PREEMPTION-CODE OF CIVIL PROCEDURE SECTIONS 1281.97 AND 1281.98

Sanders v. Superior Court, 110 Cal. App. 5th 1304

After defendant Edward Jones & Co. failed to pay a bill for arbitrator fees by the 30th day following the due date, plaintiff Sanders moved to vacate the trial court’s order to compel arbitration, as it was permitted to do under Code of Civ. Proc.

Section 1281.98. The trial court denied the motion based on the Second Division’s ruling in Hernandez v. Sohnen Enterprises, 102 Cal. App. 5th 222 (2024) that Section 1281.98 was preempted by the FAA. Sanders filed a petition for a writ of mandate.

The Court of Appeal granted the writ. It disagreed with the reasoning in Hernandez that

Section 1281.98 and its counterpart, Section 1281.97, hindered arbitration. Rather, the Legislature, in enacting the sections found that employers were refusing to pay arbitration fees in an effort to stymie the ability of employees to assert their rights by preventing the arbitration from moving forward.

Edward Jones also contended that the decision eliminating prejudice as an element for finding waiver of arbitration in Quach v. Commerce Club of California, 16 Cal. 5th 562 (2024) supported an argument that section 1281.98 is preempted by the FAA because it is an arbitration-specific rule that treats arbitration contracts differently from other contracts, even if the rule was adopted to favor arbitration. Quach followed the ruling in Morgan v. Sundance, Inc., 596 U.S. 411 (2022. In Morgan, the Court quoted its nearly 50-year-old decision in Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967) 388 U.S. 395, 404, fn. 12, in stating “[t]he [FAA‘s] policy is to make ‘arbitration agreements as enforceable as other contracts, but not more so.’”)

Section 1281.98 does not alter state law contract principles for arbitration agreements. Rather, section 1281.98 is a procedural rule contained in the CAA that specifies the 30-day grace period for the drafting party to pay arbitration fees and costs and the consequences for failure to timely pay. Edward Jones and Sanders implicitly consented to application of the CAA's procedural provisions. Thus, unlike the judicially created waiver requirement invalidated in Morgan and Quach, the parties here implicitly agreed in the arbitration agreement that section 1281.98 would apply to their arbitration. The fact section 1281.98 describes the consequences of a drafting party's failure to timely pay required fees and costs as a “material breach of the arbitration agreement” and waiver of the drafting party's “right to compel the employee or consumer to proceed with that arbitration” does not transmute a mutually agreed-upon contract provision into a judicially created change in state contract law. Just as the parties to a contract for the sale of widgets can agree upon what constitutes a breach of the contract, parties to an arbitration agreement can agree that section 1281.98 applies to their arbitration agreement. Moreover, section 1281.98 is like other arbitration-specific procedural rules, including the deadlines in section 1288 for filing a petition to confirm or vacate an arbitration award and the provision in section 1281.2(c), for a court to stay an arbitration pending resolution of related litigation between a party to the arbitration agreement and third parties not bound by the agreement, where there is a possibility of conflicting rulings on a common issue of law or fact.

Imposing a 30-day time limit to pay arbitration fees neither frustrates nor hinders arbitration. Section 1281.98 does not affect the enforceability of the arbitration agreement itself. Rather, it is intended to promote the parties' intent to have an expedited and costefficient way to resolve their disputes.