The FAA preempts California's Code of Civil Procedure section 1281.97, which requires employers to pay arbitration fees within 30 days of the due date or return the case to court, a state appellate panel has ruled.
As part of her employment with Sohnen Enterprises as a product handler, Massiel Hernandez signed an arbitration agreement, which stated that it was governed by the FAA.
Several years later, she filed a complaint against Sohnen for disability discrimination, Labor Code violations and related causes of action.
The parties stipulated to stay the trial court proceedings and arbitrate pursuant to the agreement, and Hernandez filed a demand for arbitration. The arbitrator sent a notice to both parties with the filing fees that were due upon receipt.
When Sohnen paid the filing fees more than 30 days later, Hernandez filed a motion to withdraw from arbitration and vacate the stay of court proceedings. She argued that under section 1281.97, Sohnen materially breached the arbitration agreement and waived its right to arbitrate by failing to pay the arbitration fees within 30 days of the date.
The trial court agreed, granting the motion, but the appellate panel reversed.
Although the parties disputed whether the state law requirements or the FAA governed the agreement, the court had little difficulty concluding that the federal statute applied, given its clear statement.
The FAA does not expressly preempt state law, but it does contain procedural provisions, the court noted, and when the FAA applies to an arbitration agreement, it will preempt state substantive law that conflicts with the policies of the FAA.
In the case at hand, the arbitration agreement "plainly states 'this agreement is governed by the FAA,'" the court wrote. "[T]he statement in the arbitration agreement is broad, encompassing both the procedural and substantive provisions of the FAA. The agreement consistently refers to procedures contained in the FAA, such as allowing a party to seek appointment of an arbitrator pursuant to the FAA."
The agreement contained no provision explicitly referring to California law, the court added, indicating that the "parties selected the procedural provisions of the FAA and the Federal Rules of Civil Procedure, and therefore, the procedures of [California law], including section 1281.97, do not apply."
Hernandez countered that the parties affirmatively incorporated California's arbitration law into their agreement by stipulating in a provision that the arbitration "fully complies" with the requirements of Armendariz v. Foundation Health Psychcare Services, Inc.
But Armendariz does not require parties to arbitrate under California law, the court said, so the parties' representation that their arbitration would meet California's minimum requirements for a fair arbitral forum did not designate California arbitration law to govern the agreement.
Even if the court were to conclude that section 1281.97 applied, it still would have reversed.
"When an agreement falls within the scope of the FAA and the parties have not expressly elected California law, we hold the FAA preempts the portion of section 1281.97 that requires findings of material breach and a waiver of the right to arbitrate as a matter of contract law," the court said.
Section 1281.97 violates the equal-treatment principle of the FAA because it mandates findings of material breach and waiver for late payment that do not apply generally to all contracts or even to all arbitrations, the court explained.
"Under California contract law, defenses to enforcement of a contract are generally questions for the trier of fact and subject to doctrines such as substantial compliance, but section 1281.97 imposes a stricter requirement, mandating a finding of material breach and waiver as a matter of law in consumer and employment arbitration contracts, and making it harder to enforce arbitration agreements in those matters," the court said.
Imposing a higher standard for enforcement of arbitration agreements in consumer and employee disputes is contrary to the FAA's policy to ensure arbitration agreements are as enforceable as other contracts; section 1281.97 further frustrates the FAA's objective of cheaper, more efficient resolution of disputes by increasing the overall cost of litigation and wasting resources already invested toward arbitration.
"We conclude that unless the parties have expressly selected California's arbitration provisions to apply to their agreement, the FAA preempts the portion of section 1281.97 that dictates findings of material breach and waiver as a matter of law," the court wrote.
To read the opinion in Hernandez v. Sohnen Enterprises, Inc., click here.
Why it matters
The court provided a road map for employers to ensure application of the FAA and its procedures in lieu of California's state law requirements, including the payment of arbitral fees within a 30-day window. Unless the parties expressly select the state law arbitration provisions to apply to an agreement, the FAA preempts California's procedural requirements, the court held.
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