Hernandez v. Sohnen Enterprises ( 2024 )

Filed 5/22/24
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
MASSIEL HERNANDEZ, B323303
Plaintiff and Respondent, (Los Angeles County
Super. Ct. No.
v. 21STCV26283)
SOHNEN ENTERPRISES, INC.,
Defendant and Appellant.
APPEAL from an order of the Superior Court of Los
Angeles County, Steven I. Goorvitch, Judge. Reversed.
Wolflick, Khachaturian & Bouayad, Gregory D. Wolflick
and Theodore S. Khachaturian for Defendant and Appellant.
Moon Law Group, Kane Moon, Christopher L. Garcia and
Sara Salinas for Plaintiff and Respondent.
____________________
After an employer failed to pay arbitration costs within 30
days of the due date, the employee filed a motion to withdraw
from arbitration and litigate in state court as permitted under
California Code of Civil Procedure section 1281.97.1 The trial
court found the employer breached the arbitration agreement and
granted the motion. On appeal, the employer contends that the
Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.) governs the
parties’ arbitration agreement and preempts section 1281.97.
First, we conclude that an order granting a motion under section
1281.97 to withdraw from arbitration and proceed in court is
appealable. Second, we find the arbitration agreement in this
case is governed by the FAA, including both the substantive and
procedural provisions of the FAA, rather than California’s
arbitration laws. As a result, the procedures of section 1281.97
do not apply and the order must be reversed. Even if we were to
conclude that section 1281.97 applies, however, we would still
reverse, because 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. Accordingly, we reverse.
FACTUAL AND PROCEDURAL HISTORY
On December 2, 2016, plaintiff and respondent Massiel
Hernandez executed an arbitration agreement with defendant
and appellant Sohnen Enterprises that stated, “This Agreement
is governed by the Federal Arbitration Act (‘FAA’), 9 U.S.C.
[section] 1, et seq.” The agreement provided that “any disputes
1 All further statutory references are to the California Code
of Civil Procedure unless otherwise stated.
2
regarding the enforceability, interpretation, scope, applicability
or coverage of this Agreement are reserved solely for the Court,
not for arbitration.” If the parties could not agree on an
arbitrator, a party could “seek court appointment of an arbitrator
pursuant to the FAA.” The agreement explained that arbitration
fees would be paid by Sohnen or other parties to the dispute, not
by the employee, but parties choosing to be represented by an
attorney would be responsible for their own attorney fees.
During arbitration, the parties could conduct discovery and bring
motions under the Federal Rules of Civil Procedure except as
specifically provided otherwise in the agreement. The parties
waived class or representative actions “to the fullest extent
permitted by the FAA.” The agreement also provided, “The
arbitrator shall not have the power to commit errors of law or
legal reasoning and the arbitrator’s award may be vacated or
corrected by a court of competent jurisdiction for any such error.
The decision of the arbitrator can be entered and enforced as a
final judgment in any court of competent jurisdiction.”
Hernandez worked for Sohnen as a “product handler” from
February 2015 to August 2020. On July 16, 2021, Hernandez
filed a complaint against Sohnen for disability discrimination,
Labor Code violations, and related causes of action. On
November 8, 2021, the parties stipulated to stay the trial court
proceedings and arbitrate pursuant to their arbitration
agreement, which they attached. The stipulation stated that the
Federal Rules of Civil Procedure applied to the arbitration. The
parties represented that their agreement “fully complies with the
requirements of Armendariz v. Foundation Health Psychcare
Services, Inc. (2000) 24 Cal.4th 83,” because the arbitration would
provide a neutral arbitrator, all types of relief otherwise available
3
in court, a written arbitration award, and Sohnen would pay “the
entire cost of the arbitration filing fee and the arbitrator’s initial
deposit (or any similar request, including any fees or costs that
are unique to the arbitration) on or before any deadline specified
by the arbitrator to do so[.]” The trial court entered an order in
accordance with the terms of the stipulation, stating that Sohnen
must pay the arbitration costs on or before any deadline specified
by the arbitrator.
Hernandez filed a demand for arbitration with the Judicial
Arbitration and Mediation Services, Inc. (JAMS). On April 7,
2022, JAMS sent a notice to the parties stating that filing fees of
$1,750 were due upon receipt. Once the fees were received,
JAMS would formally commence the matter and proceed with the
arbitrator selection process. Sohnen paid the filing fees on
May 13, 2022.
Hernandez filed a motion in the trial court to withdraw
from arbitration and vacate the stay of court proceedings
pursuant to section 1281.97. 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 due date.
Sohnen opposed the motion on several grounds, including
that the FAA and the Federal Rules of Civil Procedure applied to
the arbitration, rather than California’s Code of Civil Procedure,
and the FAA preempts sections 1281.97, 1281.98, and 1281.99.
In July 2022, Hernandez filed a reply. She noted Sohnen
did not dispute that the deposit to initiate arbitration was not
paid within 30 days of the due date. She argued that although
the Federal Rules of Civil Procedure applied to the arbitration
itself, there was no arbitration because Sohnen did not timely
4
pay the deposit required to commence arbitration. In addition,
the FAA did not preempt section 1281.97, because section
1281.97 facilitated arbitration by requiring prompt payment of
arbitration expenses.
On August 31, 2022, a hearing was held on the motion to
withdraw from arbitration and vacate the stay of court
proceedings under section 1281.97. The trial court took the
matter under submission. On September 1, 2022, the court found
Sohnen had paid the required arbitration fees late and therefore
breached the arbitration agreement, as provided in section
1281.97. The court ordered that Hernandez was not required to
arbitrate, granted the motion to withdraw from arbitration, and
vacated the stay of litigation. The court concluded the FAA did
not preempt section 1281.97. As an additional basis for the
ruling, the court found Sohnen violated the trial court’s order to
pay the cost of the arbitration and the initial deposit on or before
the arbitrator’s deadline. Although federal rules might apply to
the arbitration itself, the court concluded federal rules did not
apply to the trial court’s decisions in advance of the arbitration
proceeding, and the parties had delegated threshold
determinations to the court. The court awarded $1,230 in
monetary sanctions to Hernandez for reasonable expenses
incurred as a result of the material breach. Sohnen filed a timely
notice of appeal from the order under section 1281.97.
