When the defendants do not timely pay arbitration fees

Using SB 707 (CCP §§ 1280, 1281) to escape arbitration: the statutes and case law

2023 March

In 2019, Governor Gavin Newsom signed SB 707, an arbitration-related bill, into law. SB 707: (1) has been in effect since January 1, 2020; (2) amended sections 1280 and 1281.96 of the Code of Civil Procedure; and (3) added sections 1281.97, 1281.98, and 1281.99 to the Code of Civil Procedure. This newer law applies to employment- and consumer-arbitration agreements. If a company or business defaults on an arbitration payment beyond 30 days of its due date, SB 707 states that it is in default of the arbitration and has waived its right to compel arbitration. In this scenario, SB 707 outlines four procedural remedies available to employees and consumers:

they may elect to withdraw the claim from arbitration and proceed in court (Code Civ. Proc., §§ 1281.97, subd. (b)(1), 1281.98, subd. (b)(1));

they may pay the employer’s unpaid fees in order to continue the arbitration, and recover the amount paid at the end of the proceeding regardless of whether or not they prevail (Code Civ. Proc., § 1281.98, subd.(b)(4));

they may petition the court for an order compelling the defendant to pay the fees (Code Civ. Proc., § 1281.98, subd. (b)(3)); or

they may choose to continue in arbitration, provided that the arbitrator agrees to continue as well (Code Civ. Proc. § 1281.98, subd. (b)(2)).

This article provides both: (1) tips to follow as soon as lawyers representing employees and consumers are compelled to arbitration in the event that a defendant later does not timely pay arbitration fees and (2) the latest friendly SB 707 cases that lawyers representing employees and consumers should cite after a defendant does not timely pay arbitration fees.

After being compelled to arbitration, get a service list from opposing counsel

I successfully had a motion-to-compel-arbitration order vacated after a set of defendants in that case failed to pay arbitration fees on time. The judge did not buy those defendants’ arguments seeking to keep the case in arbitration, but I am discussing the case in this article because defendants made unique arguments. The American Arbitration Association (“AAA”) was the arbitration company in the case.

There was only one counsel of record listed for the defendants in their pleadings. I served the Demand for Arbitration via regular mail and AAA served their invoices via email only to that sole counsel of record. The defendants argued that they did not have notice of my Demand for Arbitration and AAA’s invoices because the only counsel of record was no longer at the law firm representing those defendants by the time I served the Demand for Arbitration; they never bothered to let me or the court know that counsel of record had left until after those defendants had failed to timely pay their arbitration fees.

Those defendants alleged that they had an automated reply set up and essentially “blamed” AAA for not doing anything after presumably seeing the automated reply. They also blamed me for only sending the Demand for Arbitration to the sole counsel of record, saying I should have also included some partner who told me to “pound sand” pre-litigation even though he was not at all involved after I filed the lawsuit. Based on this experience, I strongly urge everyone reading this article to get opposing counsel to email you a service list in writing after being compelled to arbitration.

Options after a defendant fails to timely pay arbitration fees

As mentioned above, an employee or consumer has four possible options in the event a company fails to timely pay arbitration fees. One option is to withdraw from arbitration and proceed in court.

All three remaining options are applicable when an employee or consumer decides to remain in arbitration (and does not elect to proceed in court). (Code Civ. Proc., § 1281.98, subd. (d).) With respect to all three remaining options, the remedy is the same: “the arbitrator shall impose appropriate sanctions…including monetary sanctions, issue sanctions, evidence sanctions, or terminating sanctions.” (Code Civ. Proc., § 1281.98, subd. (d).) Thus, the arbitrator arguably has more leeway in deciding what remedies to order compared to the ones available should the employee or consumer elect to go to court. To be clear, regardless of whether the employee or consumer elects to go back to court or stay in arbitration, both the court and arbitrator must sanction a company for not timely paying arbitration fees.

However, the remedies are arguably more explicit should the employee or consumer elect to go to court. In such a scenario, a court must grant monetary sanctions but can refuse to grant any additional non-monetary sanctions by finding that a company acted with “substantial justification.” (Code Civ. Proc., § 1281.99, subds. (a)-(b).)

