealer under Article 1 (commencing with Section 11700) of Chapter 4 of Division 5 of the Vehicle Code that enters into contracts for the installment sale or lease of motor vehicles pursuant to the requirements of Chapter 2B (commencing with Section 2981) or 2D (commencing with Section 2985.7) of Title 14 of Part 4 of Division 3 of the Civil Code and assigns substantially all of those contracts to financial institutions within 30 days. (Fin. Code Sec. 4052.)
2. Defines “personal identifying information,” for purposes of Title 1.81.3 of Part 4 of Division 3 of the Civil Code, as a person’s name, address, telephone number, driver’s license number, social security number, place of employment, employee identification number, mother’s maiden name, demand deposit account number, savings account number, or credit card number. (Civ. Code Sec. 1798.92.)

This bill adds an additional determination to the list of exclusions from compelled arbitration. A court is required to compel arbitration unless it determines that the petitioner is a financial institution, as defined in Section 4052 of the Financial Code, that seeks to apply a written agreement to arbitrate, contained in a contract consented to by a consumer, to a relationship with that consumer created fraudulently by the petitioner without the consumer’s consent and by unlawfully using the consumer’s personal identifying information, as defined in Section 1798.92 of the Civil Code.

Background

This bill arises in response to a now infamous scheme carried out by employees of Wells Fargo Bank. Much of the bank growth that was occurring was through banking institutions cross-selling customers on more products and services. As part of this trend, Wells Fargo built an incentive-compensation program but failed to properly monitor or limit the program. These circumstances allowed and encouraged employees to pursue underhanded sales practices. Thousands of bank employees found ways to game the system by secretly signing up existing clients for new services that were never requested.

The Wells Fargo employees misused consumer names and personal information to create new checking and credit card accounts to inflate their sales figures to meet their sales targets and claim higher bonuses without the customers’ knowledge or consent. According to the bank’s own analysis, employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers. Employees funded the deposit accounts by transferring funds from existing accounts. Wells Fargo employees also requested and activated debit cards without consumers’ knowledge or consent, going so far as to create PINs for consumers without telling them. Some employees concocted email addresses that did not belong to their customers and used those new addresses to enroll people in online-banking services without their knowledge or consent. Wells Fargo employees targeted Mexican immigrants who spoke little English, older adults with memory problems, college students opening their first bank accounts, and small-business owners with several lines of credit.

As a result of these illegal deposit and credit card practices, many consumers were hit with annual fees, overdraft-protection charges, finance charges, late fees, and other costs. The Consumer Financial Protection Bureau levied a fine against Wells Fargo of $100 million for this widespread practice and ordered Wells Fargo to refund fees and charges that were paid because of these unauthorized accounts. However, when customers attempted to assert their rights against Wells Fargo in state and federal courts across the country, the bank responded by repeatedly and successfully compelling arbitration. Some media reports indicate that Wells Fargo may have been moving these disputes regarding unauthorized accounts into arbitration for years, which may have kept the overall fraudulent scheme from coming into wider public view sooner.

This bill seeks to prevent this litigation strategy. It creates an exception to the general requirement that a court enforce valid arbitration agreements when such agreements are being applied to relationships between the parties that were created fraudulently without the consumers’ consent and by unlawfully using the consumers’ personal identifying information.

Comments

The author writes:

It’s been tough to avoid news stories about the Wells Fargo fraud scandal. Starting in 2011, the bank’s employees opened more than 2 million phony bank and credit card accounts without the knowledge or consent of customers across the nation. Customers learned of the scheme only when they started getting socked by fees for those phony accounts or they noticed their credit was inexplicably being affected. But when they sought to hold Wells Fargo accountable, their path to the courthouse was blocked. Arbitration clauses were hidden in the fine print of the original, legitimate contracts they had signed, sometimes years before, to open a bank account. So instead of fighting Wells Fargo in the fairer and public forum of a courthouse, the bank’s customers were forced into secret, binding arbitrations overseen by an arbitrator hired by the bank. Most disturbing of all, Wells Fargo was able to successfully argue that the arbitration clauses hidden in the original, legitimate banking contracts could be used to force disputes over the fictitious accounts into closed-door arbitration. With the fraud cases locked behind closed doors, Wells Fargo kept the scheme hidden from broader public disclosure, allowing it to mushroom.

