California Court of Appeal Tells Arbitration Agreement Drafting Parties: Put Your Money Where Your Mouth Is

July 15, 2024

In Keeton v. Tesla, Inc., No. A166690, 2024 WL 3175244, at *1 (Cal. Ct. App. June 26, 2024), the California Court of Appeal, First District, Division 1, recently held that a party may terminate an employment or consumer arbitration pursuant to California Code of Civil Procedure section 1281.98 ("Section 1281.98")¹ if the party drafting the arbitration agreement fails to pay certain arbitration fees within 30 days of when payment is due.

Keeton involved an employment arbitration for alleged discrimination, harassment, and retaliation. After filing a complaint in court, the employee stipulated to stay the action and submit her claims to JAMS arbitration as required in the arbitration agreement in her employment agreement. The employee filed a demand for arbitration and JAMS appointed an arbitrator and issued an invoice for a deposit for all pre-hearing work, stating that payment was due upon receipt. The employer paid the invoice thirty-three days from the date of the initial invoice.

The employee moved to vacate the trial court's arbitration order and to lift the stay of litigation on the grounds that the employer failed to pay the arbitration fee deposit within thirty days as required by Section 1281.98. The trial court granted her motion, finding the employer materially breached the arbitration agreement, and therefore, under Section 1281.98, the employee was entitled to terminate arbitration and proceed with her claim in court. The court also imposed a $1,000 sanction on the employer.

The court of appeal affirmed. The court found that the California Arbitration Act ("CAA") applied to the arbitration agreement, and therefore, Section 1281.98 applied. Notably, the court found that the CAA applied to the arbitration agreement "by default" because the issue was raised in California state court, even though the agreement was silent as to whether the CAA governed, and despite the fact that the employer contended (and the employee did not challenge) that the Federal Arbitration Act ("FAA") applied to the arbitration agreement.

The court then held that the FAA did not preempt Section 1281.98 because arbitration-specific state procedural rules are not preempted where the parties agreed to arbitrate by those rules and the rules are consistent with the FAA's objectives (the efficient and speedy resolution of claims). The court likened Section 1281.98 to a statute of limitations and found that application of Section 1281.98 would further, rather than undermine, the FAA's objectives, because it forces the employer to keep the arbitration ball moving forward towards resolution and prevents delay caused by late-payment.

The court's approach in Keeton is far from settled law. As the Keeton court recognized, at least one federal district court and the California Court of Appeal, Second District, examined a similar statute (California Code of Civil Procedure section 1281.97, which requires payment of fees to initiate arbitration be paid within 30 days) and found FAA preemption.² However, the court in Keeton disagreed with the analysis by those courts, and also distinguished them factually because the parties in those cases had expressly incorporated the FAA into their arbitration agreement (whereas the court held that the agreement in Keeton effectively incorporated the CAA despite being silent on the issue).

There are three key takeaways for parties seeking to enforce arbitration agreements with employees and consumers:

• To avoid application of Section 1281.97 and 1281.98, expressly incorporate the FAA into the arbitration agreement;
• A California court will likely find that the CAA-or at least its procedural rules-applies to the arbitration if your arbitration agreement does not expressly incorporate the FAA; and
• When in doubt, pay all arbitration fees upon receipt and by not later than 30 days after receiving the initial invoice.

For more information or assistance with California employment or consumer arbitration agreements, contact your Dentons team or the authors.

1. Section 1281.98 provides in relevant part:

   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 as a result of the material breach.

   * * *

   If the drafting party materially breaches the arbitration agreement and is in default under subdivision (a), the employee or consumer may unilaterally elect to... [w]ithdraw the claim from arbitration and proceed in a court of appropriate jurisdiction… or … continue the arbitration.

   Cal. Code Civ. Proc. § 1281.98, subd. (a)(1), (b).↩

2. Belyea v. GreenSky, Inc., 637 F. Supp. 3d 745, 756 (N.D. Cal. 2022); Hernandez v. Sohnen Enterprises, Inc., 321 Cal. Rptr. 3d 283, 290 (Cal. Ct. App. 2024).↩