Espinoza v. Super. Ct. ( 2022 )

Filed 9/27/22
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION ONE
ROSA M. QUINCOZA ESPINOZA, B314914
Petitioner, (Los Angeles County
Super. Ct. No. 20STCV34704)
v.
OPINION AND ORDER
THE SUPERIOR COURT OF LOS GRANTING
ANGELES COUNTY, PETITION FOR
WRIT OF MANDATE
Respondent;
CENTINELA SKILLED NURSING
& WELLNESS CENTRE WEST,
LLC,
Real Party in Interest.
ORIGINAL PROCEEDING; petition for writ of mandate.
Richard L. Fruin, Judge. Petition is granted.
Pairavi Law, Edwin Pairavi and Joshua M. Mohrsaz for
Petitioner.
No appearance by Respondent.
Fisher & Phillips, Grace Y. Horoupian, Hassan A. Aburish
and Megan E. Walker for Real Party in Interest.
Rob Bonta, Attorney General, Nicklas A. Akers, Assistant
Attorney General, Michele Van Gelderen and Rachel A.
Foodman, Deputy Attorneys General, for Attorney General as
Amicus Curiae.
____________________________
Plaintiff and petitioner Rosa M. Quincoza Espinoza filed
claims for discrimination and retaliation against her former
employer, defendant and real party in interest Centinela Skilled
Nursing & Wellness Centre West, LLC. The trial court granted
defendant’s motion to stay litigation and compel the parties to
proceed in arbitration. When defendant failed to pay its
arbitration fees by a statutory deadline, plaintiff moved the trial
court to lift the stay of litigation and allow her to proceed in
court. The trial court denied the motion, and plaintiff filed the
instant petition for a writ of mandate directing the trial court to
reverse that denial.
Plaintiff’s motion to lift the litigation stay contended that
defendant had failed to pay the arbitration provider’s initial
invoice within 30 days of the due date for payment, and thus
under Code of Civil Procedure1 section 1281.97, subdivision (a)(1)
was in default and material breach of the arbitration agreement.
Under those circumstances, section 1281.97 entitled her to
1Unspecified statutory citations are to the Code of Civil
Procedure.
2
proceed with her claims in court. Defendant opposed the motion
and provided evidence that it had since made the necessary
payment, and the delay was inadvertent and due to a clerical
error.
The trial court found that defendant was not in material
breach because it had substantially complied with its payment
obligations and the delay did not prejudice plaintiff. Plaintiff
filed the instant writ petition, contending that section 1281.97
must be applied strictly when payment is not made within
30 days, with no exceptions for substantial compliance or lack of
prejudice. Defendant argues in opposition that strict application
of section 1281.97 is contrary to legislative intent. Alternatively,
defendant argues section 1281.97 is preempted by the Federal
Arbitration Act (FAA) (9 U.S.C. § 1 et seq.), which the trial court
found applies to the arbitration agreement between defendant
and plaintiff. Defendant did not raise this preemption argument
below, and thus the trial court did not address it.
We agree with plaintiff that, based on the plain language
as well as the legislative history of section 1281.97, the
Legislature intended courts to apply the statute’s payment
deadline strictly. Thus, under section 1281.97, subdivision (a)(1),
defendant was in material breach of the arbitration agreement
even though, as the trial court found, the delay in payment was
inadvertent, brief, and did not prejudice plaintiff.
We reject defendant’s argument that the FAA preempts
section 1281.97. The FAA preempts state laws that prohibit or
discourage the formation or enforcement of arbitration
agreements, or that interfere with fundamental attributes of
arbitration. As our colleagues in Division Two recently held in
Gallo v. Wood Ranch USA, Inc. (2022) 81 Cal.App.5th 6213
(Gallo), section 1281.97 does none of this. Rather, the statute set
forth procedural requirements to ensure timely payment of
arbitration fees, thus “ further[ing]—rather than frustrat[ing]—
the objectives of the FAA to honor the parties’ intent to arbitrate
and to preserve arbitration as a speedy and effective alternative
forum for resolving disputes.” (Gallo, at p. 630.)
Accordingly, we grant the petition.
PROCEDURAL BACKGROUND
On September 10, 2020, plaintiff filed a complaint against
defendant in the trial court, asserting claims for disability
discrimination, retaliation, and other causes of action arising
from her employment with defendant.
On April 1, 2021, defendant moved to compel arbitration
pursuant to an agreement plaintiff signed when she began her
employment. The trial court granted the motion to compel and
stayed further litigation pending the arbitration. In granting the
motion, the court found that “the FAA governs the terms of the
parties’ agreement.”
On May 19, 2021, plaintiff’s counsel e-mailed the
arbitration provider, stating, “We are initiating arbitration,” and
providing copies of the complaint, arbitration agreement, and the
trial court order compelling arbitration. Plaintiff’s counsel sent
the e-mail to defendant’s counsel as well. On May 24, 2021, the
arbitration provider sent the parties an initial invoice for an
administrative fee and telephonic arbitration management
conference, with a due date of May 31, 2021.
On July 1, 2021, the arbitration provider confirmed to
plaintiff’s counsel that it had yet to receive payment from
defendant. Plaintiff then filed a motion in the trial court under
sections 1281.97 and 1281.98 contending defendant had
4
materially breached the arbitration agreement by failing to pay
the invoice within 30 days of the due date for payment. Plaintiff
sought an order lifting the litigation stay, allowing her claims to
proceed in court, and imposing monetary and evidentiary
sanctions on defendant under section 1281.99.
Defendant opposed plaintiff’s motion, arguing that plaintiff
had never served a demand for arbitration on defendant, and
thus under the arbitration provider’s rules, arbitration could not
have commenced even had defendant timely paid the invoice.