SB 33 will help prevent such a rampant campaign of deception from ever happening again in California. It is a simple and very direct bill. It covers only the activities of banks and financial institutions like Wells Fargo. It’s not anti-arbitration. It only prohibits arbitrations in cases involving fraud or identity theft. SB 33 will also act as a deterrent against future fraud. Companies will be on notice that if they commit fraud against a customer, they will lose any legal advantage they might have enjoyed in arbitration. Instead, they will have to fight it out in the far more equitable forum of a public courtroom.

Narrowly tailored measure to address an identified issue. Despite fraudulently creating millions of accounts in its customers’ names without their consent or knowledge, Wells Fargo was consistently successful in keeping its customers’ claims out of courts. As a general matter, arbitrations provide an alternative method of dispute resolution, outside of the courts, wherein a neutral third party, known as the arbitrator, renders a decision after a hearing to which both parties have had an opportunity to be heard. Under California law, there are two distinguishable types of arbitration: judicial arbitration (also known as court-annexed arbitration, governed under Code of Civil Procedure Sections 1141.10 -1141.31) and private arbitrations (also commonly known as “contractual,” “voluntary,” or “nonjudicial” arbitrations; governed under the California Arbitration Act, Code of Civil Procedure Section 1280 et seq.).

In regards to private arbitration, the increased use of mandatory arbitration clauses in consumer contracts has been highly controversial for a variety of reasons, including alleged issues surrounding concerns of “repeat players,” whereby a repeat defendant, such as a corporate defendant, may, conspicuously or not, receive preferential treatment or rulings from arbitrators who rely on being selected by the corporate defendant to earn a living as an arbitrator. As is generally the custom in the industry, Wells Fargo’s consumer contracts included these sorts of private arbitration agreements that required the parties to arbitrate their disputes.

In connection with the scheme discussed above, when customers sought to bring claims arising from the fraudulent accounts opened in their names, Wells Fargo successfully asserted that the arbitration agreements contained in the customers’ original contracts should be enforced with respect to the claims arising from the fraudulent accounts. Despite widespread condemnation in the media, the litigation tactic was incredibly successful and kept these cases from being litigated publicly and on a class basis.

In order to ensure that consumers are more thoroughly protected against this sort of fraud in the future and that they will have their day in court, this bill makes clear that such arbitration agreements cannot be applied to these types of relationships.

Currently, when a plaintiff brings suit against a defendant based upon claims covered by an arbitration agreement, the defendant may petition the court to compel the plaintiff to arbitrate the controversy. The court is required to order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists. Although there are currently several exceptions, none directly address the circumstances posed by a Wells Fargo-type situation. Under the circumstances of those cases, a valid arbitration agreement, created with the consent of the customer in connection with the initiation of a valid account with a financial institution, exists. The financial institution can then point to this valid and existing agreement between the parties in its petition to compel arbitration, even when the underlying claims arise from an entirely fraudulent relationship between the parties that only came into being through the unlawful use of the consumer’s personal identifying information.

This bill narrowly targets this specific situation with precise language. Pursuant to this bill, a court is not required to compel arbitration even if a petition by a financial institution adequately establishes that an existing, written agreement to arbitrate, contained in a contract consented to by a consumer, exists, if the petitioner is seeking to apply such an agreement to a relationship between the parties fraudulently created by the financial institution, without the consumer’s consent and through the unlawful use of the consumer’s personal identifying information.

