Solis v. Sohnen Enterprises CA2/5 ( 2024 )

Filed 5/23/24 Solis v. Sohnen Enterprises CA2/5
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions
not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion
has not been certified for publication or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
CANDIDA SOLIS, B323296
Plaintiff and Respondent, (Los Angeles
County Super. Ct.
v. No. 21STCV26265)
SOHNEN ENTERPRISES, INC., et al.,
Defendants and Appellants.
APPEAL from an order of the Superior Court of Los
Angeles County, Timothy P. Dillon, Judge. Reversed.
Wolflick, Khachaturian & Bouayad, Gregory D. Wolflick
and Theodore S. Khachaturian for Defendants and Appellants.
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 and two
individuals contend that the Federal Arbitration Act (FAA; 9
U.S.C. § 1 et seq.) governs the 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.
1 All further statutory references are to the California Code
of Civil Procedure unless otherwise stated.
2
[section] 1, et seq.” The agreement provided that “any disputes
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.”
Solis worked in Sohnen’s warehouse from August 2014 to
August 2020. On July 16, 2021, Solis filed a complaint against
Sohnen and two former coworkers, defendants and appellants
Claudia Hernandez and Diana Garcia (collectively Defendants)
for sexual harassment, sexual orientation harassment,
gender/sex discrimination, disability discrimination, Labor Code
violations, and related causes of action. On November 10, 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
3
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 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.
Solis 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.
Solis 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.
Defendants 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.
4
In June 2022, Solis 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 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 June 22, 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 July 26, 2022, the trial court asked
the parties to submit further briefing as to whether Sohnen’s late
payment was a violation of the parties’ stipulation and the court’s
order requiring payment that created a separate ground to grant
the motion to vacate. Solis provided a supplemental brief taking
the position that the trial court could not grant the motion to
vacate the stay and withdraw from arbitration as a sanction for
Sohnen’s violation of the court order, and Sohnen’s breach of the
stipulation did not have an impact on whether the parties were
required to arbitrate. Defendants filed a supplemental brief
arguing that Sohnen did not violate the court’s order, and in fact,
had paid the arbitration fees early, because no arbitrator had yet
been appointed.
Another hearing was held on the motion to vacate on
August 23, 2022. The trial court found Sohnen had paid the
required arbitration fees late and therefore breached the
arbitration agreement, as provided in section 1281.97. The court
concluded the FAA did not preempt section 1281.97. As an
5
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 $1,500 in monetary sanctions to Solis for reasonable
expenses incurred as a result of the material breach. Defendants
filed a timely notice of appeal from the order under section
1281.97.
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
6
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.
(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
7
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
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
8
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,
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
9
and orders.2 An order “dismissing or denying a petition to compel
arbitration” is appealable under section 1294, subdivision (a), of
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
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
10
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
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
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.”
11
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
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
3 An order denying a stay of litigation pending arbitration
is reviewable, however, in connection with an appeal from
12
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
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
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.”
13
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
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
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
14
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,
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
Defendants contend 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 arbitration agreement in this case. Defendants assert the
FAA governs the arbitration agreement, including both the
substantive and procedural provisions of the FAA, while Solis
contends the procedures of the CAA apply, including section
1281.97. We conclude the agreement is governed by 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
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.)
15
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
(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
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.)
16
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.
(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
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.)
17
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).)
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.
18
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–
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
19
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
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.)
20
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
referring to California law in the agreement. The agreement is
governed solely by 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.
Solis contends the parties affirmatively incorporated
California’s arbitration law in their agreement to arbitrate,
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
21
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
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 does not
expressly elect 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
7 We note that the arbitration agreement in this case
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
Cal.4th at pp. 1339–1340). On appeal, Solis 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
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
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
23
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,
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
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
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
Solis 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, Defendants contend 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.”
Defendants argue 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
25
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.
26
DISPOSITION
The August 23, 2022 order is reversed. Appellants Sohnen
Enterprises, Claudia Hernandez, and Diana Garcia are awarded
their costs on appeal.
NOT TO BE PUBLISHED.
MOOR, J.
I concur:
KIM, J.
27
Candida Solis v. Sohnen Enterprises, Inc. et al.
B323296
BAKER, Acting P. J., Dissenting
I would affirm the trial court’s order for the reasons stated
in my opinion in Hernandez v. Sohnen Enterprises, Inc. (May 22,
2024, B323303) ___ Cal.App.5th ___
<https://www.courts.ca.gov/opinions-slip.htm>.
BAKER, Acting P. J.