Employers may be able to breathe a sigh of relief as a California Court of Appeal concluded that the Federal Arbitration Act (“FAA”) preempts state law that allowed employees to wriggle out of arbitration and win thousands of dollars of attorneys’ fees if the employer did not promptly pay the ADR provider.  

In 2020, Code of Civil Procedure section 1281.97 set strict penalties for untimely payment of arbitration fees in employment and consumer arbitration. 1281.97 determined that the employer materially breached the arbitration agreement and waived the right to arbitration if the employer had not paid an ADR invoice within 30 days after the invoice issued. Since that time, Courts have held that slightly late payments or payments delayed due to no fault of the employer empower employees to bring a motion to terminate the arbitration and win attorneys’ fees and costs for the time that the case was in arbitration. Fees and costs can amount to tens of thousands of dollars.

1282.97 Order Compelling Withdrawal from Arbitration Is Immediately Appealable

An important preliminary issue that the majority in Hernandez v. Sohnen addressed favorably for employers was whether an employer has the right to an immediate appeal of a trial court’s order compelling the withdrawal from arbitration under 1281.97 as there is no express statutory right to appeal such an order. In other words, many court orders may be wrong and have appellate issues, but those orders are not ripe to be considered directly by a court of appeal until after a trial when the case is completely adjudicated. Denial of a petition to compel arbitration has long been recognized as an immediately appealable order and Hernandez, after a lengthy analysis, concluded that an order granting a 1281.97 motion was the functional equivalent of denying a motion to compel arbitration and was, therefore, immediately appealable.

Parties Agreed to Use FAA and Federal Law So Trial Court Should Not Have Followed 1281.97

The Court observed that arbitration agreements incorporating the California Arbitration Act and rules will not be preempted by the FAA. However, because the arbitration agreement at issue stated “this agreement is governed by the FAA” and the parties stipulated to apply the Federal Rules of Civil Procedure, the Court of Appeal concluded that the parties did not agree to use California law and that the trial court erred by applying 1281.97.  

FAA Preempts 1281.97

The majority held, in the alternative, that 1281.97 is preempted by the FAA and violates the “equal-treatment principle” by mandating that a material breach occurs when a payment is late and waives the right to arbitration. The opinion held “unless the parties have expressly selected California’s arbitration provisions to apply to their agreement, the FAA preempts the portion of 1281.97 that dictates findings of material breach and waiver as a matter of law.”  

What Next?

There is a strong dissent in the Hernandez case that not only makes the argument that a direct appeal should not occur following a 1281.97 decision to stop the arbitration, but the dissent highlights prior California cases that concluded that 1281.97 is not preempted by the FAA and implores the California Supreme Court to take the case up.  

Lessons For California Employers

California employers should promptly examine their arbitration agreements and ensure that the agreements are made under the FAA and the Federal Rules of Civil Procedure.