The California Chamber of Commerce is encouraging its members to send letters to California Governor Gavin Newsom urging him to veto California SB 707, which was passed by the state’s Assembly and Senate and is currently sitting on his desk awaiting his signature.  The bill would amend the state’s existing law on arbitration agreements to provide that a company’s failure to pay arbitration fees in a consumer or employment arbitration would constitute a material breach of the arbitration agreement that allows the consumer or employee to proceed in court, requires the court to impose monetary sanctions, and authorizes the court to impose other sanctions such as a default judgment against the company.

SB 707 was enrolled and presented to the Governor on September 19, after the legislative session ended.  As a result, if the Governor does not sign or veto the bill by October 13, 2019, it  will automatically become law and have a January 1, 2020 effective date.

The bill would add new Sections 1281.97, 1281.98, and 1281.99 to the California Code of Civil Procedure.  The bill would also add the term “drafting party” which is defined to mean “the company or business that included a predispute arbitration provision in a contract with a consumer or employee.  The term includes any third party relying upon, or otherwise subject to an arbitration provision, other than the employee or consumer.”  New Section 1281.97 would provide that “in an employment or consumer arbitration that requires, either expressly or through application of state or federal law or the rules of the arbitration administrator, the drafting party to pay certain costs and fees before the arbitration can proceed, if the fees or costs to initiate an arbitration proceeding are not paid within 30 days after the due date, the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives the right to compel arbitration.”  In the event of such default, the employee or consumer can either withdraw the claim from arbitration and proceed in “a court of appropriate jurisdiction” or compel an arbitration in which the drafting party must pay reasonable attorney’s fees and arbitration costs.

New Section 1281.98 would also make the drafting party’s failure to pay fees and costs required to continue an arbitration proceeding a material breach.  In addition to allowing the consumer or employee to withdraw the claim from arbitration and proceed in court, the provision would  (1) allow the consumer or employee to continue the arbitration proceeding if the arbitration company agrees to continue the arbitration notwithstanding the drafting party’s failure to pay fees or costs, and (2) authorize the arbitration company to institute a collection action at the end of the arbitration against the drafting party for payment of all fees associated with the arbitration.

Alternatively, the consumer or employee could (1) petition the court for an order compelling the drafting party to pay the arbitration fees it is obligated to pay, or (2) pay the drafting party’s fees and recover such fees as part of the reward without regard to any findings on the merits of the arbitration.  If a consumer or employee exercises the option to proceed in court under either Section 1281.97 or Section 1281.98, the statute of limitations “with regard to all claims brought or that relate back to any claim brought in arbitration shall be tolled as of the date of the first filing of a claim in any court, arbitration forum, or other dispute resolution forum.”

New Section 1281.99 would provide that a court “shall impose a monetary sanction against a drafting party that materially breaches an arbitration agreement…by ordering the drafting party to pay the reasonable expenses, including attorney’s fees and costs, incurred by the employee or consumer as a result of the material breach.”  A court can also order various sanctions “unless the court finds that one subject to the sanction acted with substantial justification or that other circumstances make the imposition of the sanction unjust.”

Such sanctions include “an evidence sanction by an order prohibiting the drafting party from conducting discovery in the civil action,” or a “terminating sanction” such as “an order striking out the pleadings or parts of the pleadings of the drafting party” and “an order rendering a judgment by default against the drafting party.”

The term “court” as used in the new provisions is not expressly limited to state courts.  However, because the provisions would become part of the California Code of Civil Procedure, they would presumably only apply to California state courts.  Since AAA and JAMS rules already address the consequences of the non-payment of fees and costs (which include a dismissal of the arbitration that would allow the consumer to proceed in court), the bill represents legislative overkill.  In addition, the bill could hinder the ability of companies to push back against some plaintiffs’ attorneys who are filing serial arbitrations involving questionable claims in order to pressure early settlements from companies facing thousands of dollars in arbitration fees.

The California Chamber of Commerce has provided its members with a template of a letter to send to Governor Newsom urging him to veto SB 707.  The letter asserts that the bill fails to address justified reasons for a drafting party to withhold payment of fees and costs.  Examples given of such reasons are:

• Following the California Supreme Court’s decision in Dynamex Operations West that changed the standard for classifying individuals as employees or independent contractors, trial attorneys have filed thousands of requests for arbitration, alleging misclassification.  Companies have legitimately withheld payment of arbitration fees and costs while a court determines if the arbitration should proceed in instances where individuals “signed up” by trial attorneys have disputed they are actually represented by such attorneys, have not appeared at arbitrations, or have never worked for the company involved.
• By treating the failure to pay a nominal amount of fees and costs the same as the failure to pay all fees and costs, the bill treats a company that makes an unintentional mistake regarding payment the same as a company that intentionally withholds the entire payment in an effort to delay the arbitration.
• Where a company’s financial circumstances change after entering into an arbitration agreement and cause the company to be unable to pay fees and costs, the sanctions set forth in the bill should not be triggered.

By allowing a consumer to avoid enforcement of an arbitration agreement where a company has justified reasons for withholding payment of fees and costs, the bill might be vulnerable to a preemption challenge under the Federal Arbitration Act for singling out arbitration for special treatment and creating obstacles for the enforcement of mandatory arbitration agreements.