Contributors

Jasmin B. Bhandari

Principal

Since 2020, California law (specifically Code of Civil Procedure section 1281.97) has required employers to pay arbitration fees quickly or face harsh consequences. A check getting lost in the mail, or other minor delay exceeding 30 days after the due date has been found to be a “material breach” of the arbitration agreement under 1281.97, allowing the employee-plaintiff to withdraw from arbitration, pursue the case in court and seek sanctions against the employer-drafter.

However, in May 2024, the Second Appellate District of the California Court of Appeal decided in Hernandez v. Sohnen Enterprises, Inc., that an arbitration agreement governed by the Federal Arbitration Act (FAA) is not subject to this 30-day rule under 1281.97. Instead, the Court held that both the substantive and procedural provisions of the FAA applied (meaning 1281.97 was inapplicable) and even if it did apply, it would still reverse because the FAA preempts the provisions of the California Code of Civil Procedure mandating finding breach and waiver when an agreement is covered by the FAA and does not expressly adopt California arbitration laws.

In Hernandez, the arbitration agreement specifically stated that the FAA governed the agreement and any arbitration taking place under the agreement. The agreement did not mention California arbitration law anywhere. As is the case with most arbitration providers, the provider sent an invoice stating that the fees are due “upon receipt,” which meant the 30-day timeframe began running immediately. When the employer paid the fee a week after the 30-day timeframe, Hernandez filed a motion to withdraw from arbitration, which was granted. The company appealed.

The Court of Appeal broke from a line of cases which had held 1281.97 consistent with the FAA. Instead, it held that 1281.97 is preempted by the FAA because instead of assessing defenses like substantial compliance, which would be done in other types of breach of contract cases, the breach is automatic after 30 days, meaning arbitration clauses are treated more harshly, which federal law disfavors.

While this decision presents a ray of light against the harsh results imposed by 1281.97, this is not the last we will hear of potential consequences for missing the 30 day payment deadline. Since there is a split in authority with other Court of Appeal decisions, this issue is not resolved until the California Supreme Court takes it up and makes the final call. But it is potential good news for employers nonetheless.