California Legislature approves arbitration measure spurred by the Wells Fargo scandal

The California Legislature has approved a bill aimed at stopping banks from using arbitration clauses to shield themselves from lawsuits over sham accounts — a direct response to the Wells Fargo scandal.

Senate Bill 33 passed the state Assembly on Tuesday and was approved by the Senate on Wednesday. It now goes to Gov. Jerry Brown’s desk.

If the bill becomes law, financial institutions may challenge it, arguing it stands in opposition to a federal law that favors arbitration and has been used to prevent states from weakening or disregarding arbitration agreements.

Authored by Sen. Bill Dodd (D-Napa) and sponsored by State Treasurer John Chiang, the legislation was designed to block a legal tactic Wells Fargo successfully used to keep disputes over unauthorized accounts out of public court proceedings.

“The idea that consumers can be blocked from our public courts when their bank commits fraud and identity theft against them is simply un-American,” Dodd said in a statement Wednesday.

At Wells Fargo, like at most big banks, when customers open accounts they sign contracts that contain an arbitration clause — a provision requiring disputes to be handled in private arbitration, not in court.

Over the past few years, both before and after the San Francisco institution acknowledged in September 2016 of creating millions of potentially unauthorized accounts, customers tried to sue the bank over the practice. However, state and federal courts tossed out those cases after Wells Fargo argued its arbitration agreement still applied.

Judges agreed with the bank’s argument that the arbitration clauses in customers’ contracts for legitimate accounts applied to all disputes with the bank, including those over unauthorized accounts.

Even so, amid a public outcry, Wells Fargo agreed to settle several class-action cases over the matter for $142 million this year.

Dodd’s bill would prevent California courts from enforcing arbitration clauses if consumers are suing banks or credit unions over accounts that were opened fraudulently.

The California Chamber of Commerce, California Bankers Assn. and other business groups opposed the bill, arguing that if it became law it would likely lead to years of costly litigation and ultimately be invalidated by federal courts.

Over the last few decades, the U.S. Supreme Court has issued opinions in several arbitration-related cases, generally saying states cannot make rules that disfavor arbitration and that state courts must honor arbitration agreements.

Alan Kaplinsky, a Philadelphia attorney who pioneered the use of arbitration clauses, told The Times this spring that if the bill becomes law, he believes the Supreme Court would eventually overturn it.

“It clearly won’t stand up,” he said. “Really, there’s no doubt at all that the state law would be preempted.”

james.koren@latimes.com

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