Defendant also provided declarations averring that defendant’s
vice president of operations had approved payment of the invoice
on June 15, 2021, but “[d]ue to a clerical error, the request for
cash flow was delayed and this prevented the accounts payable
department from issuing a check for payment of the invoice.”
Defendant learned on July 1, 2021 that the invoice was unpaid,
and the arbitration provider confirmed receipt of defendant’s
payment on July 9, 2021.
Defendant’s counsel further averred that he communicated
with plaintiff’s counsel on other matters, including settlement
negotiations, on June 15 and 24, 2021, during which plaintiff’s
counsel “made no mention of any delay in the commencement of
the arbitration.”
Following a hearing, the trial court issued an order denying
plaintiff’s motion to lift the litigation stay and impose sanctions.
The court found defendant was “in substantial[ ] compliance with
the arbitration provision and not in material breach . . . .” The
court noted defendant’s declaration establishing that defendant’s
“vice president approved payment of the invoice on June 15 and
forwarded the invoice for payment but . . . the invoice was not
paid then due to ‘clerical error.’ ” The court further found
5
plaintiff “suffered no material prejudice” from the delay, as
evidenced by plaintiff’s counsel “engag[ing] in settlement
discussions . . . without . . . expressing concern that the invoice
was not by then paid.”
Plaintiff then filed the instant writ petition challenging the
trial court’s order. A majority of a panel of this court issued an
alternative writ directing the trial court to reverse its order, with
one justice dissenting. The trial court declined to reverse its
order, and we issued an order to show cause.2
DISCUSSION
A. Code of Civil Procedure Section 1281.97
Section 1281.97 was enacted as part of Senate Bill No. 707
(2019–2020 Reg. Sess.) (Senate Bill No. 707) (Stats. 2019, ch. 870,
§ 4). In the enacting legislation, the Legislature expressed
2 Writ review is appropriate when “(1) ‘the remedy by
appeal would be inadequate’ [citation] or (2) the writ presents a
‘significant issue of law’ or an issue of ‘widespread’ or ‘public
interest’ [citations].” (California Dept. of Tax & Fee
Administration v. Superior Court (2020) 48 Cal.App.5th 922,
929.) Writ review is appropriate here. Because, as we conclude,
the trial court’s order was improper, requiring plaintiff to proceed
through an arbitration before she can challenge the order on
appeal would be a waste of time and resources, for which the
appeal would be an inadequate remedy. (See Medeiros v.
Superior Court (2007) 146 Cal.App.4th 1008, 1014, fn. 7 [“Writ
review is the appropriate way to review the challenged order and
avoid having parties try a case in a forum where they do not
belong, only to have to do it all over again in the appropriate
forum.”].) Further, the interpretation and enforceability of
section 1281.97 presents significant issues of law.
6
concern that “[a] company’s failure to pay the fees of an
arbitration service provider in accordance with its obligations
contained within an arbitration agreement or through application
of state or federal law or the rules of the arbitration provider
hinders the efficient resolution of disputes and contravenes public
policy.” (Stats. 2019, ch. 870, § 1, subd. (c).) Further, “[a]
company’s strategic non-payment of fees and costs severely
prejudices the ability of employees or consumers to vindicate
their rights. This practice is particularly problematic and unfair
when the party failing or refusing to pay those fees and costs is
the party that imposed the obligation to arbitrate disputes.” (Id.,
§ 1, subd. (d).)
The enacting legislation cited two opinions by the Ninth
Circuit Court of Appeals, Brown v. Dillard’s, Inc. (2005) 430 F.3d
1004 and Sink v. Aden Enterprises, Inc. (2003) 352 F.3d 1197,
characterizing them as holding that “an employer’s refusal to
participate in arbitration” or “an employer’s failure to pay
arbitration fees” constituted “a material breach” of the
arbitration agreement. (Stats. 2019, ch. 870, § 1, subd. (e).)
The legislation also quoted Armendariz v. Foundation
Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 for the
proposition that “ ‘when an employer imposes mandatory
arbitration as a condition of employment, the arbitration
agreement or arbitration process cannot generally require the
employee to bear any type of expense that the employee would
not be required to bear if he or she were free to bring the action
in court.’ ” (Stats. 2019, ch. 870, § 1, subd. (b).) Senate Bill
No. 707 was intended to “affirm” these three court decisions and
establish “that a company’s failure to pay arbitration fees
pursuant to a mandatory arbitration provision constitutes a
7
breach of the arbitration agreement and allows the non-
breaching party to bring a claim in court.” (Id., § 1, subd. (f).)
Section 1281.97, subdivision (a)(1) provides, “In an
employment or consumer arbitration that requires, either
expressly or through application of state or federal law or the
rules of the arbitration provider, the drafting party[3] 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 Section 1281.2.”4
Section 1281.97 further requires that the arbitration
provider “immediately provide an invoice for any fees and costs,”
which is “due upon receipt” “absent an express provision in the
arbitration agreement stating the number of days in which the
parties to the arbitration must pay any required fees or costs.”
(§ 1281.97, subd. (a)(2).)5 Thus, unless the parties expressly
3 The “ ‘drafting party’ ” is “the company or business that
included a predispute arbitration provision in a contract with a
consumer or employee,” or “any third party relying upon, or
otherwise subject to the arbitration provision, other than the
employee or consumer.” (§ 1280, subd. (e).)
4 Section 1281.2 requires a court to order parties to
arbitration “if it determines that an agreement to arbitrate the
controversy exists,” subject to specified exceptions, including that
“[t]he right to compel arbitration has been waived by the
petitioner,” or “[g]rounds exist for rescission of the agreement.”
(§ 1281.2, subds. (a)–(b).)
5 This subdivision was a later amendment to section
1281.97. (See Stats. 2021, ch. 222, § 2.)
