By Eden E. Anderson, Rebecca S. Bjork, and Gerald L. Maatman, Jr.,
Duane Morris Takeaways: On May 22, 2024, the California Court of Appeal held in Hernandez v. Sohnen Enterprises, Inc., 2024 WL 2313710 (Cal. App. May 22, 2024), that the Federal Arbitration Act (“FAA”) preempts the California Arbitration Act’s provisions that impose forfeiture of the right to arbitration for late payment of arbitration fees. Although employers should continue to closely monitor and fully adhere to arbitration fee payment deadlines, the Hernandez decision recognizes that mistakes can occur and should not result in the overly harsh penalty of forfeiture of the arbitral forum. The decision creates a split of authority within the California Courts of Appeal that may ultimately need to be resolved by the California Supreme Court.
Case Background
After Hernandez initially filed various claims against her employer in court, the parties stipulated to move the claims into arbitration and to stay the court case. The applicable arbitration agreement provided that it was governed by the FAA and that the Federal Rules of Civil Procedure (“FRCP”) would apply in arbitration. After Hernandez’s demand was filed in arbitration, JAMS requested payment from the employer of its share of the filing fees. The employer paid those fees one week past the 30-day statutory deadline of Section 1281.97 of the California Code of Civil Procedure (“Section 1281.97”). Hernandez then filed a motion to withdraw from arbitration and to lift the stay of the court case.
The trial court granted the motion. It concluded that the employer’s late payment of arbitration fees was a material breach of the arbitration agreement. The court also imposed monetary sanctions against the employer. The employer appealed on the basis that the arbitration agreement was governed by the FAA and that the FAA preempted Section 1281.97.
The Court Of Appeal’s Decision
The Court of Appeal reversed. It held that, because the parties agreed that the FAA and FRCP would apply to the arbitration agreement and in arbitration, the procedures of the California Arbitration Act, including Section 1281.97’s 30-day arbitration fee payment deadline, did not apply. Additionally, the Court of Appeal held that, even if Section 1281.97 applied, it was preempted by the FAA.
Under the FAA and its “equal treatment” principle, arbitration agreements must be treated the same as any other contract and can only be invalidated based on generally applicable contract defenses. The Court of Appeal held that Section 1281.97 violated this equal treatment principle because it mandates a finding of material breach (and resulting waiver of the right to arbitration for late payment of arbitration fees) that would not apply generally to all contracts. The Court of Appeal noted that, ordinarily, a party to a contract can argue substantial compliance, but Section 1281.97 precludes such an argument because it mandates strict adherence to fee payment deadlines. Additionally, the Court of Appeal found that Section 1281.97 frustrates the FAA’s objective of cheaper, more efficient resolution of disputes by increasing the overall cost of litigation and wasting resources already invested in arbitration.
Implications Of The Decision
The Hernandez decision marks the first time the California Court of Appeal has held that Section 1281.97 is preempted by the FAA. The decision creates a split in authority amongst the California Courts of Appeal. Other appellate courts in California have concluded that Section 1281.97 promotes the goals of the FAA because, in requiring prompt payment of arbitration fees, arbitrations can proceed without delay. Employers must continue to closely monitor arbitration fee payment deadlines to ensure timely payment. However, if a mistake happens, the Hernandez case may, if followed by trial courts, provide relief so long as the applicable arbitration agreement makes clear that the FAA and federal law, and not the California Arbitration Act or California law, govern.