5
DISCUSSION
California Law Governing a Failure to Pay Arbitration
Fees
Even prior to enactment of section 1281.97, an employee
could avoid enforcement of an arbitration agreement by showing
that the employer’s failure to perform an obligation under the
contract was a material breach of the agreement. (Pry Corp. of
America v. Leach (1960) 177 Cal.App.2d 632, 639; Brown v.
Dillard’s, Inc. (2005) 430 F.3d 1004, 1010–1012.) Whether a
party’s breach of an agreement is material is normally a question
of fact. (Brown v. Grimes (2011) 192 Cal.App.4th 265, 277–278.)
Unless a contract states that time is of the essence, a payment
made within a reasonable time after the specified due date will
usually constitute substantial compliance. (Magic Carpet Ride
LLC v. Rugger Investment Group, L.L.C. (2019) 41 Cal.App.5th
357, 364 (Magic Carpet).)
Similarly, an employer who fails to perform an obligation
under an arbitration agreement may have waived the right to
demand arbitration. (Engalla v. Permanente Medical Group, Inc.
(1997) 15 Cal.4th 951, 983 (Engalla).) The party seeking to show
a waiver has a heavy burden of proof because California law
reflects a strong policy favoring arbitration agreements. (St.
Agnes Medical Center v. PacifiCare of California (2003) 31
Cal.4th 1187, 1195 (St. Agnes).) Whether there has been a
waiver of the right to arbitrate is also generally a question of fact.
6
(Engalla, supra, 15 Cal.4th at pp. 983–984; St. Agnes, supra, 31
Cal.4th at p. 1196.)
In 2019, the California Legislature added sections 1281.97,
1281.98, and 1281.99 to the California Arbitration Act (CAA;
§ 1280 et seq.) to assist consumers and employees who find
themselves in “procedural limbo” because they are required to
submit a dispute to arbitration, but the entity enforcing the
arbitration agreement has not paid the arbitration fees required
to proceed. (Stats. 2019, ch. 870, § 4; Gallo v. Wood Ranch USA,
Inc. (2022) 81 Cal.App.5th 621, 629 & 633–634 (Gallo).) Section
1281.97 addresses the failure to timely pay fees or costs to
initiate arbitration, while section 1281.98 addresses the failure to
timely pay fees or costs to continue arbitration. (De Leon v.
Juanita’s Foods (2022) 85 Cal.App.5th 740, 750 (De Leon).)
Section 1281.97, subdivision (a)(1), provides: “In an
employment or consumer arbitration that requires . . . the
drafting party to pay certain fees and costs 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 its right to compel
arbitration under [s]ection 1281.2.”
Section 1281.97, subdivision (b), provides, “If the drafting
party materially breaches the arbitration agreement and is in
default under subdivision (a), the employee or consumer may do
either of the following: [¶] (1) Withdraw the claim from
arbitration and proceed in a court of appropriate jurisdiction.
[¶] (2) Compel arbitration in which the drafting party shall pay
reasonable attorney’s fees and costs related to the arbitration.” If
the employee or consumer chooses to withdraw from arbitration
7
and proceed in court, the court must impose sanctions on the
drafting party under section 1281.99. (§ 1281.98, subd. (d).)
Section 1281.97 does not require that the arbitrator make
an initial finding of breach, default, or waiver. (Williams v. West
Coast Hospitals, Inc. (2022) 86 Cal.App.5th 1054, 1066
(Williams).) The statute defines a material breach “as a matter
of law to be the failure to pay anything less than the full amount
due by the expiration of the statutory grace period, rather than
leaving materiality as an issue of fact for the trier of fact to
determine.” (Gallo, supra, 81 Cal.App.5th at p. 644.) There are
no exceptions to section 1281.97 for substantial compliance or
lack of prejudice. (Espinoza v. Superior Court (2022) 83
Cal.App.5th 761, 775–776 (Espinoza).)
In the enacting legislation, the legislature expressed
concern that an entity’s failure to pay the arbitration provider
hindered the efficient resolution of disputes. (Stats. 2019, ch.
870, § 1, subd. (c).) A company that compels arbitration, then
strategically withholds payment of arbitration fees “severely
prejudices” the ability of consumers and employees to pursue
their claims. (Stats. 2019, ch. 870, § 1, subd. (d).) Section
1281.97 is not limited, however, to circumstances of strategic
non-payment. (Espinoza, supra, 83 Cal.App.5th at p. 777.) The
statute is strictly applied whenever a drafting party fails to pay
arbitration costs and fees by the statutory deadline. (Ibid.)
In addition to the remedies provided under section 1281.97,
section 1281.99 provides that the company or business that
materially breached the arbitration agreement must pay the
“reasonable expenses, including attorney’s fees and costs,
incurred by the employee or consumer as a result of the material
breach” (§ 1281.99, subd. (a)), and may also suffer an evidentiary,
8
terminating, or contempt sanction unless it “acted with
substantial justification” or “other circumstances make the
imposition of the sanction unjust” (§ 1281.99, subd. (b)).
Appealability
As a preliminary matter, we must determine whether an
order under section 1281.97 to withdraw from arbitration and
proceed in court is an appealable order. “The existence of an
appealable judgment is a jurisdictional prerequisite to an appeal.
A reviewing court must raise the issue on its own initiative
whenever a doubt exists as to whether the trial court has entered
a final judgment or other order or judgment made appealable by
Code of Civil Procedure section 904.1.” (Jennings v. Marralle
(1994) 8 Cal.4th 121, 126.)
