Arbitration agreements: To reference FAA or not to reference FAA, that is the question

Last Updated 6/4/2024


Since 2020, California employers have had to wrestle with stricter rules governing the enforcement of arbitration agreements and the timing of paying arbitration fees. Senate Bill 707 was enacted to add sections 1281.97, 1281.98, and 1281.99 to the Code of Civil Procedure, to provide the following:

 

1.      Any drafter of an arbitration agreement that fails to pay the fees necessary to commence or continue arbitration, within 30 days after such fees being due to be tendered to the arbitrator, is held to have materially breached the arbitration and is in default of the agreement.

 

2.      The bill provides consumers or employees several remedies in the event a drafting party breaches the arbitration agreement by failing to pay the arbitration costs and fees.

 

  • The bill would permit, should the drafting party fail to pay the costs necessary to commence arbitration, the employee or consumer to remove the matter to court or move to compel the arbitration.
  •  In the event that the drafting party fails to pay the fees or costs necessary to continue an arbitration currently in progress, the bill enables the employee or consumer to move the matter to court, seek a court order compelling the payment of the fees, continue the arbitration and permit the arbitrator to seek collection of their fees, or pay the costs and fees and seek those fees from the drafting party at the conclusion of the arbitration regardless of the ultimate outcome.
  •  Finally, to deter drafting parties from failing to pay arbitration costs and fees in a timely manner, this bill imposes mandatory monetary sanctions on any drafting party found to be in default of an arbitration agreement for failure to pay costs and fees, and permits the imposition of additional evidentiary, terminating, or contempt sanctions, as the court or arbitrator sees fit.


Since the measure’s enactment, various California appellate courts have ruled favorably for employees on this front, upholding these new statutes and concluding that they promote the goals of the Federal Arbitration Agreement (FAA) because, in requiring timely payment of arbitration fees, arbitrations can commence without delay. And these courts have been unanimous until now.


In comes the Second Appellate District’s decision of Hernandez v. Sohnen Enterprises, Inc. which recently held that an arbitration agreement was governed by the FAA rather than California’s arbitration laws, thus finding that the procedures of section 1281.97 do not apply. Moreover, the court added that even if it were to conclude that section 1281.97 applies, when an agreement falls within the scope of the FAA and does not expressly adopt California arbitration laws, the FAA preempts the provisions of section 1281.97 that mandate findings of breach and waiver. California now finds itself with a split of authority that may eventually require the resolution of a higher court. In the meantime, the Hernandez court has relaxed the application of the law somewhat in situations where employers may have unintentionally failed to pay arbitration fees on time.


What lessons can employers learn from the Hernandez decision to ensure that their arbitration agreements are airtight? Employers should promptly request that their counsel review their current arbitration agreements to ensure that they are governed by the FAA. Without referencing the FAA in an arbitration agreement, a court may be more apt to apply section 1281.97 and the California Arbitration Act leading to a potentially more employee-friendly interpretation and outcome. Give Rosasco Law Group a call for a careful evaluation of your company’s existing arbitration agreement to eliminate any potential pitfalls down the road.

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