8
agree to the contrary, the drafting party’s receipt of the invoice
triggers the 30-day clock under section 1281.97,
subdivision (a)(1).6
In the event the drafting party does not pay the invoice
within the 30 days, thus materially breaching the arbitration
agreement under section 1281.97, subdivision (a)(1), the
employee or consumer may “[w]ithdraw the claim from
arbitration and proceed in a court of appropriate jurisdiction,” or
“[c]ompel arbitration in which the drafting party shall pay
reasonable attorney’s fees and costs related to the arbitration.”
(§ 1281.97, subd. (b).)
Should the employee or consumer choose to proceed in
court, “the court shall impose sanctions on the drafting party in
accordance with Section 1281.99.” (§ 1281.97, subd. (d).)
Section 1281.99, in turn, states that the court “shall impose a
monetary sanction against a drafting party” in the form of “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).)
The court “may” impose additional specified sanctions
“unless the court finds that the one subject to the sanction acted
with substantial justification or that other circumstances make
the imposition of the sanction unjust.” (§ 1281.99, subd. (b).) The
additional sanctions include “[a]n evidence sanction . . .
prohibiting the drafting party from conducting discovery in the
civil action,” “[a] terminating sanction” either “striking out the
6 The invoice in the instant case, issued May 24, did not
state it was due upon receipt, but rather listed a due date of
May 31. The parties do not take issue with that due date, and
we do not address it further.
9
pleadings or parts of the pleadings of the drafting party,” or
“rendering a judgment by default against the drafting party,” or
“[a] contempt sanction.” (Id., subd. (b)(1)–(3).)
Section 1281.98, also enacted under Senate Bill No. 707
(Stats. 2019, ch. 870, § 5), is similar to section 1281.97, but
applies when the drafting party fails to make payments required
to continue an arbitration already in progress. (§ 1281.98,
subd. (a)(1).) Although plaintiff brought her motion to lift the
arbitration stay under both sections 1281.97 and 1281.98,
defendant failed to pay within 30 days the initial invoice from the
arbitration provider, not a subsequent invoice during the
pendency of the proceedings. Thus, section 1281.97 applies to the
instant case, and that statute is the focus of our analysis.
B. Section 1281.97 Contains No Exceptions for
Substantial Compliance, Unintentional Nonpayment,
or Absence of Prejudice
The parties do not dispute that defendant did not pay the
arbitration provider’s invoice within 30 days of the due date for
payment. The trial court nonetheless denied plaintiff’s motion
under section 1281.97, finding defendant was in “substantial[ ]
compliance” with the arbitration agreement and “not in material
breach,” because the delayed payment was due to “ ‘clerical
error,’ ” and the delay did not prejudice plaintiff. Plaintiff does
not contest the findings that the delay was due to clerical error
and she suffered no prejudice. Rather, she argues section
1281.97 “provide[s] no such exceptions,” and requires strict
enforcement. We agree with plaintiff’s interpretation of the
statute.
“ ‘ “ ‘When we interpret a statute, “[o]ur fundamental
task . . . is to determine the Legislature’s intent so as to
10
effectuate the law’s purpose. We first examine the statutory
language, giving it a plain and commonsense meaning. We
do not examine that language in isolation, but in the context of
the statutory framework as a whole in order to determine its
scope and purpose and to harmonize the various parts of the
enactment. If the language is clear, courts must generally follow
its plain meaning unless a literal interpretation would result in
absurd consequences the Legislature did not intend. If the
statutory language permits more than one reasonable
interpretation, courts may consider other aids, such as the
statute’s purpose, legislative history, and public policy.”
[Citation.] “Furthermore, we consider portions of a statute in the
context of the entire statute and the statutory scheme of which it
is a part, giving significance to every word, phrase, sentence, and
part of an act in pursuance of the legislative purpose.” ’ ” ’
[Citation.]” (Smith v. LoanMe, Inc. (2021) 11 Cal.5th 183, 190.)
Interpretation of a statute is a question of law we review de novo.
(Ibid.)
The language of section 1281.97 is unambiguous. It
provides that the drafting party is in “material breach,” and the
nondrafting party is entitled to the remedies under the statute,
“if the fees or costs to initiate an arbitration proceeding are not
paid within 30 days after the due date . . . .” (§ 1281.97,
subd. (a)(1).) Under the plain language of the statute, then, the
triggering event is nothing more than nonpayment of fees within
the 30-day period—the statute specifies no other required
findings, such as whether the nonpayment was deliberate or
inadvertent, or whether the delay prejudiced the nondrafting
party. The plain language therefore indicates the Legislature
11
intended the statute to be strictly applied whenever a drafting
party failed to pay by the statutory deadline.
Supporting our conclusion is that elsewhere in the
statutory scheme enacted under Senate Bill No. 707, the
Legislature expressly granted the trial court discretion whether
to order certain remedies for nonpayment. Section 1281.99 states
that the court “shall impose a monetary sanction” in the event of
a material breach under section 1281.97 (§ 1281.99, subd. (a),
italics added), but the court “may order” additional nonmonetary
sanctions “unless the court finds that the one subject to the
sanction acted with substantial justification or that other
circumstances make the imposition of the sanction unjust” (id.,
subd. (b), italics added).
Given the Legislature’s express grant of discretion as to
imposition of nonmonetary sanctions, we may presume the
Legislature did not intend implicitly to grant that same
discretion on the issues of material breach and imposition of
monetary sanctions. (Jarman v. HCR ManorCare, Inc. (2020)
10 Cal.5th 375, 385 [“ ‘When one part of a statute contains a term
or provision, the omission of that term or provision from another
part of the statute indicates the Legislature intended to convey a
different meaning.’ ”]; People v. Buycks (2018) 5 Cal.5th 857, 880
[“ ‘When the Legislature “has employed a term or phrase in one
place and excluded it in another, it should not be implied where
excluded.” ’ ”].)