“The right to appeal is statutory.” (Gastelum v. Remax
Internat., Inc. (2016) 244 Cal.App.4th 1016, 1021 (Gastelum).)
Section 904.1 provides a general list of appealable civil judgments
and orders.2 An order “dismissing or denying a petition to compel
2 Section 904.1 states in full: “(a) An appeal, other than in
a limited civil case, is to the court of appeal. An appeal, other
than in a limited civil case, may be taken from any of the
following: [¶] (1) From a judgment, except an interlocutory
judgment, other than as provided in paragraphs (8), (9), and (11),
or a judgment of contempt that is made final and conclusive by
Section 1222. [¶] (2) From an order made after a judgment made
appealable by paragraph (1) [¶] (3) From an order granting a
motion to quash service of summons or granting a motion to stay
the action on the ground of inconvenient forum, or from a written
order of dismissal under Section 581d following an order granting
a motion to dismiss the action on the ground of inconvenient
9
arbitration” is appealable under section 1294, subdivision (a), of
the CAA. Interlocutory orders, on the other hand, are generally
not appealable. (Gastelum, supra, 244 Cal.App.4th at p. 1022.)
No statute expressly states that orders under section
1281.97 are appealable, but California courts have concluded
orders that are the “functional equivalent” of denying a petition
forum. [¶] (4) From an order granting a new trial or denying a
motion for judgment notwithstanding the verdict. [¶] (5) From an
order discharging or refusing to discharge an attachment or
granting a right to attach order. [¶] (6) From an order granting
or dissolving an injunction, or refusing to grant or dissolve an
injunction. [¶] (7) From an order appointing a receiver. [¶] (8)
From an interlocutory judgment, order, or decree, made or
entered in an action to redeem real or personal property from a
mortgage thereof, or a lien thereon, determining the right to
redeem and directing an accounting. [¶] (9) From an
interlocutory judgment in an action for partition determining the
rights and interests of the respective parties and directing
partition to be made. [¶] (10) From an order made appealable by
the Probate Code or the Family Code. [¶] (11) From an
interlocutory judgment directing payment of monetary sanctions
by a party or an attorney for a party if the amount exceeds five
thousand dollars ($5,000). [¶] (12) From an order directing
payment of monetary sanctions by a party or an attorney for a
party if the amount exceeds five thousand dollars ($5,000).
[¶] (13) From an order granting or denying a special motion to
strike under Sections 425.16 and 425.19. [¶] (14) From a final
order or judgment in a bifurcated proceeding regarding child
custody or visitation rights. [¶] (b) Sanction orders or judgments
of five thousand dollars ($5,000) or less against a party or an
attorney for a party may be reviewed on an appeal by that party
after entry of final judgment in the main action, or, at the
discretion of the court of appeal, may be reviewed upon petition
for an extraordinary writ.”
10
to compel arbitration are appealable under section 1294,
subdivision (a). In Henry v. Alcove Investment, Inc. (1991) 233
Cal.App.3d 94, 98 (Henry), the appellate court concluded that an
order staying arbitration proceedings under section 1281.2 of the
CAA should be treated the same as an order denying a petition to
compel arbitration. Under section 1281.2, if a court determines
that a party to arbitration is also a party to litigation with a third
party and there is a possibility of conflicting rulings on a common
issue of law or fact, the court may order a stay of arbitration
pending the outcome of the court action. The Henry court
reasoned, “an order staying arbitration is the functional
equivalent of an order refusing to compel arbitration. We note
the advantages of arbitration include ‘a presumptively less costly,
more expeditious manner of resolving disputes.’ [Citations.] It
follows a party to a valid arbitration agreement has a contractual
right to have its dispute with another party to the contract
resolved quickly and inexpensively. An order refusing to compel
arbitration, if not reviewed immediately, would significantly
delay arbitration and defeat its purpose. The order would force
the party seeking arbitration to proceed with a potentially
lengthy and costly trial and, if dissatisfied with the result, appeal
from the final judgment. [Citation.] By the time the Court of
Appeal overturned the trial court’s order, the value of the right to
arbitrate would be significantly diminished by the delay and
expense of litigation. The Legislature’s dissatisfaction with this
result led it to enact section 1294, subdivision (a) which
specifically authorizes an appeal from an order ‘dismissing or
denying a petition to compel arbitration. . . .’ (Recommendation
and Study Relating to Arbitration (Dec. 1960) 3 Cal.Law Revision
Com.Rep. (1961) G–1, G–60 & fn. 194.)” (Henry, supra, 233
11
Cal.App.3d at pp. 99–100.) “[An] order staying arbitration is
merely the flip side of an order refusing to compel arbitration and
should be treated the same for purposes of appellate review.” (Id.
at p. 100.)
An interlocutory order denying a stay of court proceedings,
however, is not an appealable order. (Wells Fargo Bank, N.A. v.
The Best Service Co., Inc. (2014) 232 Cal.App.4th 650, 651–652
(Wells Fargo).) Denying a stay of court proceedings is not the
functional equivalent of denying a petition to compel arbitration.
(Id. at p. 654.) Similarly, an order that simply lifts a stay of
litigation that was previously imposed under section 1281.4
pending arbitration is not an appealable order. (Gastelum, supra,
244 Cal.App.4th at p. 1023.)3
Courts have concluded that an order under section 1281.97
is the functional equivalent of denying a petition to compel
arbitration, and therefore, appealable. (Williams, supra, 86
Cal.App.5th at p. 1065; Gallo, supra, 81 Cal.App.5th at p. 633.)
We agree with Williams and Gallo on this point. An order under
section 1281.97 finding the drafting party materially breached
the arbitration agreement, allowing the employee or consumer to
withdraw a claim from arbitration and proceed in court, is not
3 An order denying a stay of litigation pending arbitration
is reviewable, however, in connection with an appeal from
another appealable order or judgment. (MKJA, Inc. v. 123 Fit
Franchising, LLC (2011) 191 Cal.App.4th 643, 655.) Section
1294.2 of the CAA provides in pertinent part: “Upon an appeal
from any order or judgment under this title, the court may review
the decision and any intermediate ruling, proceeding, order or
decision which involves the merits or necessarily affects the order
or judgment appealed from, or which substantially affects the
rights of a party.”
