The California Supreme Court (“Supreme Court”) granted review of Hohenshelt v. Superior Court (2024) 99 Cal.App.5th 1319, which held the defendant’s payment of arbitration fees after thirty (30) days from issuance of the invoice entitled the plaintiff to withdraw from arbitration. The Supreme Court will decide whether the state law that permits waiver of arbitration when fees are paid after thirty (30) days is pre-empted by the Federal Arbitration Act (“FAA”).
In 2020, the California legislature amended Code of the Code of Civil Procedure section 1281.97 (“Section 1281.97”) to address companies’ failures to timely pay arbitration fees as required by statute and/or the terms of applicable arbitration agreements.
Under Section 1281.97, when a demand for arbitration is made in a consumer or employment arbitration, arbitration providers such as JAMS or AAA are required to provide the parties with an invoice for any fees and costs before the arbitration can proceed. If the party responsible for paying the fees (typically the company or employer) fails to pay the fees within 30 days after the invoice is issued, the company or employer is deemed to have “materially breached” the arbitration agreement such that the matter can be returned to court.
After enactment of the amendment, in cases where arbitration fees went unpaid as of the 31st day, multiple court decisions allowed claimants to withdraw their claims from arbitration and return to court. Thus, at least five state courts of appeal panels have upheld the requirements of Section 1281.97 since its amendment, finding no conflict with the FAA. Other panels disagreeing with the Hernandez case include at least two that are within the Second Appellate Division. (See De Leon v. Juanita’s Foods (2022) 85 Cal.App.5th 740 [decided by the Second Appellate District, Division Three]; Hohenshelt [decided by the Second Appellate District, Division Eight.].)
In May 2024, the Second Appellate District, Division Five, of the Court of Appeal bucked the trend denying withdrawal of claims from arbitration in Hernandez v. Sohnen Enterprises, Inc. Hernandez found that the terms of the arbitration agreement at issue specified that the Federal Arbitration Act (“FAA”) governed the agreement, which pre-empted application of California’s 30-day invoice payment requirement. Justice Lamar Baker dissented from the majority opinion, correctly predicting that “[t]he majority’s opinion rather obviously invites a grant of review from our Supreme Court.”
While the Hernandez decision, and review by the Supreme Court is good news for employers, there may be a long wait to find out whether Section 1281 is definitively pre-empted by the FAA. And, since the issue involves federal law, it is possible the United States Supreme Court will weigh in on the matter in the future.
SV Employment Law Firm PC has deep litigation experience regarding arbitration agreements and the arbitration process. If you have any questions, please feel free to contact us.