Defendant argues the legislative history of Senate Bill
No. 707 indicates the Legislature’s intent was to discourage
drafting parties from deliberately delaying payment of fees,
“not to punish innocent parties who unintentionally delayed”
payment. Defendant contends to apply the remedies of section
12
1281.97 in the present circumstance, in which defendant’s delay
in payment was inadvertent and due to a clerical error, would be
an “absurd consequence[ ].”
It is certainly true that “strategic non-payment of fees” was
a motivating concern behind Senate Bill No. 707. (Stats. 2019,
ch. 870, § 1, subd. (d).) Had the Legislature intended to limit the
reach of the statute to that circumstance, it could have done so,
including by adding a provision to section 1281.97 similar to that
in section 1281.99, subdivision (b), giving trial courts discretion
not to apply the statute if the delay in payment was inadvertent
or otherwise excusable. The Legislature chose not to include such
a provision, however, which indicates an intent to apply the
statute to any circumstance in which a drafting party fails timely
to pay, and not just when the drafting party does so deliberately.
We do not agree that applying the statute strictly, even
when nonpayment is inadvertent, leads to absurd consequences.
Although strict application may in some cases impose costs on
drafting parties for innocent mistakes, the Legislature could have
concluded a brightline rule is preferable to requiring the
nondrafting party to incur further delay and expense establishing
the nonpayment was intentional and prejudicial. The Legislature
also reasonably could have decided that whatever the reason for a
delay in payment, the drafting party should bear the
consequences of that delay rather than the nondrafting party.
Indeed, the legislative history indicates the Legislature
considered and rejected the argument that section 1281.97 would
unfairly penalize drafting parties for minor errors. Groups
opposing Senate Bill No. 707, including the California Chamber
of Commerce, objected that under the proposed law a drafting
party would be subject to sanctions “even if[ ] ‘the drafting party
13
paid a majority of the fees and costs, but yet a small, minor
portion was not paid.’ ” (Assem. Com. on Judiciary, Analysis of
Senate Bill No. 707 (2019–2020 Reg. Sess.) as amended May 20,
2019, p. 8.) An analysis by the Assembly Committee on Judiciary
acknowledged “that a failure to pay the required costs and fees in
full would expose a company to significant monetary penalties
and potentially serious evidentiary sanctions or a contempt
holding. However, this risk should also be viewed in light of the
harm that the drafting party’s breach of contract could impose on
employees or consumers who are in limbo, with no avenue to
pursue their legal rights. Particularly in employment matters,
the plaintiff’s livelihood may be the subject of the adjudication.
Although a large company may view its failure to pay a few
hundred dollars for arbitration as a minor, immaterial, mistake,
that mistake may delay the hearing of an employee’s claims.
While immaterial to the drafting party, the ensuing delay
associated with this minor error could be significant to the
employee, who may not be able to pay bills, rent or other
expenses that could result in the loss of their residence, or
damage to their credit rating, while the dispute remains
unresolved.” (Id. at pp. 8–9.)
Defendant argues that Sink, the Ninth Circuit case cited in
the legislation enacting section 1281.97, does not support a
finding of material breach in the instant case. Were the relevant
language of section 1281.97 ambiguous, arguably we would look
to Sink to assist us in interpreting it. As we have explained, the
language is not ambiguous. We will not read implied terms into
an unambiguous statute merely because the enacting legislation
invoked a prior court decision.
14
In sum, the trial court erred in denying plaintiff’s motion
on the basis that defendant substantially complied with
section 1281.97, subdivision (a)(1), its delayed payment was
inadvertent, and plaintiff suffered no prejudice.
C. The FAA Does Not Preempt Section 1281.97
Our conclusion that section 1281.97 must be applied
strictly does not end our inquiry, because defendant further
argues the statute, if strictly applied, conflicts with the FAA and
therefore is preempted. Because “federal preemption presents a
pure question of law,” our review is de novo. (Farm Raised
Salmon Cases (2008) 42 Cal.4th 1077, 1089, fn. 10.)7
“The FAA makes arbitration agreements ‘valid, irrevocable,
and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.’ 9 U.S.C. § 2. That
statutory provision establishes an equal-treatment principle: A
court may invalidate an arbitration agreement based on
7 Plaintiff argues that defendant forfeited its preemption
argument by failing to raise it in the trial court. We reject this
argument. Courts have held that “a party may raise a
constitutional issue, like preemption, for the first time
on appeal.” (ReadyLink Healthcare, Inc. v. Jones (2012)
210 Cal.App.4th 1166, 1175.) It is well settled, moreover, that “a
judgment or order will be affirmed if it is correct on any theory,
regardless of the trial court’s reasons; thus, a respondent may
assert a new theory to establish that an order was correct on that
theory ‘unless doing so would unfairly prejudice [petitioner] by
depriving him or her of the opportunity to litigate an issue of
fact.’ [Citation.]” (Bailon v. Appellate Division (2002)
98 Cal.App.4th 1331, 1339, italics omitted.) Defendant’s
preemption argument does not raise any issues of fact, and
plaintiff does not contend otherwise.
15
‘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.] The FAA
thus preempts any state rule discriminating on its face against
arbitration—for example, a ‘law prohibit[ing] outright the
arbitration of a particular type of claim.’ [Citation.]” (Kindred
Nursing Centers Ltd. v. Clark (2017) 137 S.Ct. 1421, 1426.
The FAA also preempts facially neutral state-law rules that
“disfavor arbitration as applied by imposing procedural
requirements that ‘interfere[ ] with fundamental attributes of
arbitration,’ especially its ‘ “lower costs, greater efficiency and
speed, and the ability to choose expert adjudicators to resolve
specialized disputes.” [Citation.]’ [Citation.]” (Sonic-Calabasas
A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1143 (Sonic), quoting
AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 344, 348
(Concepcion).)