Therefore, as written, this exception to the enforcement of arbitration agreements applies only to financial institutions and only when the financial institutions have (1) unlawfully used a customer’s personal information; (2) fraudulently created the relevant relationship with the consumer; and (3) done so without the consumer’s consent.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 5/11/17)

John Chiang, Treasurer, State of California (co-source)

Consumer Attorneys of California (co-source)

Consumer Federation of California (co-source)

ACCE Action

Bet Tzedek Legal Services

California Advocates for Nursing Home Reform

California Alliance for Retired Americans

California Commission on Aging

California Dispute Resolution Council

California Employment Lawyers Association

California Low-Income Consumer Coalition

California Professional Firefighters

California Public Interest Research Group

California Reinvestment Coalition

Center for Responsible Lending; Centro Legal de La Raza

Consumer Action

Consumer Federation of America

Consumer Watchdog

Consumers for Auto Reliability and Safety

Consumers Union

Courage Campaign

East Bay Community Law Center

Housing and Economic Rights Advocates

The Justice & Diversity Center

Law Foundation of Silicon Valley

Legal Aid Society of San Bernardino

National Association of Consumer Advocates

Our Family Coalition

Privacy Rights Clearinghouse

Public Counsel

Public Law Center

ReFund America Project

South Asian Network

Riverside Legal Aid

Student Senate for California Community Colleges

Voices for Progress Education Fund

Watsonville Law Center

OPPOSITION: (Verified 5/11/17)

American Insurance Association

Association of California Insurance Companies

Association of California Life & Health Insurance Companies

California Apartment Association

California Bankers Association

California Building Industry Association

California Business Roundtable

California Chamber of Commerce

California Community Banking Network

California Credit Union League

California Delivery Association

California Employment Law Council

California Forestry Association

California Hospital Association

California Land Title Association

California Restaurant Association

California Retailers Association

Camarillo Chamber of Commerce

Civil Justice Association of California

Computing Technology Industry Association

Consumer Data Industry Association

Culver City Chamber of Commerce

El Centro Chamber of Commerce

First American Corporation

Greater Conejo Valley Chamber of Commerce

Internet Coalition

Long Beach Area Chamber of Commerce

NAIOP Commercial Real Estate Development Association Inland Empire and SoCal Chapters

National Federation of Independent Business

Orange County Business Council

Oxnard Chamber of Commerce

Personal Insurance Federation of California

Redondo Beach Chamber of Commerce

Santa Maria Valley Chamber of Commerce Visitor & Convention Bureau

Securities Industry and Financial Markets Association

Simi Valley Chamber of Commerce and Visitor Center

South Bay Association of Chambers of Commerce

Southwest California Legislative Council

ARGUMENTS IN SUPPORT: Writing in support, California State Treasurer John Chiang states that although his office took action against Wells Fargo for the widespread fraud by suspending all relationships with the bank, the actions did not provide relief for the customers who had already been defrauded. He, along with many of the organizations in support, argue that this bill will rectify this problem by giving customers their day in court when a financial institution commits fraud or identity theft against them.

ARGUMENTS IN OPPOSITION: The California Chamber of Commerce and a coalition of other groups state that the bill is likely preempted under the FAA; is ambiguous in its application; and allows class actions favoring attorneys over consumers. They also argue that the definition of “financial institution” is too broad.

Prepared by:

5/12/17 11:04:34

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SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2017-2018 Regular Session

Bill No: SB 33 (Author:Dodd)

Version: April 24, 2017

Hearing Date: May 2, 2017

Fiscal: No

Urgency: No

Consultant: CK

SUBJECT

Arbitration agreements

DESCRIPTION

Upon petition by a party, courts are required to order parties to arbitrate controversies if an agreement to arbitrate the controversy exists unless it determines certain exceptions apply. This bill would add another exception to this list. Arbitration would not be compelled when the court determines that a petitioner is a financial institution that seeks to apply a written agreement to arbitrate, contained in a contract consented to by a consumer, to a relationship with that consumer created fraudulently by the petitioner without the consumer’s consent or by unlawfully using the consumer’s personal identifying information.

