California Court Says “Check Is in the Mail” Violates California Arbitration Act; Lets Employee Avoid Arbitration Over Non-Prejudicial Technicality (US)
Latest California court decision is another example of judicial hostility to employment arbitration agreements.
California employers and their employees frequently agree to resolve disputes through binding private arbitration, rather than the more time-consuming and costly process of litigating claims in court. However, to require arbitration, California employers are required to pay all fees unique to arbitration. Under the California Arbitration Act, “if the fees or costs required to continue the arbitration proceeding are not paid within 30 days after the due date [defined as the date the invoice issues], 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.” (Cal Code Civ. Proc. 1281.98(a)(1)). In Doe v. Superior Court of the City and County of San Francisco, the California Court of Appeal, First District was called on to interpret the meaning of “paid” within this statute.
In Doe, the plaintiff sued her former employer and a former manager in California state court for sexual harassment and sexual assault. The plaintiff previously had agreed with her employer to arbitrate claims arising out of her employment, so her employer asked that the court require the plaintiff to arbitrate, which it did. The arbitration provider selected to adjudicate the dispute, the American Arbitration Association (AAA), issued an invoice to the employer for arbitration services, indicating that payment was due on October 3, 2022, which was the 30th day after the invoice issued. On September 30, and therefore several days before the 30-day period expired, the employer mailed a check for full payment of the invoice to the Texas address provided by the AAA. However, the AAA did not receive the check until October 5 – the 32nd day after it issued the invoice. Significantly, nothing in the Doe decision indicated that the AAA’s untimely receipt – by two days – of the employer’s payment prejudiced the plaintiff of delayed the arbitration.
But, based on this technicality, the plaintiff sought to withdraw from the arbitration and moved the trial court to vacate its order compelling her to arbitrate her claims. The trial court denied the motion, reasoning that “paid” does not mean “received” and that the employer’s timely mailing of the payment before the 30th day satisfied the statute. The plaintiff then sought a writ from the Court of Appeal vacating the trial court order.
The Court of Appeal first concluded that the word “paid” as used within the statute was ambiguous. It then considered the purpose of the statute and its legislative history to determine whether “paid” meant remitted to, or received by, the arbitration provider. The Court noted that the Legislature’s purpose in enacting section 1281.98 was to solve the quandary that employees were presented with when employers required employees to arbitrate claims but then failed to pay timely the fees required for adjudication of their claims within arbitration. Section 1281.98 provides employees with options and remedies for the situation when an employer “stalls or obstructs the arbitration proceeding by refusing to pay the required fees.” The Court reasoned that construing “paid” to require actual receipt of payment by the 30th day best effectuated this purpose. The Court said: “This construction provides a clear, bright-line rule for determining compliance with the 30-day statutory grace period as the arbitrator can readily and definitively determine whether funds have been received to satisfy any outstanding fees or costs owed for a pending arbitration.” The Court also relied on court decisions applying section 1281.98 strictly and rejecting any exceptions, such as “good faith” or “clerical error,” to the requirement that fees are paid within 30 days. Those decisions did not construe “paid,” however.
The Court rejected the employer’s argument that it should be deemed in compliance with the statute because it complied with language within the AAA’s invoice indicating that it needed to “remit” payment by the 30-day deadline. The Court brushed this argument aside, reasoning that language within the AAA’s invoice could not alter the statutory mandate.
The Court did not address whether the Federal Arbitration Act (“FAA”) preempts section 1281.98. Of the several courts that have addressed that argument, most have rejected preemption. In Belyea v. GreenSky, Inc., 637 F.Supp.3d 745, 759 (N.D. Cal. 2022), however, the court found the statute preempted on the grounds that the statute disfavored arbitration agreements and thus offended the “equal treatment” principle of the FAA. Courts that have reached the opposite conclusion of Belyea have reasoned that section 1281.98 promotes or incentives arbitration by requiring timely payment of arbitration invoices. Of course, it is difficult to see how that is so given that the consequence of untimely payment can be loss of the right to arbitrate and termination of an arbitration proceeding. Section 1281.98 therefore can be viewed as a means to avoid arbitration, and not to facilitate it. Further, those familiar with the California Legislature’s multi-year efforts to prohibit arbitration of employment disputes would be highly skeptical of the notion that the Legislature enacted the statute to promote or to incentivize arbitration. To the contrary, a more credible interpretation would be to view its real purpose as to provide employees with another tool to evade arbitration.
The takeaway from this decision for employers engaged in arbitration disputes with California employees should be that the 30-day payment deadline will be construed strictly to require actual receipt of payment within 30 days from the date an invoice issues. Accordingly, when mailing payments, employers should do so sufficiently in advance of the 30-day deadline to account for time in transit, as well as potentially longer unexpected delays with the postal system. Paying arbitration fees electronically, such as through a wire transfer, is likely to be faster than mail but also may require multiple days for the funds to be deposited within the arbitration organization’s account.