12
simply an order lifting a stay of court proceedings. An order
under section 1281.97 finding a defendant materially breached
the arbitration agreement and waived the right to arbitrate
operates as a complete defense to enforcement of the parties’
arbitration agreement, which is the functional equivalent of an
order denying a petition to compel arbitration. (Williams, supra,
86 Cal.App.5th at p. 1065.) If not reviewed immediately, the
order will significantly delay arbitration and defeat its purpose
by forcing the party desiring arbitration to conduct a potentially
lengthy, costly trial, and to appeal from the final judgment. By
the time the appellate court overturns the order, the value of the
right to arbitrate would be significantly diminished by the delay
and expense of litigation.
Principles of statutory construction support our conclusion.
“[T]he Legislature is deemed to be aware of existing laws and
judicial decisions in effect at the time legislation is enacted and to
have enacted and amended statutes ‘ “in the light of such
decisions as have a direct bearing upon them.” ’ [Citations.]”
(People v. Overstreet (1986) 42 Cal.3d 891, 897.) “ ‘[W]hen the
Legislature amends a statute without changing those portions . . .
that have previously been construed by the courts, the
Legislature is presumed to have known of and to have acquiesced
in the previous judicial construction.’ [Citations.]” (People v.
Atkins (2001) 25 Cal.4th 76, 89–90.)
The Legislature was presumably aware of the case law
construing orders that are functionally equivalent to denying a
motion to compel arbitration to be appealable, but the
Legislature did not include any language to alter the existing law
or address appealability when it enacted section 1281.97.
Moreover, after Williams and Gallo held that orders under
13
section 1281.97 are appealable as the functional equivalent of an
order denying a motion to compel arbitration, the Legislature
amended section 1294, subdivision (a), effective January 1, 2024,
to add that “the perfecting of such an appeal shall not
automatically stay any proceedings in the trial court during the
pendency of the appeal.” (Stats. 2023, ch. 710 (S.B. 365), § 1.)4
By amending section 1294, subdivision (a), without changing the
portion that had been construed to include orders under section
1281.97, the Legislature is considered to have acquiesced to the
judicial construction. The Legislature chose instead to balance
competing interests by providing, in the trial court’s discretion,
4 An analysis of Senate Bill 365 (SB 365) prepared for the
Senate Judiciary Committee states the purpose of the bill as
follows in pertinent part: “Current law allows corporate
defendants to pause a consumer, government, or worker’s case by
simply filing an appeal of a trial court’s denial of a motion to
compel arbitration. Through this process, powerful corporations
delay cases filed against them for typically one to three years.
This bill allows consumers, governments, or workers to move
their case forward if a company files an appeal, rather than
waiting for years while the appeal is heard. SB 365 will level the
playing field for consumers, governments, and workers who
deserve to move their case forward when a company or employer
violates their rights.” (Sen. Com. on Judiciary, Analysis of SB
365 (2023-2024 Reg. Sess.) April 7, 2023, p. 6.)
14
for litigation to proceed in court while the order denying
arbitration is reviewed on appeal.
Because we conclude the order under section 1281.97 is
appealable, we consider whether the trial court properly applied
section 1281.97.
Preemption
Sohnen contends section 1281.97 does not apply in this case
because it is preempted by the FAA. The first question we must
consider is which statutory arbitration scheme applies to the
parties’ agreement. Sohnen asserts the FAA governs the
arbitration agreement, including both the substantive and
procedural provisions of the FAA, while Hernandez contends the
procedures of the CAA apply, including section 1281.97. We
conclude the parties selected the FAA in its entirety. Under
these circumstances, section 1281.97 of the CAA does not apply
and the order under section 1281.97 must be reversed. Even if
we were to conclude that section 1281.97 applies, however, we
would still reverse, because when an agreement falls within the
scope of the FAA and does not expressly select California
arbitration procedures, the FAA preempts the provisions of
section 1281.97 that require finding a breach or waiver of the
parties’ arbitration agreement as a matter of law.
A. General Application and Purpose of the FAA
The FAA was enacted to override judicial hostility to
enforcing arbitration agreements. (Volt Information Sciences,
Inc. v. Board of Trustees of Leland Stanford Junior University
15
(1989) 489 U.S. 468, 478 (Volt); AT&T Mobility LLC v.
Concepcion (2011) 563 U.S. 333, 339 (Concepcion).) Section 2 of
the FAA provides that an arbitration agreement within the scope
of the FAA is “valid, irrevocable, and enforceable, save upon such
grounds as exist at law or in equity for the revocation of any
contract or as otherwise provided in [the FAA].” (9 U.S.C. § 2.)5
“The FAA embodies a strong federal policy favoring
arbitration.” (Mendoza v. Trans Valley Transport (2022) 75
Cal.App.5th 748, 761 (Mendoza).)6 The FAA does not bestow
arbitration agreements with special status; it simply ensures
arbitration agreements are as enforceable as other contracts.
5 The FAA applies in “any maritime transaction or a
contract evidencing a transaction involving commerce.” (9 U.S.C.
§ 2.) The phrase “involving commerce” in section 2 of the FAA is
broader than merely people and activities within the flow of
interstate commerce; it extends the FAA’s reach to the full limits
of the Commerce Clause. (Allied-Bruce Terminix Companies, Inc.
v. Dobson (1995) 513 U.S. 265, 279 and 273 (Allied-Bruce); Muller
v. Roy Miller Freight Lines, LLC (2019) 34 Cal.App.5th 1056,
1062.) “Employment contracts, except for those covering workers
engaged in transportation, are covered by the [FAA.]” (Equal
Employment Opportunity Commission v. Waffle House, Inc.