BACKGROUND

This bill arises in response to a now infamous scheme carried out by employees of Wells Fargo Bank. Much of the bank growth that was occurring was through banking institutions cross-selling customers on more products and services. As part of this trend, Wells Fargo built an incentive-compensation program but failed to properly monitor or limit the program. These circumstances allowed and encouraged employees to pursue underhanded sales practices. Thousands of bank employees found ways to game the system by secretly signing up existing clients for new services that were never requested.

The Wells Fargo employees misused consumer names and personal information to create new checking and credit card accounts to inflate their sales figures to meet their sales targets and claim higher bonuses without the customers’ knowledge or consent. According to the bank’s own analysis, employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers. Employees funded the deposit accounts by transferring funds from existing accounts. Wells Fargo employees also requested and activated debit cards without consumers’ knowledge or consent, going so far as to create PINs for consumers without telling them. Some employees concocted email addresses that did not belong to their customers and used those new addresses to enroll people in online-banking services without their knowledge or consent. Wells Fargo employees targeted Mexican immigrants who spoke little English, older adults with memory problems, college students opening their first bank accounts, and small-business owners with several lines of credit.

As a result of these illegal deposit and credit card practices, many consumers were hit with annual fees, overdraft-protection charges, finance charges, late fees, and other costs. The Consumer Financial Protection Bureau levied a fine against Wells Fargo of $100 million for this widespread practice and ordered Wells Fargo to refund fees and charges that were paid because of these unauthorized accounts. However, when customers attempted to assert their rights against Wells Fargo in state and federal courts across the country, the bank responded by repeatedly and successfully compelling arbitration. Some media reports indicate that Wells Fargo may have been moving these disputes regarding unauthorized accounts into arbitration for years, which may have kept the overall fraudulent scheme from coming into wider public view sooner.

This bill seeks to prevent this litigation strategy. It would create an exception to the general requirement that a court enforce valid arbitration agreements when such agreements are being applied to relationships between the parties that were created fraudulently without the consumers’ consent and by unlawfully using the consumers’ personal identifying information.

(This analysis reflects the author’s amendment to be taken in Committee.)

CHANGES TO EXISTING LAW

Existing law, the California Arbitration Act (CAA), governs arbitrations in California, including the enforcement of arbitration agreements, rules for neutral arbitrators, the conduct of arbitration proceedings, and the enforcement of arbitration awards. (Code Civ. Proc. Sec. 1280 et. seq.)

Existing law, the Federal Arbitration Act (FAA), provides that a written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. (9 U.S.C. Sec. 2.)

Existing law provides that on petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless the court determines that:

• the right to compel arbitration has been waived by the petitioner;
• grounds exist for the revocation of the agreement; or
• 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. A pending court action or special proceeding includes an action or proceeding initiated by the party refusing to arbitrate after the petition to compel arbitration has been filed, but on or before the date of the hearing on the petition.

(Code Civ. Proc. Sec. 1281.2.)

Existing law provides that for purposes of the California Financial Information Privacy Act, “financial institution” means any institution the business of which is engaging in financial activities as described in Section 1843(k) of Title 12 of the United States Code and doing business in this state. An institution that is not significantly engaged in financial activities is not a financial institution. The term “financial institution” does not include any institution that is primarily engaged in providing hardware, software, or interactive services, provided that it does not act as a debt collector, as defined in 15 U.S.C. Section 1692a, or engage in activities for which the institution is required to acquire a charter, license, or registration from a state or federal governmental banking, insurance, or securities agency. The term “financial institution” does not include the Federal Agricultural Mortgage Corporation or any entity chartered and operating under the Farm Credit Act of 1971 (12 U.S.C. Sec. 2001 et seq.), provided that the entity does not sell or transfer nonpublic personal information to an affiliate or a nonaffiliated third party. The term “financial institution” does not include institutions chartered by Congress specifically to engage in a proposed or actual securitization, secondary market sale, including sales of servicing rights, or similar transactions related to a transaction of the consumer, as long as those institutions do not sell or transfer nonpublic personal information to a nonaffiliated third party. The term “financial institution” does not include any provider of professional services, or any wholly owned affiliate thereof, that is prohibited by rules of professional ethics and applicable law from voluntarily disclosing confidential client information without the consent of the client. The term “financial institution” does not include any person licensed as a dealer under Article 1 (commencing with Section 11700) of Chapter 4 of Division 5 of the Vehicle Code that enters into contracts for the installment sale or lease of motor vehicles pursuant to the requirements of Chapter 2B (commencing with Section 2981) or 2D (commencing with Section 2985.7) of Title 14 of Part 4 of Division 3 of the Civil Code and assigns substantially all of those contracts to financial institutions within 30 days. (Fin. Code Sec. 4052.)

