Governor Brown signed SB 1241 by Senator Bob Wieckowski (D-Fremont) which limits employment contract restrictions on choice of law and forum.

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.

On March 1, 2016, the Senate Judiciary Committee held an informational hearing on the topic of private or contractual arbitration agreements. In that hearing, many issues facing consumers and employees who are subject to arbitration clauses contained in standardized, take-it-or-leave-it, or “adhesive,” contracts were brought to light.

A package of arbitration bills, of which this bill is one, arose out of the hearing, seeking to address various fairness issues surrounding the rules that govern the conduct and operation of arbitrators and arbitrations in this state.

Of particular relevance to this bill are issues of fairness surrounding choice of law and choice of forum clauses as a condition of non-negotiable consumer and employment contracts, and, specifically, the ability of a seller or employer to require a California consumer or employee to litigate or arbitrate their claims arising out of California in another state, or pursuant to another state’s laws.

Generally speaking, California law does not currently prohibit companies or employers from requiring consumers or employees to agree to a non-California forum or to apply non-California law to resolve their disputes. As a matter of case law, such clauses are valid so long as the California consumer or employee “will not find their substantial legal rights significantly impaired by their enforcement.” (America Online, Inc. v. The Superior Court of Alameda County (2001) 90 Cal.App.4th 1, 21, 23.)

This new law seeks to ensure that California consumers and employees cannot be forced to litigate or arbitrate their California-based claims outside of California, under out-of-state laws, as a condition of a consumer or employment contract.

This new law applies to contracts entered into, modified, or extended on or after January 1, 2017. It 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.

The law also makes any provision of a contract that violates these prohibitions voidable, upon request of the employee, and would require a dispute over a voided provision to be adjudicated in California under California law. The law excepts from these provisions a contract with an employee who was individually represented by legal counsel. These provisions become newly added labor code section 925 on January 1.

SB 1201 may have some effect on the adjudication of workers’ compensation claims. Arbitration clauses and choice of law rules have been written into NFL player contracts, and have been used to defend workers’ compensation claims by these professional athletes. For example, Bruce Matthews played football in the National Football League from 1983 to 2002. On August 5, 2010, an arbitrator ruled that Bruce Matthews could pursue a workers’ compensation claim in California but that the claim must proceed under Tennessee law, if at all. A federal judge in the United States District Court, Southern District of California upheld the arbitrator in the case of National Football League Players’ Association v the NFL.

It is likely that this new law will be tested against the strong federal policy favoring such agreements.