(2002) 534 U.S. 279, 289.)
6 The CAA sets forth a comprehensive statutory scheme
governing private arbitration in California. (Moncharsh v. Heily
& Blase (1992) 3 Cal.4th 1, 9.) The CAA similarly provides that a
written arbitration agreement is valid, enforceable and
irrevocable, except on grounds for the revocation of any contract.
(§ 1281.) “[U]nder California law, as under federal law, an
arbitration agreement may only be invalidated for the same
reasons as other contracts.” (Armendariz v. Foundation Health
Psychcare Services, Inc., supra, 24 Cal.4th at p. 98.)
16
(Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th
376, 384 (Cronus).) A court interpreting an arbitration
agreement within the coverage of the FAA must resolve
ambiguities about the scope of the arbitration agreement in favor
of arbitration in accordance with the federal policy favoring
arbitration. (Volt, supra, 489 U.S. at pp. 475–476; Cronus, supra,35 Cal.4th at p. 384.)
Sections 1 and 2 of the FAA contain substantive federal
arbitration law that applies in federal and state court to any
arbitration agreement within the scope of the FAA. (Moses H.
Cone Memorial Hospital v. Mercury Constr. Corp. (1983) 460 U.S.
1, 24; Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th
1334, 1350–1351 (DIRECTV); Cronus, supra, 35 Cal.4th at
pp. 387–390.) The FAA does not expressly preempt state law, nor
does it reflect an intent by Congress to occupy the entire field of
arbitration. (Volt, supra, 489 U.S. at p. 477.) When the FAA
applies to an agreement, however, the substantive provisions of
the FAA preempt state law to the extent that state law actually
conflicts with the federal law or operates as an obstacle to
accomplishing the purposes of the FAA. (Ibid.; Cronus, supra, 35
Cal.4th at pp. 387–390)
The FAA also contains procedural provisions. (DIRECTV,
supra, 44 Cal.4th at p. 1351.) The procedural provisions of the
FAA apply in federal court proceedings related to arbitrations.
(Ibid.) By their terms, these procedural provisions of the FAA do
not apply in state court. (Ibid.) The procedural provisions of
California arbitration laws apply in California courts by default.
(Valencia v. Smyth (2010) 185 Cal.App.4th 153, 174 (Valencia).)
17
B. Choice of Law
Parties can avoid preemption by expressly agreeing to
apply state law to their agreements, whether state substantive
law, state procedural law, or both. (Volt, supra, 489 U.S. at
p. 476.) “There is no federal policy favoring arbitration under a
certain set of procedural rules; the federal policy is simply to
ensure the enforceability, according to their terms, of private
agreements to arbitrate.” (Ibid.) When parties have agreed to
arbitrate in accordance with state substantive and/or procedural
law, the FAA does not preempt the state law to which the parties
agreed. (Id. at pp. 477–478.)
If parties expressly agree to apply the CAA, or agree to
apply California law, including California’s arbitration rules,
then the state arbitration laws will not be preempted by the FAA.
(Volt, supra, 489 U.S. at p. 470; Rodriguez v. American
Technologies, Inc. (2006) 136 Cal.App.4th 1110, 1118
(Rodriguez).) In other words, if the parties have agreed to apply
section 1281.97, no discussion of preemption is required.
Similarly, if parties agree to apply the FAA’s procedural
provisions, rather than the procedures of the CAA, then the state
arbitration procedures do not apply and there is no preemption
issue. (Cronus, supra, 35 Cal.4th at p. 394; Valencia, supra, 185
Cal.App.4th at p. 157.) For example, in Rodriguez, some of the
parties in a multiparty contract dispute agreed to arbitrate
claims “ ‘[p]ursuant to the Federal Arbitration Act.’ ” (Rodriguez,
supra, 136 Cal.App.4th at p. 1116.) The FAA required the court
to stay judicial proceedings until arbitration was completed,
while the CAA allowed for a stay of arbitration. (Id. at pp. 1117–
18
1118.) The Rodriguez court concluded the agreement to arbitrate
claims “ ‘pursuant to the FAA’ ” was broad, adopting all
provisions of the FAA to govern the parties’ agreement, and there
was no contract provision suggesting the parties intended to
apply California arbitration law. (Id. at p. 1122.) There was no
ambiguity about the parties’ intent for the substantive and
procedural law of the FAA to govern their agreement, including
the provisions of the FAA that compelled arbitration under the
circumstances of the case. (Id. at p. 1122.)
When the FAA applies to an arbitration agreement, it will,
however, preempt state substantive law that conflicts with the
policies of the FAA. (Concepcion, supra, 563 U.S. at p. 341 [FAA
preempts generally applicable contract defenses used in a
manner to disfavor arbitration].)
C. Standard of Review and Principles of Contract
Interpretation
When there is no parol evidence, or the parol evidence is
not in conflict, the determination of whether an arbitration
agreement is governed by federal law is a question of law
concerning contract and statutory interpretation that we review
de novo. (Rodriguez, supra, 136 Cal.App.4th at p. 1117.)
“An arbitration agreement is governed by contract law. It
is construed like other contracts to give effect to the intention of
the parties and the ordinary rules of contract interpretation
apply.” (Mendoza, supra, 75 Cal.App.5th at p. 764.) We examine
the language of the parties’ contract to determine which laws
they intended to apply. (Cronus, supra, 35 Cal.4th at p. 383.)
“The primary object of contract interpretation is to ascertain and
19
carry out the mutual intention of the parties at the time the
contract was formed, determined from the writing alone, if
possible. [Citations.] When the language of a contract is ‘clear,
explicit, and unequivocal, and there is no ambiguity, the court
will enforce the express language.’ [Citation.]” (In re Marriage of
Nassimi (2016) 3 Cal.App.5th 667, 688 (Nassimi), footnote
omitted.)