Existing law defines “personal identifying information,” for purposes of Title 1.81.3 of Part 4 of Division 3 of the Civil Code, as a person’s name, address, telephone number, driver’s license number, social security number, place of employment, employee identification number, mother’s maiden name, demand deposit account number, savings account number, or credit card number. (Civ. Code Sec. 1798.92.)

This bill would add an additional determination to the list of exclusions from compelled arbitration. A court would be required to compel arbitration unless it determines that the petitioner is a financial institution, as defined in Section 4052 of the Financial Code, that seeks to apply a written agreement to arbitrate, contained in a contract consented to by a consumer, to a relationship with that consumer created fraudulently by the petitioner without the consumer’s consent and by unlawfully using the consumer’s personal identifying information, as defined in Section 1798.92 of the Civil Code.

COMMENT

1. Stated need for the bill

According to the author:

It’s been tough to avoid news stories about the Wells Fargo fraud scandal. Starting in 2011, the bank’s employees opened more than 2 million phony bank and credit card accounts without the knowledge or consent of customers across the nation. Customers learned of the scheme only when they started getting socked by fees for those phony accounts or they noticed their credit was inexplicably being affected. But when they sought to hold Wells Fargo accountable, their path to the courthouse was blocked. Arbitration clauses were hidden in the fine print of the original, legitimate contracts they had signed, sometimes years before, to open a bank account. So instead of fighting Wells Fargo in the fairer and public forum of a courthouse, the bank’s customers were forced into secret, binding arbitrations overseen by an arbitrator hired by the bank. Most disturbing of all, Wells Fargo was able to successfully argue that the arbitration clauses hidden in the original, legitimate banking contracts could be used to force disputes over the fictitious accounts into closed-door arbitration. With the fraud cases locked behind closed doors, Wells Fargo kept the scheme hidden from broader public disclosure, allowing it to mushroom.

SB 33 will help prevent such a rampant campaign of deception from ever happening again in California. It is a simple and very direct bill. It covers only the activities of banks and financial institutions like Wells Fargo. It’s not anti-arbitration. It only prohibits arbitrations in cases involving fraud or identity theft. SB 33 will also act as a deterrent against future fraud. Companies will be on notice that if they commit fraud against a customer, they will lose any legal advantage they might have enjoyed in arbitration. Instead, they will have to fight it out in the far more equitable forum of a public courtroom.

2. Narrowly tailored measure to address an identified issue

Despite fraudulently creating millions of accounts in its customers’ names without their consent or knowledge, Wells Fargo was consistently successful in keeping its customers’ claims out of courts. As a general matter, arbitrations provide an alternative method of dispute resolution, outside of the courts, wherein a neutral third party, known as the arbitrator, renders a decision after a hearing to which both parties have had an opportunity to be heard. Under California law, there are two distinguishable types of arbitration: judicial arbitration (also known as court-annexed arbitration, governed under Code of Civil Procedure Sections 1141.10 -1141.31) and private arbitrations (also commonly known as “contractual,” “voluntary,” or “nonjudicial” arbitrations; governed under the California Arbitration Act, Code of Civil Procedure Section 1280 et seq.).

