[co-author: Emily Young]

Some cases have limited California’s statutory right to withdraw from arbitration based on late fee payments, but many others have enforced this strict rule, making timely payment of arbitration fees and carefully worded arbitration provisions important best practices.

TAKEAWAYS

• Courts have split on whether (1) a court or arbitrator should rule on attempts to withdraw from arbitration based on late fee payments, and (2) the Federal Arbitration Act (FAA) preempts such withdrawal altogether.
• Companies arbitrating with employees or consumers must pay arbitration fees on time or risk waiving arbitration and paying significant attorneys’ fees.
• Companies should also update their arbitration agreements with employees and consumers to reflect the current legal landscape.

Sections 1281.97 through 1281.99 of the California Code of Civil Procedure set strict penalties for nonpayment of arbitration fees in employee and consumer arbitrations. Under those sections, the drafter of an employee or consumer arbitration agreement is in material breach of the agreement if it does not pay arbitration fees within 30 days. Following such a breach, employees and consumers may withdraw their claim from arbitration and proceed in court, and are also entitled to their attorneys’ fees and costs incurred both during the abandoned arbitration and in withdrawing from arbitration.

Although these sections have been in effect since 2020, California state and federal courts remain split on two key issues regarding their interpretation:

• whether the determination of a material breach under these sections can be delegated to an arbitrator, and
• whether federal law preempts these sections when the Federal Arbitration Act applies.

The Delegation Split
Dekker v. Vivint Solar, Inc., No. 20-16584, 2021 WL 4958856 (9th Cir. Oct. 26, 2021), involved an arbitration with solar panel installer Vivint for unfair business practices. The parties’ arbitration agreement delegated issues regarding a breach of the agreement, and its scope, to the arbitrator. However, when Vivint failed to pay arbitration fees within 30 days, plaintiffs raised the issue of breach under section 1281.97 with the district court, which found such a breach and vacated its order compelling arbitration. Vivint appealed and the Ninth Circuit reversed. In a brief memorandum opinion, it held that the arbitration agreement at issue included a delegation clause and thus that the arbitrator should decide whether there had been a breach pursuant to section 1281.97.

In Belyea v. GreenSky, Inc., --- F. Supp. 3d ----, No. 20-cv-01693-JSC, 2022 WL 14965532 (N.D. Cal. Oct. 26, 2022), a dispute arising out of loans for home improvements, GreenSky failed to pay arbitration fees within 30 days and plaintiffs claimed that it had materially breached the agreement under section 1281.97. Citing Dekker, GreenSky argued that the arbitrator should determine compliance with section 1281.97 because the arbitration agreement delegated claims as to the “validity, enforceability or scope of tph[e] Arbitration Agreement” to the arbitrator. The Northern District of California disagreed. Without addressing Dekker, it held that issues of “waiver” and “breach” under section 1281.97 are presumptively disputes for judicial determination, and that section 1281.97 prevented GreenSky from enforcing the delegation of those issues.

Most recently, in Cvejic v. Skyview Capital, 92 Cal. App. 5th 1073 (2023), Skyview failed to timely pay arbitration fees and the trial court allowed its former employee, Cvejic, to withdraw from arbitration. The California Court of Appeal affirmed, expressly rejecting Dekker, but on a different basis than the implicit rejection in Belyea. Focusing on legislative intent, Cvejic held that sections 1281.97 and 1281.98 tasked the trial court—not an arbitrator—with deciding whether a breach had occurred under those sections.

The Preemption Split
In Espinoza v. Superior Court, 83 Cal. App. 5th 761 (2022), arising from claims of employment discrimination, the former employer failed to pay arbitration fees within 30 days due to a clerical error. The trial court found that the employer was not in material breach because it had substantially complied with its payment obligations and the delay was not prejudicial. On appeal, the former employee argued that section 1281.97 requires strict compliance, while her former employer both defended the substantial compliance ruling below and also argued that section 1281.97 was preempted by the Federal Arbitration Act (FAA). According to the employer, section 1281.97 created a definition of “material breach” and “waiver” exclusive to arbitration agreements and thereby disfavored arbitration agreements vis-à-vis other contracts in violation of the FAA’s equal-treatment principle. The California Court of Appeal reversed, rejecting both the substantial compliance and FAA preemption arguments. On the issue of preemption, the court adopted the logic of Gallo v. Wood Ranch USA, Inc., 81 Cal. App. 5th 621 (2022), an opinion handed down by the Court of Appeal two months prior. Like Gallo, Espinoza held that the FAA does not preempt section 1281.97 because the California statute ensures timely payment of arbitration fees, which furthers, rather than frustrates, the objectives of the FAA.

In the same Belyea matter discussed above, GreenSky also argued that the FAA preempted section 1281.97 based on equal-treatment grounds. The Northern District of California agreed, expressly disagreeing with Espinoza, Gallo and two 2021 orders from the Central District of California. Belyea reasoned that because section 1281.97 makes arbitration provisions unenforceable on arbitration-specific grounds, it did not treat such provisions equally with other contracts and was therefore preempted by the FAA—regardless of whether the threat of unenforceability is viewed as incentivizing or undermining arbitration. To date, no case appears to have addressed Belyea’s preemption holding.

Best Practices
In light of this uncertain legal landscape, companies relying on arbitration agreements with consumers or employees in California should consult with counsel regularly on the language of those agreements, and as soon as any dispute subject to arbitration is initiated. Such companies should also be vigilant in making timely payment of arbitration fees.

Best practices to consider include:

• Paying arbitration fees online and documenting such payments,
• Calendaring arbitration fee deadlines,
• Seeking clarification and agreement from the arbitral forum and/or opposing party if there is any ambiguity as to payment due dates,
• Expressly delegating the issue of withdrawal from arbitration to the arbitrator, and

Expressly invoking the FAA to the exclusion of California arbitration rules.

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