Calif. Appellate Court Holds That FAA Can Preempt Arbitration Fee Payment Requirements of CCP 1281.97

May 24, 2024 Advisory

California Code of Procedure (CCP) 1281.97 et al. requires employers in employment arbitration matters to timely pay arbitration fees (within 30 days of the payment deadline) or face potential withdrawal from arbitration by employees. The purpose of the statutes is to prevent employers from compelling claims to arbitration and then strategically withhold payment of arbitration fees. Cases from both federal and state courts have held that the Federal Arbitration Act (FAA) does not preempt the payment requirements of the CCP § 1281.97.

On May 22, 2024, the 2nd District Court of Appeal issued a decision in Hernandez v. Sohnen Enterprise, Inc., holding that where the arbitration agreement expressly identifies the FAA and does not mention the California Arbitration Act (CAA), the FAA preempts the CAA, including CCP § 1281.97, reversing the trial court. In Hernandez, the employer failed to pay arbitration costs within the 30 days of the due date. The employee filed a motion to withdraw from arbitration and litigate in state court pursuant to CCP, section 1281.97. The trial court found the employer’s late payment was a breach of the arbitration agreement and granted the motion, which was reversed on appeal.   

CCP 1281.97 became a trap for the unwary. If the employer inadvertently failed to timely pay the arbitration invoice within 30 days, the arbitration could be dismissed based on simply missing the payment deadline. Now, the Hernandez decision places employers in a better position to remain in arbitration so long as the arbitration agreement is expressly governed by the FAA. It is not, however, a guarantee since there are also decisions from other federal and California state courts ruling that the FAA does not preempt the CAA with respect to paying arbitration fees.

The Hernandez decision underscores the importance of employers to specifically identify that the FAA governs arbitration agreements. Employers should also remain vigilant about payment deadlines given the remaining uncertainty as to whether a late payment could affect the employer’s right to arbitration.

If you have questions regarding your company’s arbitration policy, please reach out to your regular Armstrong Teasdale lawyer or one of the listed authors.

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