California says that preemption does not excuse untimely payment of arbitration invoices

The 1^st Appellate District in Colon-Perez v. Security Industry Specialists, Inc., is the latest court to address whether the California Arbitration Act's provisions regarding timely payment of arbitration invoices are preempted by the Federal Arbitration Act. This issue has become ripe for review by the California Supreme Court and the United States Supreme Court.

Code Civ. Proc. §§ 1281.97 and 1281.98

In 2019, the California Legislature added sections 1281.97 and 1281.98 to the CAA. 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. These sections provide that in an employment or consumer arbitration, if the drafting party fails to pay arbitration fees 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 the employee or consumer to proceed with that arbitration as a result of the material breach."

Since the enactment of sections 1281.97 and 1281.98, there have been numerous cases where employers failed to timely pay arbitration fees and employees elected to withdraw from the arbitration and proceed in superior court. In some instances, employers have argued that sections 1281.97 and 1281.98 are preempted by the FAA, with mixed results.

The general argument of FAA preemption

The FAA "requires courts to place arbitration agreements 'on equal footing with all other contracts.'" Kindred Nursing Centers L.P. v. Clark, 581 U.S. 246, 248 (2017). Under this equal treatment principle, while a court can invalidate an arbitration agreement based on "'generally applicable contract defenses,'" it cannot do so based on state rules that "'apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.'" Id. at 251.

Employers argue that sections 1281.97 and 1281.98 violate the FAA's equal treatment principle because they treat arbitration agreements differently than other contracts. Specifically, the statute withdraws the right of the drafting party to enforce the arbitration agreement and a "rule affects the 'enforceability' of a contract when it determines that one side may enforce the contract, but the other may not." Belyea v. GreenSky Inc., 637 F. Supp. 3d 745, 758 (N.D. 2022). In sum, employers argue that sections 1281.97 and 1281.98 single out arbitration agreements for disfavored treatment because no other contracts are voided on a bright line basis due to tardy performance (whereas the rule for a material breach of a contract generally is a "reasonable time" to perform an act under Civ. Code § 1657).

California appellate court decisions addressing preemption arguments

There are six published decisions that have addressed employers' FAA preemption argument and five of them rejected the argument - all following the same reasoning.

The courts found that sections 1281.97 and 1281.98 are not preempted because they "further--rather than frustrate--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 v. Wood Ranch USA, Inc., 81 Cal. App. 5th 621, 630 (2022). Sections 1281.97 and 1281.98 "do not commit the additional--and . . . necessary for preemption--sin of outright prohibiting arbitration or more subtly discouraging arbitration. Instead, [they] define the procedures governing the date by which the party who drafted an agreement to arbitrate against an employee . . . must pay the initial fees and costs to arbitrate, and specify the consequences of untimely payment." Id. at p. 641 (italics omitted). See also Colon-Perez v. Security Industry Specialists, Inc., No. A168297, 2025 WL 322949 (Cal. Ct. App. Jan. 29, 2025); Keeton v. Tesla, Inc., 103 Cal. App. 5th 26 (2024); Hohenshelt v. Superior Ct., 99 Cal. App. 5th 1319 (2024); Suarez v. Superior Ct. of San Diego Cnty., 99 Cal. App. 5th 32 (2024).

Only Division Five of the 2^nd Appellate District, in Hernandez v. Sohnen Enterprises, Inc., 102 Cal. App. 5th 222 (2024), has agreed that the FAA preempts section 1281.97 and 1281.98. In doing so, the Hernandez court noted that "parties can avoid preemption by expressly agreeing to apply state law to their agreements, whether state substantive law, state procedural law, or both." Id. at 298. Interestingly, the five cases that rejected the preemption argument dealt with arbitration agreements which expressly incorporated the CAA or incorporated it to the extent the CAA is not in conflict with the FAA.

What's next?

Hohenshelt v. Superior Ct., is currently pending review in the California Supreme Court to address the appellate split in authority. Given that the United States Supreme Court, on six separate occasions, has found California state law to disfavor arbitration and be preempted by the FAA, if the California Supreme Court rule that sections 1281.97 and 1281.98 are not preempted, the U.S. Supreme Court may well be invited to issue its seventh reprimand to the Golden State. Until then, employers should be sure to pay their arbitration bills on time.