Why is California So Behind in International Arbitration and Is That About to Change?

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Author: Madison Grant

United States

In the world of international arbitration, it is clear – California is not among the most frequently or widely used seats of arbitration. This reality is in many ways mind boggling. California has a well-developed, stabile, and reliable legal structure conducive to arbitration. California also has a booming economy – the sixth largest in the world if counted on its own, apart from the United States.[1] These factors would normally indicate a welcoming location for a seat of arbitration. So why is California falling so far behind popular seats like New York, London, Hong Kong, Paris, Shanghai, Munich and even Florida?

California’s disfavored status as a seat of international arbitration can certainly be traced to a number of different factors, not least of which is the 1998 California Supreme Court case Birbrower v. Superior Court of Santa Clara County.[2] Birbrower centers around a fee dispute, ultimately leading the California Supreme Court to hold that lawyers not licensed to practice law in Calfornia are in violation of California Business and Professions Code Section 6125 when they represent clients in an arbitration. Section 6125 states “No person shall practice law in California unless the person is an active member of the State Bar.”[3] Although the effect on out-of-state attorneys diminished after the Bar established a pro hac vice-like process for representations in arbitrations, foreign lawyers remained barred from participation.[4] Given other U.S. states like New York and Florida do not have these strong limitations, and so many international cities are especially inviting to foreign attorneys, California’s strict rules severely inhibit its growth as an arbitral hub.

But this longstanding resistance to foreign lawyers participating in arbitrations is on the cusp of change. A 2017 proposal in the California Senate (recently revised in January) would reverse the Birbrower rule and welcome out-of-state and international parties to arbitrate in California without obtaining in-state representation.[5] If passed in CA’s Assembly, Senate Bill 766 will usher in a new era for California, and coupled with the state’s huge foreign-facing economy, could result in an extreme growth in arbitrations involving parties from other states and from abroad. Some cities and states with large arbitral centers reportedly bring in over a billion dollars in arbitration-related legal fees annually, evidencing the enormous economic potential benefits to California looming on the horizon.[6] California practitioners are closely watching this process in anticipation of the changes it will bring – JAMS in conjunction with USC law school will be hosting its third annual symposium on the Bill next month – but the question remains: what effect will this bill have on the United States’ primary arbitral hubs, and how will it alter the balance of arbitral centers worldwide?

[1] Best States for Business: California, Forbes, https://www.forbes.com/places/ca/ (last visited Feb. 22, 2018).

[2] Birbrower v. Superior Court of Santa Clara County, 949 P.2d 1 (Cal. 1998).

[3] Cal. Bus. & Prof. Code § 6125 (West 2018).

[4] Richard Chernick & Howard B. Miller, Open CA for Int’l Arbitration Business, Daily Journal (L.A.), Feb. 9, 2018, at 1.

[5] SB-766 International Commercial Arbitration: Representation, Cal. Legislative Info. (Jan. 11, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB766.

[6] Chernick & Howard, supra note 4, at 2.