Defendant argues section 1281.97 violates the FAA’s equal-
treatment principle because it “creates a definition of ‘material
breach’ and ‘waiver’ ” exclusive to arbitration agreements and
inconsistent with “general principles of breach of contract and
waiver in other contexts.” Defendant contends that under
generally applicable California contract law, a finding of waiver
or material breach involves a fact-specific, factor-based inquiry by
the trier of fact. Section 1281.97 “displaces ordinary fact-
finding,” instead mandating that any failure to pay arbitration
fees within the 30-day statutory period, even briefly and
unintentionally, constitutes a material breach and waiver of the
right to arbitration. Section 1281.97’s rule, moreover,
asymmetrically applies only to drafting parties. Defendant
16
contends section 1281.97 therefore singles out arbitration
agreements for disfavored treatment, in violation of the FAA.
After completion of briefing and oral argument in the
instant case, our colleagues in Division Two issued their decision
in Gallo, supra, 81 Cal.App.5th 621, upholding the validity of
section 1281.97 in the face of a preemption argument similar to
the one advanced by defendant here. We invited the parties to
submit supplemental briefing addressing Gallo, which they did.
Having reviewed that briefing, we agree with the holding and
reasoning of Gallo, and apply it here. We begin by summarizing
Gallo.
1. Gallo
In Gallo, the defendant failed to pay its arbitration fees
within 30 days of the deadline set by the arbitration provider,
apparently due to miscommunications within the law firm
representing the defendant. (Gallo, supra, 81 Cal.App.5th at
pp. 631–632.) The defendant ultimately paid its fees 10 days past
the 30-day cutoff. (Id. at p. 632.) The trial court granted the
plaintiff’s motion under section 1281.97 to return the matter to
court, finding the defendant “had no viable excuse for its late
payment,” and rejecting the defendant’s argument that the FAA
preempted section 1281.97. (Gallo, at p. 632.)
The Court of Appeal affirmed the trial court. (Gallo, supra,
81 Cal.App.5th at p. 647.) The appellate court acknowledged that
section 1281.97 “undeniably single[s] out arbitration insofar as
[it] define[s] procedures that apply only to arbitrated disputes.”
(Gallo, at p. 641.) The court further acknowledged that the
statute “departs from the usual rule” that material breach is “an
issue of fact for the trier of fact to determine.” (Id. at p. 644.)
17
The court disagreed with the defendant, however, that this
required a finding of preemption.
Analyzing precedent, the Gallo court observed that the
mere fact that a law applies solely to arbitration is insufficient to
preempt it under the FAA. (Gallo, supra, 81 Cal.App.5th at
p. 638.) Rather, the FAA preempts state laws that “single[ ] out
one or more types of arbitration agreements in order to ‘outright’
‘prohibit[ ]’ their formation or enforcement,” such as laws
prohibiting arbitration of certain categories of claims. (Id. at
pp. 637–638.) The FAA also preempts state laws that, while not
outright barring arbitration of certain claims, “ ‘more subtly’
discourage” the formation or enforcement of arbitration
agreements, for example by imposing heightened notice
requirements for arbitration agreements, limiting the ability of
representatives with power of attorney to sign arbitration
agreements, or prohibiting waivers of class arbitration. (Id. at
p. 638.)
In contrast, Gallo noted state laws “that define the
standard rules ‘governing the conduct of arbitration,” such as
provisions within the California Arbitration Act (CAA) (§ 1280
et seq.), “have been upheld as not preempted by the FAA, even
though those provisions are necessarily arbitration specific.”
(Gallo, supra, 81 Cal.App.5th at p. 639.) This is because “ ‘[t]here
is no federal policy favoring arbitration under a certain set of
procedural rules” [citation] so ‘the FAA leaves room for states to
enact some rules affecting arbitration’ that the parties may
choose to adopt [citation].” (Ibid.) As examples of valid
arbitration-specific state rules, Gallo cited section 1281.2, which
permits trial courts under certain circumstances to stay
arbitration or deny it altogether if there is risk of a conflicting
18
ruling in a parallel judicial action, and section 1286.2, which
narrows the scope of judicial review of arbitration awards.
(Gallo, at pp. 639–640.)
Applying these principles, the Gallo court concluded that,
although section 1281.97 is an arbitration specific statute, it
does not “commit the additional—and . . . necessary for
preemption—sin of outright prohibiting arbitration or more
subtly discouraging arbitration.” (Gallo, supra, 81 Cal.App.5th at
p. 641.) Rather, stated the court, section 1281.97, along with
section 1281.99, “define the procedures governing the date by
which the party who drafted an agreement to arbitrate against
an employee or consumer must pay the initial fees and costs to
arbitrate, and specify the consequences of untimely payment.”
(Ibid.) These provisions, the court reasoned, are akin to other
procedural statutes under the CAA, such as sections 1281.2 and
1281.6, “that have been repeatedly found not to be preempted by
the FAA, at least where . . . the parties have agreed to
incorporate the CAA into their agreement to arbitrate.” (Gallo,
at p. 642.)
The court also concluded sections 1281.97 and 1281.99
“do not disfavor arbitration because the consequences of blowing
the payment limitations period they erect do not necessarily end
the nascent arbitration: Section 1281.97 gives the employee or
consumer the option of continuing in arbitration or returning to a
judicial forum.” (Gallo, supra, 81 Cal.App.5th at p. 642.)
The court further held that section 1281.97 does not
interfere with fundamental attributes of arbitration, the other
basis upon which courts have found state laws affecting
arbitration preempted. (Gallo, supra, 81 Cal.App.5th at pp. 640,
642.) Because the arbitration agreement at issue in Gallo
19
expressly incorporated the CAA, applying the CAA’s procedural
rules did not “interfere with the FAA’s first goal of honoring the
parties’ intent.” (Id. at p. 642.) Also, applying section 1281.97 “is
fully consistent with the parties’ more general intent to arbitrate
because the parties’ agreement was to arbitrate the dispute, not
let it die on the vine and languish in limbo while the party who
demanded arbitration thereafter stalls it by not paying the
necessary costs in a timely fashion.” (Gallo, at p. 643.)
