At a glance:

  • The California Court of Appeal weighs whether federal law will preempt California’s recent arbitration statutes involving employee and consumer protections from “procedural limbo” in an arbitration.
  • Businesses with an arbitration agreement that fail to pay their arbitration fees within 30 days may face sanctions and penalties.
  • Sanctions can include paying all expenses, losing the right to arbitrate, or facing penalties such as termination, exclusion of evidence, or contempt.

In a case of first impression, the California Court of Appeal asks whether the California Code of Civil Procedure, §§ 1281.97, 1281.98, and 1281.99 are preempted by the Federal Arbitration Act, 9 U.S.C. § 1 et seq. Sunny Gallo v. Wood Ranch, USA, B311067 (2/1  7/25/22). Those statutory provisions were enacted in California to protect employees and consumers from falling into a state of “procedural limbo” when a business that has drafted an arbitration agreement fails to pay arbitration fees within 30 days after the fees are due. This failure to pay fees can lead to delay and “procedural limbo” in an arbitration, while the arbitral forum and the parties try to work out where to go next. The consequences are significant under the recent California statutes because the “drafter” of the arbitration agreement can end up paying all the fees, or lose the right to arbitrate, or even face sanctions such as termination, evidence preclusion, monetary payment, and even contempt.

State statutes regarding arbitration will be preempted by federal law if the court determines that the state statute unduly burdens arbitration, making it harder to arbitrate than to litigate in court.

The court holds that the California statutes are not preempted, “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.”

What’s the Takeaway for California Employers?

California companies with arbitration provisions should not dilly-dally about paying their share of arbitration fees in employment and consumer disputes, given the severe consequences. The failure of the “drafter” to make timely payment creates options for the consumer or employee, all of which are likely to be unpleasant for the drafter of the arbitration agreement.

Businesses and employers need to be aware of the changing legal landscape surrounding California’s statutes regarding arbitration agreements. If you have any questions about your business’s arbitration agreement practices or avoiding potential penalties, please contact any of AlvaradoSmith’s Employment Practice attorneys.

Additional Reading on AB 51 by AlvaradoSmith: UPDATED: California’s Ban on Mandatory Employment Arbitration Agreements restored by US Court of Appeals.

Marc D. Alexander is a mediator and litigator at AlvaradoSmith. He authors the blog California Mediation and Arbitration and co-contributes to the blog California Attorneys Fees. For additional information and questions, please contact Marc D. Alexander at malexander@alvaradosmith.com or at 714.852.6800.

 

DISCLAIMER: The information contained herein is intended for informational purposes only and should not be construed as professional counsel or legal advice. Seek legal counsel for advice with respect to any legal matter. The information in this document may not reflect the most current developments as the subject matter is extremely fluid and may change daily. The content and interpretation of the issues addressed herein are subject to change.