New California Law Presents Yet Another Threat to Out-of-State Businesses

July 22, 2016

Consider for a moment that you are a business headquartered in Texas who is large enough to have operations in various U.S. states, including California.  You should know about California Senate Bill 1241 pending currently in the state legislature.

SB 1241 would do two things: (1) automatically apply California law to employment and consumer contract disputes, and (2) force out-of-state companies to defend such disputes in a California state or federal court.  SB 1241 will deprive out-of-state businesses of the ability to include in their consumer and employment contracts the state in which arbitrations and lawsuits would take place and what state’s law would apply.

SB 1241 has passed all committees and is currently on the Assembly floor for a third reading.  The Legislature returns from summer recess on August 1, 2016, at which time the Assembly may pass the bill and send it to Governor Jerry Brown for consideration.  The governor has not publicly taken a position on the bill yet.

SB 1241’s stated goal is to keep consumers and employees from being deprived of the protection of California law or their local courts in disputes arising in California.  SB 1241 would add language to the Consumer Contract Awareness Act of 1990 and a new addition to the Labor Code.

SB 1241’s current version would prohibit all companies from requiring consumers or employees to agree to provisions choosing non-California law or a venue outside California for claims arising within California, whether in litigation or arbitration.  The proposed law would apply to consumer or employment contracts entered into after January 1, 2017 and those contracts entered into before that date but still effective after January 1 through renewal or modification.

SB 1241 would make offending contracts voidable at the mere request of the consumer or employee.  Further, SB 1241 would empower a court to award reasonable attorney’s fees to the consumer or employee who is enforcing his or her rights under the new law.  Other remedies would also be available, such as injunctions.

The bill does state, however, that these new rules would not apply to a contract with a party who is individually represented by an attorney in negotiating the agreement if it designates an out-of-state choice of law and/or venue.

SB 1241 will result in companies that sell products or services in California, or allow Californians to purchase products or services from them online, or hire employees in California, being divested of the ability to designate another state’s law or venue, such as the state where the company is based.  This is a significant departure from current law and this author is not aware of any other state that has a similar law on the books.  If SB 1241 becomes law, companies will be pulled into a California court of their consumer’s or employee’s choosing, with California’s not so business-friendly laws applying.

If enacted, claims available to consumer and employee plaintiffs will also likely be expanded under SB 1241 — SB 1241 will usher in more lawsuits against businesses in California.  Plaintiffs’ attorneys will surely assert that including a non-California choice of law or venue provision in an agreement (whether intentionally or inadvertently) gives rise to claims under the California Private Attorneys General Act (PAGA), and common and unfair competition law.  PAGA claims, especially in the employment context, have steadily been on the rise in California for years.

SB 1241 is a response by a state legislature continuing to struggle with how to respond to California state and federal courts who have routinely upheld the enforceability of arbitration provisions in consumer and employment contracts regardless of their choice of law or venue selection provisions.

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