As for the FAA’s “goal of safeguarding arbitration as an
expedited and cost-efficient vehicle for resolving disputes,” the
Gallo court concluded section 1281.97 actually “facilitate[s]
arbitration by preventing parties from insisting that a dispute be
resolved through arbitration and then sabotaging that arbitration
by refusing to pay the fees necessary to move forward in
arbitration.” (Gallo, supra, 81 Cal.App.5th at p. 643.)
The Gallo court rejected the defendant’s argument, similar
to defendant’s argument in this case, that section 1281.97
disfavored arbitration because it allowed a finding of material
breach without a showing that the defendant “was to blame for
the late payment or that plaintiff was prejudiced by it.” (Gallo,
supra, 81 Cal.App.5th at p. 644.) The court concluded that the
Legislature “had a good reason for declaring untimely payment
[of arbitration fees] a material breach as a matter of law”:
“Employees and consumers were facing either the complete
denial of any relief or delays in obtaining relief by virtue of the
‘ “perverse incentive” ’ companies and businesses had to push
claims into arbitration and then to refuse to pay the resulting
arbitration fees; in such circumstances and to combat those
incentives, the Legislature reasoned, no breach was immaterial
to the stranded employee or consumer.” (Ibid.)
20
The court further noted that all arbitration-specific rules
alter rights the parties otherwise would have under generally
applicable litigation principles—for example, the rules limiting
judicial review of arbitration awards deprive the losing party of
the full right to appeal available in litigation. (Gallo, supra,
81 Cal.App.5th at p. 644.) Yet, noted the court, many such rules
have not been held preempted. (Id. at p. 645.) The court
explained: “[S]ection 1281.97 is one of several statutes that are
part of the CAA, which defines the very procedures by which
arbitration is to be conducted under California law. These
statutes, by definition, set up different procedures from those
governing litigation in the California courts. In any given case
(and thus in every single case), one of the parties to an arbitration
will be able to show that it was harmed by being subject to those
arbitration-specific procedures: A party who might have obtained
a reversal due to legal or factual error in the trial court will be
denied that reversal under the more limited review provisions
of section 1286.2, just as [the defendant] is now arguing that
it might not have been found in material breach of the
arbitration agreement had it been in court (and not subject to
§ 1281.97), where it could have advanced its counsel’s
inattentiveness as a possible excuse for its 36-day-late payment.
If that showing were enough to justify preemption under the
FAA, then preemption would be found in every case and the CAA
would cease to exist. This is contrary to the law, explained above,
which has repeatedly rejected FAA preemption challenges to the
CAA’s provisions defining how arbitration is to proceed.” (Id. at
pp. 644–645.)
Addressing other arguments the defendant in Gallo raised,
the court concluded the fact that section 1281.97 “had the effect
21
of ending the arbitration in this case” did not “frustrate[ ] the
FAA’s objective of honoring the parties’ intent,” because the
parties agreed to be bound by the CAA and its payment
requirements, and “did not agree to let [the defendant]
commit . . . violations of section 1281.97 with impunity.”
(Gallo, supra, 81 Cal.App.5th at p. 645.) The court rejected the
defendant’s contention that canceling an arbitration because of a
slight delay in payment thwarted the FAA’s objective of speedy
and efficient dispute resolution, stating that “section 1281.97’s
procedures putting a business’s feet to the fire to pay on time
facilitates the resolution of disputes with alacrity.” (Ibid.)
Similarly, the court disagreed section 1281.97 was “ ‘hostile’ ” to
arbitration when the statute, if incorporated into the parties’
agreement, “honors the parties’ intent and results in a faster
proceeding.” (Ibid.)
Gallo noted that federal district courts uniformly had
rejected arguments the FAA preempted section 1281.97. (Gallo,
supra, 81 Cal.App.5th at p. 643, citing Postmates Inc. v. 10,356
Individuals (C.D.Cal., Jan. 19, 2021, No. CV-20-2783-PSG
(JEMx), 2021 WL 540155, 2021 U.S.Dist. Lexis 28554, pp. *21–
*22; Agerkop v. Sisyphian LLC (C.D.Cal., Apr. 13, 2021,
No. CV-19-10414-CBM-(JPRx), 2021 WL 1940456, 2021 U.S.Dist.
Lexis 93905, pp. *11–*13.)
2. Analysis
a. Under Gallo’s reasoning, defendant’s
preemption argument fails
We agree with Gallo that section 1281.97 is not analogous
to state laws preempted by the FAA in other cases. Section
1281.97 does not prohibit or discourage the formation or
22
enforcement of arbitration agreements, either by barring certain
claims from arbitration or imposing obstacles that make it
difficult to enter into arbitration agreements. Indeed, in the
instant case, as in Gallo, the defendant successfully moved the
trial court to enforce the arbitration agreement at issue.
Once a court has enforced an arbitration agreement,
however (or the parties have agreed to arbitrate under it), section
1281.97 sets forth certain procedural requirements to achieve the
FAA’s goal of “safeguarding arbitration as an expedited and
cost-efficient vehicle for resolving disputes.” (Gallo, supra,
81 Cal.App.5th at p. 643.) Specifically, drafting parties must
timely pay their required fees to ensure the arbitration does not
“die on the vine and languish in limbo.” (Ibid.) Far from
imposing an obstacle to arbitration, section 1281.97 facilitates an
expeditious resolution of the dispute, thus furthering the goals of
the FAA. As Gallo observed, this is akin to section 1286.2, which
also facilitates expeditious resolution by narrowing the scope of
judicial review of arbitration awards. (Gallo, at p. 640; Marsch v.
