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Court of Appeal:
Code Section Invalidating Arbitration Contract for Failure to Pay Is Still Not Preempted
Opinion Rejects Argument That Recent California Supreme Court Case Requires Judicial Invalidation of California Statute
By a MetNews Staff Writer
Div. Seven of this district’s Court of Appeal has held that a California code section, providing that the drafter of an employment or consumer arbitration agreement will be found to have waived the right to enforce it if it fails to timely pay mandated fees, is not preempted by the Federal Arbitration Act, rejecting the argument that the July 2024 California Supreme Court decision in Quach v. California Commerce Club Inc. demands a contrary conclusion.
At issue is California Code of Civil Procedure §1281.98, enacted as part of the California Arbitration Act (“CAA”), which 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, that the drafting party pay certain fees and costs during the pendency of an arbitration proceeding, if the fees or costs required to continue the 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 the employee or consumer to proceed with that arbitration….”
A majority of courts have concluded that the section does not conflict with the Federal Arbitration Act’s purpose of promoting expeditious resolution of disputes and so is not preempted. In May of last year, however, Div. Five of this district’s Court of Appeal came to a contrary conclusion in Hernandez v. Sohnen Enterprises, Inc.
In Tuesday’s opinion, which was written by Justice Gail Ruderman Feuer and joined in by Presiding Justice Gonzalo Martinez and Justice Natalie P. Stone, the court said:
“We agree with the numerous Courts of Appeal that have concluded section 1281.98 furthers the goal of the [Federal Arbitration Act (“FAA”)] to require expeditious arbitration of disputes and, accordingly, the section is not preempted….Moreover,…the California Supreme Court in its recent decision in Quach v. California Commerce Club…did not expand the scope of FAA preemption to encompass all state arbitration-specific rules, including those that favor arbitration.”
The California Supreme Court will ultimately resolve the continued viability of §1281.98(a)(1), having granted review in the Hernandez case.
Arbitration Waiver
On March 5, 2020, plaintiff Mone Yvette Sanders was hired as a branch office administrator by the financial advisory firm Edward D. Jones & Co. L.P. (“Edward Jones”). In August, she signed a “Work At Home Agreement” that contained an “Arbitration and Class Action Waiver” provision.
Under the contract, Sanders agreed that “any disputes as a result of this temporary arrangement to work from home,” including any wage and hour claims, would be submitted to mandatory binding arbitration.
Edward Jones terminated Sanders in December 2020. She filed a putative class and representative action the following summer.
In the complaint, she asserts wage and hour claims as well as a representative action for civil penalties under the Private Attorneys General Act of 2004 (“PAGA”). Los Angeles Superior Court Judge William F. Highberger granted Edward Jones’ motion to compel arbitration of Sanders’ individual Labor Code and PAGA claims, and stayed the representative cause of action pending the results of the proceedings.
Sanders initiated the arbitration with JAMS, but Edward Jones failed to pay $54,000 in fees within 30 days of the payment due date, as required. The plaintiff then filed a motion seeking to vacate the order compelling arbitration under §1281.98.
Highberger granted the motion on May 1, 2024, saying that he “agrees intellectually” with the view that the section is preempted by the FAA, but indicating that he was bound to follow case law. However, he vacated the ruling two months later and denied the motion based on Hernandez.
Sanders filed a petition for writ of mandate seeking an order directing the trial court to vacate its July order and enter a new one granting the plaintiff’s motion.
Sec. 1281.98 Applies
Feuer noted that, absent an agreement to the contrary, the CAA’s procedural requirements govern proceedings in California and, because the contract in question was silent on the matter, §1281.98 applies.
The jurist acknowledged that the FAA preempts any state rule openly discriminating against arbitration or any rule that covertly disfavors the procedure. Edwards Jones argues that the Quach decision supports the contention that §1281.98 is preempted by the FAA because it treats arbitration agreements differently from other contracts.
In the Quach decision, the Supreme Court eliminated the judicially-created rule that a party opposing arbitration must show prejudice in order to establish that the other party has waived its right to enforce an agreement, finding that the requirement amounted to an additional special rule only applicable to arbitration contracts.
Rejecting this view, Feuer wrote:
[U]nlike Quach…, section 1281.98 does not alter state law contract principles for arbitration agreements. Rather, section 1281.98 is a procedural rule contained in the CAA that specifies the 30-day grace period for the drafting party to pay arbitration fees and costs and the consequences for failure to timely pay….[U]nlike the judicially created waiver requirement invalidated in…Quach, the parties here implicitly agreed in the arbitration agreement that section 1281.98 would apply to their arbitration.”
She added:
“The fact section 1281.98 describes the consequences of a drafting party’s failure to timely pay required fees and costs as a ‘material breach of the arbitration agreement’ and waiver of the drafting party’s ‘right to compel the employee or consumer to proceed with that arbitration’ does not transmute a mutually agreed-upon contract provision into a judicially created change in state contract law. Just as the parties to a contract for the sale of widgets can agree upon what constitutes a breach of the contract, parties to an arbitration agreement can agree that section 1281.98 applies to their arbitration agreement.”
Saying that “[i]mposing a 30-day time limit to pay arbitration fees neither frustrates nor hinders arbitration,” she declared:
“The petition for writ of mandate is granted. Let a peremptory writ of mandate issue directing the trial court to vacate its order denying Sanders’s motion to withdraw from arbitration under section 1281.98, subdivision (b)(1), and allowing Sanders to pursue her claims in court.”
The case is Sanders v. Superior Court (Edward D. Jones & Co.), 2025 S.O.S. 1252.
Acting for the plaintiff were Kane Moon, Sang D. Song, and Stanley Jungjoon Park of the Los Angeles-based Moon Law Group PC. Edward Jones was represented by Daniel Patrick Hoffer, Rebecca Jennifer Lee, and Rudolph Graham Klapper of the Los Angeles office of Venable LLP, as well as John Spencer Worden of the firm’s San Francisco location.
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