“ ‘The whole of a contract is to be taken together, so as to
give effect to every part, if reasonably practicable, each clause
helping to interpret the other.’ [Citation.] This means that
‘[c]ourts must interpret contractual language in a manner which
gives force and effect to every provision’ [citation, italics omitted],
and avoid constructions which would render any of its provisions
or words ‘surplusage.’ [Citation.] Put simply, ‘[a] contract term
should not be construed to render some of its provisions
meaningless or irrelevant.’ [Citation.]” (Nassimi, supra, 3
Cal.App.5th at p. 688.)
D. Application
The arbitration agreement in this case plainly states “this
agreement is governed by the FAA.” As in Rodriguez, supra, 136
Cal.App.4th at p. 1122, the 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.
In addition, both the arbitration agreement and the parties’
stipulation expressly agree to apply the Federal Rules of Civil
Procedure to the arbitration. There is no provision explicitly
20
referring to California law in the agreement. The parties selected
the procedural provisions of the FAA and the Federal Rules of
Civil Procedure, and therefore, the procedures of the CAA,
including section 1281.97, do not apply. The order based on
section 1281.97 must be reversed.
Hernandez contends the parties affirmatively incorporated
California’s arbitration law in their agreement, including section
1281.97, by stipulating that the arbitration “fully complies” with
the requirements of Armendariz v. Foundation Health Psychcare
Services, Inc., supra, 24 Cal.4th at p. 91, and listing those
requirements. We disagree. In Armendariz, the California
Supreme Court held that discrimination claims under the
California Fair Employment and Housing Act (FEHA) are
arbitrable if the arbitration meets certain minimum standards of
fairness allowing employees to vindicate their statutory rights,
“including neutrality of the arbitrator, the provision of adequate
discovery, a written decision that will permit a limited form of
judicial review, and limitations on the costs of arbitration.” (Id.
at p. 91.) Armendariz does not require parties to arbitrate under
the CAA. 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.7
7 We note that the parties’ arbitration agreement permits a
court to vacate or correct the arbitrator’s award for an error of
law. The procedural provisions of the FAA do not allow for
parties to expand the scope of review by agreement. (Hall Street
Associates, L.L.C. v. Mattel, Inc. (2008) 552 U.S. 576, 590.)
California law allows parties to expressly agree to judicial review
of the merits of an arbitration award. (DIRECTV, supra, 44
21
E. Mandatory Findings Preempted by the FAA
Even if we were to conclude that section 1281.97 applies,
however, we would still reverse the order in this case. 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.
Whether a state statute is preempted by the FAA depends
on whether the statute conflicts with or obstructs the purpose of
the FAA. (Gallo, supra, 81 Cal.App.5th at p. 637.) Section 2 of
the FAA embodies an “equal-treatment” principle: “ ‘A court may
invalidate an arbitration agreement based on “generally
applicable contract defenses” like fraud or unconscionability, but
not on legal rules that “apply only to arbitration or that derive
their meaning from the fact that an agreement to arbitrate is at
issue.” ’ [Citation.]” (Viking River Cruises, Inc. v. Moriana (2022)
596 U.S. 639, 650.) Under this principle, a state law that
discriminates on its face against arbitration, such as barring
arbitration of a particular type of claim, will be preempted by the
FAA. (Ibid.; Gallo, supra, 81 Cal.App.5th at p. 637.) Similarly,
state laws that impose requirements that discourage formation or
enforcement of arbitration agreements are preempted. (Gallo,
supra, 81 Cal.App.5th at p. 637.) “The United States Supreme
Cal.4th at pp. 1339–1340). On appeal, Hernandez has not relied
on this provision as evidence that the parties intended to apply
California’s arbitration law to the agreement, and therefore, any
such argument has been waived.
22
Court has frequently held that state laws invalidating arbitration
agreements on grounds applicable only to arbitration provisions
contravene the policy of enforceability established by section 2 of
the FAA, and are therefore preempted.” (DIRECTV, supra, 44
Cal.4th at p. 1351.)
State laws that regulate arbitration without undermining
the FAA’s substantive policies are not preempted. (Gallo, supra,
81 Cal.App.5th at pp. 638–639.) The FAA’s primary objective is
to honor the mutual intent of the parties by enforcing their
arbitration agreement on its terms. (Id. at pp. 640–641.) “The
second fundamental attribute of arbitration is its ‘promise of
quicker, more informal, and often cheaper [dispute] resolutions
for everyone involved’ [citation], such that the second objective of
the FAA is to safeguard ‘arbitration’s fundamental attributes of
speed and efficiency.’ [Citations.]” (Id. at p. 641.)
We conclude, consistent with the federal district court in
Belyea v. GreenSky, Inc. (N.D. Cal. 2022) 637 F.Supp.3d 745, 756,
that section 1281.97 violates the equal-treatment principle
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. 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.
Several California courts have concluded section 1281.97
furthers the goals of the FAA by encouraging or facilitating
arbitration. (Gallo, supra, 81 Cal.App.5th at p. 642; Espinoza,
23
supra, 83 Cal.App.5th at p. 783; Suarez v. Superior Court (2024)
99 Cal.App.5th 32, 42–43; cf. De Leon, supra, 85 Cal.App.5th at
pp. 753–754 [describing preemption holding in Gallo]; Hohenshelt
v. Superior Court (2024) 99 Cal.App.5th 1319, 1325–1326 [similar
provisions of section 1281.98 further FAA’s objectives].) We
respectfully disagree.8 The drafting party already has an
incentive under California contract law to make timely payments
in order not to waive the right to arbitrate. Section 1281.97
limits the enforceability of certain types of arbitration
agreements by allowing consumers and employees to elect to
avoid arbitration even in cases of minor, inadvertent, or
inconsequential delay. 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. In addition,
section 1281.97 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 order finding Sohnen materially breached the
arbitration agreement and waived the right to arbitrate, allowing
8 Justice Wiley dissented in Hohenshelt, noting that he
would find section 1281.98 is preempted by the FAA because it
singles out certain arbitration agreements for disfavored
treatment. (Hohenshelt, supra, 99 Cal.App.5th at p. 1328 (dis.
opn. of Wiley, J.).)