Williams (1994) 23 Cal.App.4th 238, 243 [“To ensure that an
arbitrator’s decision is, indeed, the end of a dispute, arbitration
judgments are subject to extremely narrow judicial review.”].)
Further distinguishing section 1281.97 from invalid state
laws prohibiting or discouraging arbitration, section 1281.97
does not automatically invalidate arbitration agreements if the
drafting party fails to meet is procedural obligations. Rather, as
Gallo noted, it “gives the employee or consumer the option of
continuing in arbitration or returning to a judicial forum.”
(Gallo, supra, 81 Cal.App.5th at p. 642.) In other words, even
when triggered, the remedies under section 1281.97 are not an
absolute bar to arbitration.
23
Also compelling is Gallo’s reasoning that the mere fact an
arbitration specific rule alters the rights the parties would have
in ordinary litigation does not necessarily mean the rule conflicts
with the FAA’s equal treatment principle. As Gallo explained,
courts have upheld the CAA’s limitations on judicial review of
arbitration awards, despite those rules depriving the parties of
their full appellate rights. (Gallo, supra, 81 Cal.App.5th at
pp. 644–645.) Similarly, section 1281.97, for the sake of ensuring
expeditious resolution of disputes, limits the arguments a
drafting party may raise when it fails timely to pay its required
fees, for example barring arguments that the failure was
excusable or nonprejudicial. We agree with Gallo that this
limitation does not violate the FAA.
Defendant argues Gallo is inapposite because the court in
that case “was not presented with the issue of whether strict
application of [section 1281.97] is required or whether such strict
application—without regard to general contract principles—
would be preempted by the FAA.” Defendant contends “the
superior court in Gallo had considered general contract principles
in finding that the defendant had ‘no viable excuse for its late
payment’ [citation], so there was no conflict between the statute’s
requirements and the superior court’s contract analysis.” In the
instant case, in contrast, the trial court applied generally
applicable contract principles of substantial compliance to deny
plaintiff’s section 1281.97 motion.
Nothing in Gallo suggests its holding depends on the trial
court’s ruling under section 1281.97 also being correct under
ordinary contract principles. Gallo specifically acknowledged
section 1281.97 applies a different rule for material breach than
applies under generally applicable contract law, and concluded
24
the rule was valid under the FAA without reference to the
trial court’s particular ruling in that case. (Gallo, supra,
81 Cal.App.5th at pp. 644–645.) Indeed, apart from the summary
of the case background, Gallo never discusses the trial court’s
particular ruling. We reject defendant’s suggestion that Gallo’s
preemption analysis would differ had the trial court in that case,
as in the instant case, denied the section 1281.97 motion under
generally applicable contract principles.
Defendant further argues 1281.97 conflicts with the FAA
because its penalties for delays in payment, namely the monetary
and other sanctions under section 1281.99, will discourage
companies from entering into arbitration agreements. We
disagree. The statute’s 30-day deadline is generous enough that
a party exercising reasonable diligence reliably can meet it, and
we think it unlikely employers and others would forego the
advantages of arbitration for fear of missing that deadline.
Rather, particularly in light of Gallo and this opinion, we expect
drafting parties will take extra care timely to pay their
arbitration invoices, thus expediting resolution of disputes and
fulfilling the goals of section 1281.97.
b. The arbitration agreement at issue
incorporated the CAA by default
As we explain below, the arbitration agreement in the
instant case differs from the arbitration agreement in Gallo in
that it does not expressly incorporate the CAA. That distinction
does not affect our holding, because we conclude the arbitration
agreement in the instant case incorporates the CAA by default.
The arbitration agreement in Gallo stated that the
arbitrator was “to look to the ‘California Arbitration Act . . . to
conduct the arbitration and any pre-arbitration activities.’ ”
25
(Gallo, supra, 81 Cal.App.5th at p. 630].) The Gallo court
emphasized this express agreement to incorporate the CAA,
which now includes section 1281.97, when concluding that section
1281.97 did not “frustrate[ ] the FAA’s goals of honoring the
parties’ intent” by imposing terms to which the parties did not
agree. (Gallo, at p. 643; see id. at p. 642 [referring to sections of
the CAA “that have been repeatedly found not to be preempted by
the FAA, at least where . . . the parties have agreed to
incorporate the CAA into their agreement to arbitrate”].)
The arbitration agreement at issue in the instant case
does not include express language broadly incorporating the
CAA. On the subject of governing law, the agreement states,
“The arbitrator shall be bound by the provisions and procedures
set forth in the Employment Arbitration Rules and Mediation
Procedures of the [American Arbitration Association]. The
applicable substantive law shall be the law of the state in which
[the employee] provide[s] services or federal law. If both federal
and state law speak to a cause of action, the party commencing
the action shall have the right to elect his/her choice of law.”
The agreement also provides that discovery is governed by
“the civil discovery statutes of the state in which [the employee]
provide[s] services.” The agreement further states, “Following
the issuance of the arbitrator’s decision, any party may petition a
court to confirm, enforce, correct or vacate the arbitrator’s
opinion and award under the Federal Arbitration Act, 9 U.S.C.
§§ 1–16, if applicable, and/or applicable state law.”
This language lacks the broad express incorporation of the
CAA’s procedures present in Gallo—rather, the agreement
expressly refers to state law procedures only in the context of
26
discovery and any steps “to confirm, enforce, correct or vacate the
arbitrator’s opinion and award.”
We need not, and do not, decide whether Gallo’s holding
depends on the arbitration agreement at issue incorporating the
CAA, because we conclude that requirement is satisfied here,
despite the lack of express incorporation. As this court held in
Valencia v. Smyth (2010) 185 Cal.App.4th 153 (Valencia), “the
procedural provisions of the CAA apply in California courts by
default.” (Id. at p. 174, italics omitted.)