In regards to private arbitration, the increased use of mandatory arbitration clauses in consumer contracts has been highly controversial for a variety of reasons, including alleged issues surrounding concerns of “repeat players,” whereby a repeat defendant, such as a corporate defendant, may, conspicuously or not, receive preferential treatment or rulings from arbitrators who rely on being selected by the corporate defendant to earn a living as an arbitrator. As is generally the custom in the industry, Wells Fargo’s consumer contracts included these sorts of private arbitration agreements that required the parties to arbitrate their disputes.

In connection with the scheme discussed above, when customers sought to bring claims arising from the fraudulent accounts opened in their names, Wells Fargo successfully asserted that the arbitration agreements contained in the customers’ original contracts should be enforced with respect to the claims arising from the fraudulent accounts. Despite widespread condemnation in the media, the litigation tactic was incredibly successful and kept these cases from being litigated publicly and on a class basis.

In order to ensure that consumers are more thoroughly protected against this sort of fraud in the future and that they will have their day in court, this bill makes clear that such arbitration agreements cannot be applied to these types of relationships.

Currently, when a plaintiff brings suit against a defendant based upon claims covered by an arbitration agreement, the defendant may petition the court to compel the plaintiff to arbitrate the controversy. The court is required to order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists. Although there are currently several exceptions, none directly address the circumstances posed by a Wells Fargo-type situation. Under the circumstances of those cases, a valid arbitration agreement, created with the consent of the customer in connection with the initiation of a valid account with a financial institution, exists. The financial institution can then point to this valid and existing agreement between the parties in its petition to compel arbitration, even when the underlying claims arise from an entirely fraudulent relationship between the parties that only came into being through the unlawful use of the consumer’s personal identifying information.

This bill narrowly targets this specific situation with precise language. Pursuant to this bill, a court would not be required to compel arbitration even if a petition by a financial institution adequately establishes that an existing, written agreement to arbitrate, contained in a contract consented to by a consumer, exists, if the petitioner is seeking to apply such an agreement to a relationship between the parties fraudulently created by the financial institution, without the consumer’s consent and through the unlawful use of the consumer’s personal identifying information.

Therefore, as written, this exception to the enforcement of arbitration agreements applies only to financial institutions and only when the financial institutions have (1) unlawfully used a customer’s personal information; (2) fraudulently created the relevant relationship with the consumer; and (3) done so without the consumer’s consent.

Writing in support, California State Treasurer John Chiang states that although his office took action against Wells Fargo for the widespread fraud by suspending all relationships with the bank, the actions did not provide relief for the customers who had already been defrauded. He, along with many of the organizations in support, argue that this bill will rectify this problem by giving customers their day in court when a financial institution commits fraud or identity theft against them.

3. Opposition

Many of the letters in opposition address previous versions of this bill. In them, arguments are made about the broad sweep of earlier iterations of this bill. However, the current version is extremely narrow and simply declares that valid arbitration agreements cannot be applied to relationships created, not with the consent of consumers or in lawful connection with existing relationships, but through fraud and the unlawful use of a consumer’s information.

Similarly, many of these letters highlight potential preemption issues. However, the bill as written is much narrower in its scope and is likely not vulnerable to a preemption challenge. The Federal Arbitration Act preempts state laws prohibiting the arbitration of specific types of claims or that stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. This bill does not interfere with the execution and application of valid arbitration agreements consented to by the parties. It simply makes clear that such agreements cannot be transposed to fraudulent relationships created through the improper and unlawful use of one party’s personal identifying information.

As pointed out by the California Chamber of Commerce in opposition, “[g]enerally, arbitration provisions in a contract do not identify a list of claims subject to arbitration, but rather govern any dispute arising out of the contractual relationship.” This bill would not interfere with the application of arbitration agreements to the contractual relationships they govern, which is what would otherwise trigger preemption analysis. Rather, this bill would make clear that valid arbitration agreements cannot be coopted to apply to relationships that are not based on consent or contract, but fraud.