24
Hernandez to withdraw from arbitration and proceed in court,
must be reversed.
Compliance With Court Order
Separate from the payment deadline imposed by section
1281.97, Sohnen contends the trial court erred by finding that
Sohnen violated the trial court’s order to pay arbitration fees and
costs “on or before any deadline specified by the arbitrator.”
Sohnen argues that, in any event, vacating the stay of judicial
proceedings was not an appropriate sanction for any alleged
violation of the court order. We agree.
The trial court’s order did not set a deadline for payment
that was violated. Nor can the invoice from the arbitration
provider be reasonably construed to have set a specific payment
date: the invoice ambiguously states that it is “due upon receipt,”
and Sohnen had a reasonable time for payment from the point
the invoice was received. Further, the court’s order did not
reasonably advise the parties of the consequences for violating
any payment deadline. There is no substantial evidence that a
deadline imposed by the court’s order was missed, nor is there
evidence justifying the sanction of vacating the stay of judicial
proceedings.
25
DISPOSITION
The September 1, 2022 order is reversed. Appellant
Sohnen Enterprises is awarded its costs on appeal.
CERTIFIED FOR PUBLICATION.
MOOR, J.
I concur:
KIM, J.
26
Massiel Hernandez v. Sohnen Enterprises
B323303
BAKER, Acting P. J., Dissenting
I have doubts this appeal is properly before us at this stage
of the proceedings—a point the Legislature can and should
clarify. Assuming it is, the majority errs by going out of its way
to articulate an alternative holding that, though dicta, conflicts
with other Court of Appeal cases concluding Code of Civil
Procedure section 1281.97 (section 1281.97) is not preempted by
the Federal Arbitration Act. The majority’s opinion rather
obviously invites a grant of review from our Supreme Court; for
now, I shall outline my disagreement with it.
I
First, appealability.
The Legislature and the Governor enacted section 1281.97
to remedy a problem: delayed justice. Specifically, the
Legislature was persuaded that those responsible for paying
arbitration fees (often the party that demands arbitration
ostensibly for its expediency, among other things) were failing in
some instances to timely pay those fees and thereby preventing
an arbitration from proceeding promptly. To ameliorate what it
saw as unnecessary delay, the Legislature passed a strong
incentivizing statute: Section 1281.97 provides that if a party
responsible for paying arbitration fees does not make payment
within 30 days and thereby undercuts the touted greater speed of
arbitrations, the other party may—but is not required to—
withdraw the matter from arbitration and proceed in court.
Section 1281.97 motions themselves can be decided by trial
courts quickly because they ordinarily require a ruling that is as
simple as simple gets. In nearly all cases, a trial court need only
look at the arbitration invoice; look at when, if ever, the check (or,
these days, electronic payment) to cover that invoice was sent;
and then decide: timely, or not timely. If it is not, the court then
gives the other party the option (among other options) of
proceeding in court without delay—or so the Legislature would
have thought.
In practice, however, some of these failure to timely pay
fees cases are still dragging. Consider the facts here. The
stipulation to arbitrate was filed in November 2021. The demand
to arbitrate a consumer matter was apparently submitted to
JAMS thereafter (the record does not reveal precisely when), and
on April 7, 2022, JAMS notified defendant and respondent
Sohnen Enterprises, Inc. (defendant) that a $1,750 filing fee was
due upon receipt. It is undisputed defendant did not pay the fees
within 30 days of the JAMS invoice; payment was made only
later, on May 13, 2022. Under section 1281.97, plaintiff and
appellant Massiel Hernandez (plaintiff) was therefore authorized
to move, and did move, to lift the previously entered court stay
and withdraw the matter from arbitration. The trial court
granted that motion in September 2022, yet here we are: nearly
two years after that ruling, and over two years after the demand
for arbitration, with plaintiff’s discrimination claims still waiting
for resolution.
A judge-made doctrine is the reason why at least some of
these cases are not moving forward. The usual rule, as the
2
majority recognizes, is that the right to appeal is “wholly
statutory” and only orders denying or dismissing a petition to
compel arbitration are appealable (§ 1294, subd. (a)). But
beginning in the 1990s, some Courts of Appeal decided orders
that are the “functional equivalent” of the dismissal or denial
orders referenced in section 1294, subdivision (a) are appealable
too. (See, e.g., Henry v. Alcove Investment, Inc. (1991) 233
Cal.App.3d 94.) Relying on this authority, parties are noticing
appeals from section 1281.97 orders, and those appeals are
adding delays on top of the delays they have already caused by
not timely paying arbitration fees. (See, e.g., Williams v. West
Coast Hospitals, Inc. (2022) 86 Cal.App.5th 1054, 1064.)
The majority’s opinion follows Williams in holding
defendant’s appeal of the trial court’s section 1281.97 ruling is
proper under the “functional equivalent” doctrine even though
this works at cross-purposes with section 1281.97’s aim of
speeding up arbitrations that are supposed to be speedy. This
seems wrong. It is hard to believe the Legislature intended to
permit immediate appeals from section 1281.97 orders and invite
potential delay1 when, as I have explained, section 1281.97
1
I say potential delay because a recent amendment to
section 1294 may operate independently to reduce trial court
delays. (Stats. 2023, ch. 710, § 1 [adding language to section
1294, subdivision (a) that states, “Notwithstanding Section 916,
the perfecting of such an appeal shall not automatically stay any
proceedings in the trial court during the pendency of the
appeal”].) The effect of this amendment is not before us in this
case, however, and I express no view on it here. I do, however,
add that trial court delays are not the only problem. Even
without such delays, allowing immediate appeals from section
3
determinations are customarily straightforward and the risk of
error needing correction on appeal is de minimis. Under these
circumstances, one would think the Legislature would have
relegated complaints about section 1281.97 rulings to appeals
from a final judgment or other qualifying orders under section
1294. (§§ 904.1, subd. (a), 1294, subds. (b), (c), & (e); see also
§ 1294.2 [“Upon an appeal from any order or judgment under this
title, the court may review the decision and any intermediate
ruling, proceeding, order or decision which involves the merits or
necessarily affects the order or judgment appealed from . . .”].)
