Providing an expensive lesson, a California appellate court held that an employer’s failure to timely pay an arbitration fee resulted in a waiver of the employer’s right to require arbitration.
Rosa Espinoza brought discrimination and retaliation claims in court against her former employer, Centinela Skilled Nursing & Wellness Centre West, which then moved to compel arbitration pursuant to an agreement Espinoza signed when she began working.
The trial court granted the motion and compelled the parties to proceed in arbitration. The arbitration provider sent the parties an invoice for an administrative fee with a due date of May 31, 2021.
On July 1, the arbitration provider confirmed to Espinoza’s counsel that it had yet to receive payment from Centinela. Espinoza then filed a motion in trial court under Cal. Code Civ. Proc. Section 1281.97, contending that Centinela had materially breached the arbitration agreement by failing to pay the invoice within 30 days of the due date.
Centinela countered that payment was late due to a clerical error and that it had paid the fee on July 9, telling the court that Espinoza suffered no prejudice from the delay.
The trial court agreed with the employer, denying Espinoza’s motion, as it found Centinela was in substantial compliance with the arbitration provision and not in material breach.
Espinoza appealed, and the appellate panel reversed.
Section 1281.97 provides that an employer that fails to pay costs required for an arbitration to proceed “within 30 days after the due date” is “in material breach of the arbitration agreement [and in] default of the arbitration, and waives its right to compel arbitration” under California law.
“The language of section 1281.97 is unambiguous,” the court wrote. “Under the plain language of the statute … 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.”
The panel disagreed with Centinela that its interpretation would result in an absurd consequence.
“Although strict application may in some cases impose costs on drafting parties for innocent mistakes, the Legislature could have concluded a brightline rule is preferable to requiring the nondrafting party to incur further delay and expense establishing the nonpayment was intentional and prejudicial,” the court explained. “The Legislature also reasonably could have decided that whatever the reason for a delay in payment, the drafting party should bear the consequences of that delay rather than the nondrafting party.”
Nor was the panel persuaded by Centinela’s argument that the Federal Arbitration Act (FAA) preempted Section 1281.97.
“Section 1281.97 does not prohibit or discourage the formation or enforcement of arbitration agreements, either by barring certain claims from arbitration or imposing obstacles that make it difficult to enter into arbitration agreements,” the court wrote. “Indeed, in the instant case [Centinela] successfully moved the trial court to enforce the arbitration agreement at issue.”
Far from imposing an obstacle to arbitration, the court added, Section 1281.97 actually furthers the goals of the FAA by facilitating an expeditious resolution of the dispute. In fact, the statute gives the employee the option of continuing in arbitration or returning to a judicial forum—meaning that even when triggered, the remedies under Section 1281.97 are not an absolute bar to arbitration.
Finally, the court disagreed that strict application of the statute would discourage companies from entering into arbitration agreements.
“The statute’s 30-day deadline is generous enough that a party exercising reasonable diligence reliably can meet it, and we think it unlikely employers and others would forgo the advantages of arbitration for fear of missing that deadline,” the court said. “Rather … we expect drafting parties will take extra care to [timely] pay their arbitration invoices, thus expediting resolution of disputes and fulfilling the goals of section 1281.97.”
To read the decision in Espinoza v. Superior Court, click here.
Why it matters: Employers should take note of the appellate panel’s strict application of Section 1281.97, as any failure to make payment for arbitration fees within 30 days could result in a case being sent back to court.