4. Author’s Amendment

The following amendment was agreed to by the author. It narrows the circumstances under which the new provision of this bill would apply. The exception created by this bill would now only apply if the relevant relationship was created fraudulently by the petitioner financial institution without the consumer’s consent and by unlawfully using the consumer’s personal identifying information.

Author’s Amendment:

On page 3, line 16, strike “or” and insert “and”

Support: ACCE Action; Bet Tzedek Legal Services; California Advocates for Nursing Home Reform; California Alliance for Retired Americans; California Commission on Aging; California Employment Lawyers Association; California Low-Income Consumer Coalition; California Professional Firefighters; California Public Interest Research Group; California Reinvestment Coalition; Center for Responsible Lending; Centro Legal de La Raza; Consumer Action; Consumer Federation of America; Consumer Watchdog; Consumers for Auto Reliability and Safety; Consumers Union; Courage Campaign; East Bay Community Law Center; Housing and Economic Rights Advocates; The Justice & Diversity Center; Law Foundation of Silicon Valley; Legal Aid Society of San Bernardino; National Association of Consumer Advocates; Our Family Coalition; Privacy Rights Clearinghouse; Public Counsel; Public Law Center; ReFund America Project; South Asian Network; Riverside Legal Aid; Student Senate for California Community Colleges; Voices for Progress Education Fund; Watsonville Law Center

Opposition: American Insurance Association; Association of California Insurance Companies; Association of California Life & Health Insurance Companies; California Apartment Association; California Bankers Association; California Building Industry Association; California Business Roundtable; California Community Banking Network; California Credit Union League; California Employment Law Council; California Forestry Association; California Land Title Association; California Restaurant Association; California Retailers Association; California Chamber of Commerce; California Delivery Association; California Dispute Resolution Council (oppose unless amended); California Hospital Association (oppose unless amended); Camarillo Chamber of Commerce; Civil Justice Association of California; Computing Technology Industry Association; Consumer Data Industry Association; Culver City Chamber of Commerce; El Centro Chamber of Commerce; First American Corporation; Greater Conejo Valley Chamber of Commerce; Internet Coalition; Long Beach Area Chamber of Commerce; NAIOP Commercial Real Estate Development Association Inland Empire and SoCal Chapters; National Federation of Independent Business; Orange County Business Council; Oxnard Chamber of Commerce; Personal Insurance Federation of California (oppose unless amended); Redondo Beach Chamber of Commerce; Santa Maria Valley Chamber of Commerce Visitor & Convention Bureau; Securities Industry and Financial Markets Association; Simi Valley Chamber of Commerce and Visitor Center; South Bay Association of Chambers of Commerce; Southwest California Legislative Council

HISTORY

Source: John Chiang, Treasurer, State of California; Consumer Attorneys of California; Consumer Federation of California

Related Pending Legislation: SB 76 (Nielsen, 2017) would give managerial, confidential, supervisory, and other excluded state employees the option, after exhausting normal grievance procedures, of requesting binding arbitration as a method for resolving disputes with their State employers. This bill is currently in the Senate Appropriations Committee.

Prior Legislation:

SB 1078 (Jackson, 2016) would have added specified rules relating to marketing activities of private arbitration companies and relating to the ability of arbitrators to enter into future arrangements with one party to a pending arbitration. This bill would have also allowed parties to recoup fees where an award has been vacated or the arbitrator has been removed during an arbitration for violations of ethical rules or disclosure requirements. This bill was vetoed by the Governor.

SB 1065 (Monning, Chapter 628, Statutes of 2016) provides for an expedited trial date of an appeal when a motion to compel arbitration has been denied, if the case involves a claim under the Elder Abuse and Dependent Adult Civil Protection Act and the senior has received a trial preference under existing law due to age and health.

SB 1241 (Wieckowski, Chapter 632, Statutes 2016) prohibits an employer from requiring an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would require the employee to adjudicate outside of California a claim arising in California or deprive the employee of the substantive protection of California law with respect to a controversy arising in California, excepting a contract with an employee who was represented by legal counsel, as specified.

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