Though there is accordingly good reason to believe the
Legislature did not mean to make the order before us an
immediately appealable one, I concede the majority appropriately
relies on principles of statutory construction that allow it to
presume the Legislature was aware of, and acquiesced in,
treatment of these section 1281.97 rulings as the functional
equivalent of appealable orders. But I hasten to add that the
majority’s extended discussion of the issue all but dares the
Legislature to more directly declare its intent. That, in my view,
is an invitation the Legislature should accept. Clarity is needed
here, and if the Legislature did not intend to make trial court
1281.97 orders immediately appealable as the functional
equivalent of a section 1294, subdivision (a) order, it should
amend section 1281.97 (or section 1294) to so state. For now, I
will proceed on the understanding that the appeal is properly
before us.
1281.97 orders adds to the docket of appellate courts on a
piecemeal basis with no benefit, given the low risk of trial court
error in deciding whether a payment was made within 30 days of
when due.
4
II
Second, preemption.
The majority holds section 1281.97 has no application to
this case because the arbitration agreement between plaintiff and
defendant states arbitration is to be governed by the Federal
Arbitration Act. There are several features of the agreement that
make it ambiguous in this respect, however, so the majority
includes an alternative rationale to bolster its bottom-line
decision to reverse. This alternative rationale—that section
1281.97 is preempted by the Federal Arbitration Act—creates a
conflict with many other Court of Appeal decisions.2 (See, e.g.,
Gallo v. Wood Ranch USA, Inc. (2022) 81 Cal.App.5th 621.)
In my view, the arbitration agreement here is too
ambiguous to conclude the Federal Arbitration Act fully applies.
But rather than elaborate on that point, I shall spend my time on
the majority’s preemption conclusion because it is of greater
doctrinal consequence.
Section 1281.97 is only preempted by the Federal
Arbitration Act if it stands as an obstacle to accomplishing that
act’s purposes. (Volt Information Sciences, Inc. v. Board of
Trustees of Leland Stanford Junior University (1989) 489 U.S.
468, 477 [“The [Federal Arbitration Act] contains no express pre-
emptive provision, nor does it reflect a congressional intent to
occupy the entire field of arbitration. [Citation.] But even when
Congress has not completely displaced state regulation in an
2
The majority does not state whether it undertakes a
categorical or an as applied preemption analysis. Because the
opinion is written in broad terms, I proceed on the understanding
it is the former.
5
area, state law may nonetheless be preempted to the extent that
it actually conflicts with federal law—that is, to the extent that it
‘stands as an obstacle to the accomplishment and execution of the
full purposes and objectives of Congress’”].) Gallo explains the
reasons why section 1281.97 is not such an obstacle.3 The
majority states it disagrees with Gallo and the other cases that
similarly so hold, and as best I can tell, it gives a single reason to
explain the disagreement. The reason is not convincing.
The majority believes section 1281.97 violates an “equal-
treatment principle,” which it articulates as a principle that
arbitration agreements may be invalidated based on generally
applicable contract defenses but not based on legal rules that
apply only to arbitration or derive their meaning from the fact
that arbitration is at issue. The majority asserts section 1281.97
offends this principle of equal treatment 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.”
Discerning what treatment constitutes equal treatment, however,
depends on a judgment about whether two things being compared
are sufficiently alike to warrant the same treatment. Different
treatment for contracts that have salient differences cannot
offend the equal treatment principle.
3
Of course, the question of whether section 1281.97 is an
obstacle to accomplishment of the Federal Arbitration Act’s
purposes must be considered at scale, meaning in the great many
cases the statute was enacted to govern, not a select few. To
draw an analogy, one does not decide whether strict notice of
appeal timeliness rules enable prompt adjudication of challenges
to trial court rulings by considering only those appeals that are
dismissed because the notice of appeal was not timely filed.
6
One of the asserted benefits of arbitration—which the high
court has explained the Federal Arbitration Act is meant to
further—is the promise of faster dispute resolution. (Epic
Systems Corp. v. Lewis (2018) 584 U.S. 497, 505.) The majority
provides no reason to believe that the Legislature’s specification
of a 30-day timeframe for what constitutes a material breach and
waiver for consumer and employment disputes that are supposed
to be resolved by the faster means of arbitration is meaningfully
inconsistent with what properly constitutes a material breach
and waiver for contracts where time is of the essence—and that is
the only category that matters for comparison purposes.4 Nor has
the majority provided any reason to think the Legislature was
unjustified in believing that delays for nonpayment of arbitration
fees were most prevalent and problematic in certain consumer
and employment arbitrations.
I accordingly believe the weight of authority in this area is
correct. Put simply, it is a real stretch—and a stretch too far—to
4
The majority also appears to hint that the Legislature has
somehow impermissibly invaded a judicial function to determine
what constitutes “minor” or “inadvertent” delay. If that is the
unstated concern, there are two responses. First, I am aware of
no law that precludes the Legislature from doing so, and the
Legislature should have some latitude to respond to identified
problems with dispute resolution mechanisms. Second, outlier
cases are not the focus of a categorical preemption analysis.
Even if a few matters are removed from arbitration in a case of a
minor or inadvertent delay, it is still that case that section
1281.97 overall ensures arbitrations proceed more quickly.
7
say the Federal Arbitration Act is offended by a state law that
requires prompt payment of arbitration fees.
BAKER, Acting P. J.
8