Since its enactment, California courts have universally established the California Code of Civil Procedure section 1281.97 et seq., which governs the timely payment of fees in arbitration, allows no room for error. Within the last two months, the California Court of Appeals issued two competing decisions addressing whether the Federal Arbitration Act (“FAA”) preempts the California Arbitration Act (“CAA”), and by extension the statutory fee payment deadline set forth in section 1281.97.

In this corner, fighting for federal preemption, is Hernandez v. Sohnen Enterprises, Inc. Issued by the California Court of Appeal, Second District, the Hernandez opinion examines an arbitration agreement that was governed by the FAA and which provided that “the parties could conduct discovery and bring motions under the Federal Rules of Civil Procedure except as specifically provided otherwise in the agreement [and that] [t]he parties waived class or representative actions “to the fullest extent permitted by the FAA.” The arbitration agreement made no mention of the CAA.  Subsequently, the employer failed to timely pay the arbitration fees within the 30-day safe harbor period provided for by California Code Section 1281.87. The trial court followed the draconian rule of the CAA and found that the employer had breached its duty to timely pay the fees under California law and that the plaintiff was therefore not required to arbitrate the dispute. 

The Court of Appeals reversed the trial court’s decision. In so doing, it found that the “arbitration agreement in this case is governed by the FAA, including both substantive and procedural provisions of the FAA, rather than California’s laws.  As a result, the procedures of section 1281.97 do not apply.” But the court did not stop there.  It continued: “[e]ven if we were to conclude that section 1281.97 applies, however, we would still reverse, because when an agreement falls within the scope of the FAA and does not expressly adopt California arbitration laws, the FAA preempts the provisions of section 1281.97 that mandate findings of breach and waiver.”

And in the other corner we have Keeton v. Tesla, Inc., making the case for state supremacy, as held by the California Court of Appeal, First District. In Keeton, the court determined that there are three situations in which state law is preempted by federal law: (1) “express preemption,” where Congress explicitly defines the extent to which its enactments preempt state law; (2) “field preemption,” where state law attempts to regulate conduct in a field that Congress intended the federal law exclusively to occupy; and (3) “conflict preemption,” where it is impossible to comply with both state and federal requirements, or where state law stands as an obstacle to the accomplishment and execution of the full purpose and objectives of Congress. 

With this foundation, the court followed the well-tread ground of its predecessors; that section 1281.97 et seq. is not preempted by the FAA and the timeliness of the arbitration payment had to be made within 30 days of the deadline provided on the arbitrator’s invoice. In considering the three circumstances in which federal preemption might apply, it concluded that the first two situations were wholly inapplicable: “The FAA contains no express pre-emptive provision, nor does it reflect a congressional intend to occupy the entire field of arbitration.” The First District then turned to the question of “conflict preemption”. It found that the FAA’s “principal purpose” was to ensure that “private arbitration agreements are enforced according to their terms” and that there was “no federal policy favoring arbitration under a certain set of procedural rules.” Thus, there was no conflict between the CAA and FAA to justify federal preemption.

Keeton, coming almost exactly one month after Hernandez, briefly addressed the latter case in a footnote. In the footnote, the Keeton opinion disagreed with, and distinguished the opinion in Hernandez because the arbitration agreement in the latter case explicitly provided for the procedural rules under the FAA, whereas the arbitration agreement in Keeton did not.

The Hernandez decision is a welcome sign for California employers, as it offers a reprieve from California’s suffocating arbitration fee payment statute. Even so, it is clear from Keeton that the interpretation of the law is currently unsettled.  Employers and employees alike can expect to see the question ultimately presented to the California Supreme Court. We will have to wait and see if a knockout comes in the third, and perhaps final, round of this bout.