Motions electing to go to court should cite Code of Civil Procedure sections 1281.97 subdivision (d) and 1281.99 to highlight that the judge must not only remand the case back to civil court but also must award fees and costs to plaintiff’s counsel. Code of Civil Procedure section 1281.97, subdivision (d) states: “If the employee or consumer proceeds with an action in a court of appropriate jurisdiction, the court shall impose sanctions on the drafting party in accordance with Section 1281.99.” Under Code of Civil Procedure section 1281.99 subdivision (a), “[t]he court shall impose a monetary sanction against a drafting party that materially breaches an arbitration agreement pursuant to subdivision (a) of Section 1281.97 or subdivision (a) of Section 1281.98, by ordering the drafting party to pay the reasonable expenses, including attorney’s fees and costs, incurred by the employee or consumer as a result of the material breach.” Under Code of Civil Procedure section 1281.99, subdivision (b), the court may also issue evidence, terminating, or contempt sanctions in addition to the monetary sanction. Thus, plaintiffs’ lawyers should also request evidence, terminating, and contempt sanctions in such motions.

Statutory law to cite in a civil court motion

If a defendant does not timely pay arbitration fees in an employment or consumer case, any motion filed in civil court should begin by citing the relevant provisions of Code of Civil Procedure sections 1281.97 and 1281.98. For example, plaintiffs’ lawyers filing motions to remand their cases from arbitration back to civil court can start such motions as follows:

Code Civ. Proc. § 1281.97 states:

(a)(1) 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 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.

(2) After an employee or consumer meets the filing requirements necessary to initiate an arbitration, the arbitration provider shall immediately provide an invoice for any fees and costs required before the arbitration can proceed to all of the parties to the arbitration. The invoice shall be provided in its entirety, shall state the full amount owed and the date that payment is due, and shall be sent to all parties by the same means on the same day. To avoid delay, 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, the arbitration provider shall issue all invoices to the parties as due upon receipt.

Caselaw to cite in your motion

There are three cases that plaintiffs’ counsel should always cite:

Gallo v. Wood Ranch USA, Inc. (2022) 81 Cal.App.5th 621 – decided July 25, 2022

Espinoza v. Superior Court (2022) 83 Cal.App.5th 761 – decided September 27, 2022

De Leon v. Juanita’s Foods (2022) 85 Cal.App.5th 740 – decided November 23, 2022

De Leon involved an arbitration before JAMS and made findings with respect to Code of Civil Procedure section 1281.98. On the other hand, Gallo and Espinoza involved arbitrations before AAA. Espinoza made findings with respect to the similar provision, Code of Civil Procedure section 1281.97. Gallo made findings with respect to both Code of Civil Procedure sections 1281.97 and 1281.98.

Caselaw has adopted language from statutory law regarding fees and costs after a breach

The Gallo court found that the failure to timely pay arbitration fees “constitutes a ‘material breach of the arbitration agreement’ that gives the employee or consumer, in addition to a mandatory award of attorneys’ fees and costs related to the breach as well as other discretionary sanctions, the options of either (1) continuing in arbitration with the company or business paying attorneys’ fees and costs related to the arbitration as a whole or (2) withdrawing from arbitration and resuming the litigation in a judicial forum.” (Gallo, supra, 81 Cal.App.5th at 629 (emphasis added).)

Defendants cannot overcome failure to timely pay by citing the FAA

The court in Gallo has found that the Federal Arbitration Act (FAA) does not preempt SB 707: “the California Legislature enacted Code of Civil Procedure sections 1281.97, 1281.98 and 1281.99. (citations) These provisions obligate a company or business who drafts an arbitration agreement to pay its share of arbitration fees by no later than 30 days after the date they are due, and specify that the failure to do so constitutes a ‘material breach of the arbitration agreement’ that gives the employee or consumer…the options of…withdrawing from arbitration and resuming the litigation in a judicial forum. (citations) This appeal presents a question of first impression: Are these provisions preempted by the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.)? We hold that they are not because the procedures they prescribe 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, 81 Cal.App.5th at 629-630.)

“But the FAA preempts SB 707”

The finding above is gold because defendants regularly argue that the FAA preempts SB 707. Defendants make this argument because the FAA arguably gives courts discretion to ignore a defendant’s failure to timely pay arbitration fees. Under the FAA, courts can declare a party to be in “default of arbitration.” However, the FAA does not grant non-defaulting parties the remedies typically available in a judicial proceeding. Moreover, the FAA does not directly address the scenario(s) in which a party breaches the arbitration agreement. Therefore, a plaintiff’s lawyers should cite the above finding from Gallo to make clear to civil courts that plaintiff is entitled to the remedies discussed in Code of Civil Procedure sections 1281.97, 1281.98, and 1291.99.