In Valencia, we confronted whether the arbitration
agreement at issue was governed by the procedural provisions of
the CAA or the FAA. As we explained, “parties may ‘expressly
designate that any arbitration proceeding [may] move forward
under the FAA’s procedural provisions rather than under state
procedural law.’ [Citation.] Absent such an express designation,
however, the FAA’s procedural provisions do not apply in state
court.” (Valencia, supra, 185 Cal.App.4th at p. 174; accord,
Nixon v. AmeriHome Mortgage Co., LLC (2021) 67 Cal.App.5th
934, 945; see Mave Enterprises, Inc. v. Travelers Indemnity
Co. (2013) 219 Cal.App.4th 1408, 1429 [“the procedural
provisions of the CAA” apply in California courts “absent a
choice-of-law provision expressly mandating the application of
the procedural law of another jurisdiction”].)
Although the arbitration agreement at issue in the instant
case does not expressly incorporate the procedural provisions of
the CAA, it also does not expressly incorporate the procedural
provisions of another jurisdiction. Given the absence of contrary
language, therefore, the parties implicitly consented to
application of the CAA’s procedural provisions, as much as had
they expressly incorporated those provisions into their
27
arbitration agreement. (See Judge v. Nijjar Realty, Inc. (2014)
232 Cal.App.4th 619, 631 [when arbitration agreement “does not
mention the FAA or the CAA, and . . . does not include a
choice-of-law provision,” California procedural law applies];
Valencia, supra, 185 Cal.App.4th at p. 179 [“Assuming the
parties failed to incorporate the CAA’s procedural provisions,
that failure was of no consequence: A state’s procedural statutes
automatically apply in state court unless the parties expressly
agree otherwise,” italics omitted].) Thus, as in Gallo, application
of the provisions does not conflict with the FAA’s goal of honoring
the parties’ intent.
We acknowledge that the trial court, in granting
defendant’s motion to compel arbitration, ruled that “the FAA
governs the terms of the parties’ agreement,” a ruling plaintiff
does not challenge. The trial court made that finding, however,
solely in the context of compelling arbitration in the first place,
concluding that under the FAA its “analysis is limited . . . to
whether there is an enforceable agreement between the parties
and whether Plaintiff’s claims fall within the ambit of that
agreement.” The question of what procedures governed the
arbitration itself was not before the trial court, and defendant
never raised its preemption argument in the trial court. We
interpret the trial court’s ruling on the applicability of the FAA,
therefore, to be narrow, and plaintiff’s lack of challenge to that
ruling does not preclude our conclusion that section 1281.97
applies to the agreement before us.
In its supplemental briefing, defendant argues the
arbitration agreement is not silent as to which procedural rules
apply, because it expressly incorporates the Employment
Arbitration Rules and Mediation Procedures of the American
28
Arbitration Association (AAA rules).8 Rule 47 of those rules,
entitled “Suspension for Non-Payment,” provides “If arbitrator
compensation or administrative charges have not been paid in
full, the AAA may so inform the parties in order that one of them
may advance the required payment. If such payments are not
made, the arbitrator may order the suspension or termination of
the proceedings. If no arbitrator has yet been appointed, the
AAA may suspend or terminate the proceedings.”
Defendant argues AAA rule 47 “do[es] not require that the
[arbitration] be immediately terminated if payment is not
received within 30 days of the invoice.” Rather, the arbitrator
has “the discretion to suspend or terminate the arbitration
proceedings upon non-payment.”
Assuming arguendo parties contractually may waive the
provisions of section 1281.97, we disagree with defendant that
incorporation of the AAA rules constitutes waiver. AAA rule 47
concerns the actions the arbitrator or arbitration provider may
take in the event of nonpayment. Section 1281.97, in contrast,
concerns the actions the trial court may take upon nonpayment,
including lifting the litigation stay so the matter may proceed in
court and imposing sanctions.9 Nothing in the AAA rules
purports to limit or modify the trial court’s powers in that regard,
8 We grant defendant’s request to take judicial notice of
the AAA rules. (Evid. Code, §§ 452, subd. (h), 459.) We also take
judicial notice of the declaration of Mohsen Mobasser in support
of the motion to compel arbitration and stay proceedings pending
arbitration, which was filed in the trial court and attaches the
parties’ arbitration agreement. (Id., §§ 452, subd. (d), 459.)
9 We express no opinion if and to what extent section
1281.97 governs the actions of arbitrators, an issue not before us.
29
and plaintiff’s agreement to abide by the AAA rules therefore
cannot constitute a waiver of her right to invoke those powers.
D. On Remand, the Trial Court Shall Consider
Plaintiff’s Sanctions Request
Because the trial court denied plaintiff’s motion under
section 1281.97 upon a finding of defendant’s substantial
compliance, a ruling we hold to be in error, the trial court did not
reach plaintiff’s motion for sanctions under section 1281.99.
We direct the trial court to address plaintiff’s sanctions motion on
remand. We express no opinion as to how the trial court should
rule on that motion.
DISPOSITION
The petition for writ of mandate is granted. Let a
peremptory writ of mandate issue directing the trial court to
(1) vacate its order denying plaintiff’s motion under Code of Civil
Procedure sections 1281.97 and 1281.99; (2) enter an order lifting
the stay of litigation and allowing plaintiff to bring her claims in
court; and (3) conduct further proceedings, consistent with this
opinion, on plaintiff’s motion for sanctions under section 1281.99.
Petitioner shall recover her costs with regard to this writ
proceeding.
CERTIFIED FOR PUBLICATION.
BENDIX, J.
We concur:
ROTHSCHILD, P. J. CHANEY, J.
30