Hernandez v. Sohnen Enter., Inc.

321 Cal.Rptr.3d 283

Massiel HERNANDEZ, Plaintiff and Respondent,

v.SOHNEN ENTERPRISES, INC., Defendant and Appellant.

B323303

Court of Appeal, Second District, Division 5.

Filed May 22, 2024

APPEAL from an order of the Superior Court of Los Angeles County, Steven I, Goorvitch, Judge. Reversed. (Los Angeles County Super. Ct. No. 21STCV26283)

Wolflick, Khachaturian & Bouayad, Gregory D. Wolflick and Theodore S. Khachaturian, Glendale, for Defendant and Appellant.

Moon Law Group, Kane Moon, Christopher L. Garcia, Los Angeles, and Sara Salinas for Plaintiff and Respondent.

MOOR, J.

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 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, 99 Cal.Rptr.2d 745, 6 P.3d 669," 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.

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 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.

DISCUSSION

California Law Governing a Failure to Pay Arbitration Fees

[1, 2] 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, 2 Cal.Rptr. 425; 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, 120 Cal.Rptr.3d 893.) 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, 254 Cal.Rptr.3d 213 (Magic Carpet).)

[3–5] 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, 64 Cal.Rptr.2d 843, 938 P.2d 903 (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, 8 Cal.Rptr.3d 517, 82 P.3d 727 (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, 64 Cal.Rptr.2d 843, 938 P.2d 903; St. Agnes, supra, 31 Cal.4th at p. 1196, 8 Cal.Rptr.3d 517, 82 P.3d 727.)

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 & 633–334, 297 Cal. Rptr.3d 373 (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, 301 Cal.Rptr.3d 678 (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...