There are no defenses, like lack of prejudice to plaintiff, after a failure to timely pay

If a defendant in an employment or consumer case does not timely pay arbitration fees, the analysis ends and there is a breach. The plaintiff is entitled to the remedies discussed in Code of Civil Procedure sections 1281.97, 1281.98, and 1291.99. De Leon, Gallo, and Espinoza are clear that a defendant cannot raise defenses, like lack of prejudice to a plaintiff or lack of blame on the part of the defendant who breached.

Gallo found and held that “Wood Ranch [the defendant in Gallo] argues that…Wood Ranch’s tardiness in paying its initial arbitration fee of $1,900 resulted in the matter being returned to the trial court without any showing that Wood Ranch was to blame for the late payment or that plaintiff was prejudiced by it. To be sure, [Code of Civil Procedure] section 1281.97 declares any payment that exceeds the arbitration provider’s deadline and a statutorily granted 30-day grace period to be a material breach as a matter of law… Where section 1281.97 departs from the usual rule is that it statutorily defines a material breach as a matter of law…rather than leaving materiality as an issue of fact for the trier of fact to determine.” (Gallo, supra, 81 Cal.App.5th at 644.)

As in Gallo, the court in Espinoza found that an arbitration stay should be lifted for failure to timely pay. Espinoza is even more friendly because the court agreed with the plaintiff, who argued that “section 1281.97…requires strict enforcement.” (Espinoza, 83 Cal.App.5th at p. 775.) The Espinoza court found: “We agree with plaintiff’s interpretation [of strict enforcement] of the statute [Code Civ. Proc. § 1281.97].” (Ibid.) The Espinoza court further found 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.” (Id. at 771.)

The Espinoza court gave the following rationale in reaching its holdings: “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(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 intended the statute to be strictly applied whenever a drafting party failed to pay by the statutory deadline.” (Id. at 776.)

If the above citation is too long, a motion in civil court should at least state the following: As discussed in Espinoza, “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.” (Ibid.) Also, the Espinoza court indicated that section 1281.97 is “to be strictly applied.” (Ibid.)

Like the courts in Gallo and Espinoza, the court in De Leon held “that late payment as provided in [Code of Civil Procedure] section 1281.98 constitutes a ‘material breach’ without regard to any additional considerations [such as prejudice to a plaintiff, lack of delay by a defendant, etc.].” (De Leon, supra, 85 Cal.App.5th at 749.)

As soon as a defendant pays any arbitration fees, make sure they paid the invoice in full

After a plaintiff in an employment or consumer case is compelled to arbitration and serves defendant(s) with a Demand for Arbitration, the arbitration company (e.g., JAMS, AAA) will send all counsel copies of all invoices disclosing the arbitration fees that need to be paid by the defendant(s). If: (1) 30 days after the due date stated in an arbitration invoice has passed and (2) the defendant(s) pay anything less than the amount listed in the invoice, plaintiffs’ lawyers can file a motion in civil court asking the judge to vacate his or her initial order compelling arbitration and remand the case back to civil court.

The Gallo court held: “Where section 1281.97 departs from the usual rule is that it statutorily 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 [which is 30 days after the due date stated in an arbitration invoice], rather than leaving materiality as an issue of fact for the trier of fact to determine.” (Gallo, supra, 81 Cal.App.5th at 644 (emphasis added).)

In my client’s case that was successfully remanded from arbitration to civil court, the judge also vacated his initial order compelling arbitration after the defendants in that case only paid $1,900 in arbitration fees (albeit untimely after the 30-day grace period) even though the arbitration invoice amount was $2,200. The judge’s ruling stated: “Per the agreement submitted with this filing, the employer is responsible for payment of the full filing fee, $2,200.00…Thus, it is apparent from the AAA invoice that $1,900 is only the amount due if the parties’ agreement does not provide otherwise. Here, AAA expressly indicates that Defendants were responsible for the full filing fee amount of $2,200 pursuant to the parties’ agreement. Accordingly, Defendants’ payment was also untimely because they failed to submit the full amount that was due.”

Conclusion

Defendants in employment and consumer cases are learning how their cases will, for all practical purposes, be “automatically” remanded to civil court if they do not timely pay arbitration fees. I noticed how concerned defendants’ counsel are when, after I served a Demand for Arbitration on a Friday, an associate at the defense firm paid the arbitration fees using his personal credit card the next day (a Saturday) even though the defendant had at least thirty days to pay. If other defendants’ counsel are not as diligent and end up not timely paying arbitration fees, do not let them get away; take advantage of SB 707 bill and the caselaw interpreting it.