In Gallo v. Wood Ranch United States, No. B311067, 2022 Cal. App. LEXIS 652, at *3-6 (Ct. App. July 25, 2022), the Court of Appeal addressed the effect of late payment of arbitration fees under the penalties provided for by Civil Procedure Code sections 1281.97 and 1281.99, which obligate a company or business who drafts an arbitration agreement to pay its share of arbitration fees by no later than 30 days after the date they are due, and specify that the failure to do so constitutes a “material breach of the arbitration agreement” that gives the employee or consumer, in addition to a mandatory award of attorney fees and costs related to the breach as well as other discretionary sanctions, the options of either (1) continuing in arbitration with the company or business paying attorney fees and costs related to the arbitration as a whole or (2) withdrawing from arbitration and resuming the litigation in a judicial forum.  The procedural background was as follows:

In February 2020, Wood Ranch moved to compel arbitration. After briefing and a hearing, the trial court in July 2020 granted the motion and stayed the pending court proceedings. . . . By September 2020, plaintiff and Wood Ranch had agreed which arbitrator to use.3 The arbitrator was affiliated with the American Arbitration Association (AAA).  On October 20, 2020, AAA sent a letter to counsel for both parties, informing them that plaintiff’s “portion of the initial filing fee is $300,” that it was due by October 27, 2020, and that “payment should be submitted by credit card or electronic check” using a “secured paylink” that would be “forthcoming with instructions.”  Plaintiff paid the $300 the very same day.  The next day, on October 21, 2020, AAA sent a letter to counsel for both parties, informing them that plaintiff had paid her fees, that Wood Ranch now had to “pay its share of the filing fee in the amount of $1,900,” and that the fee was due by November 4, 2020. The letter included this admonition:  “As this arbitration is subject to California Code of Civil Procedure 1281.97 and 1281.98, payment must be received by December 4, 2020 [that is, 30 days after the November 4 deadline] or the AAA will close the parties’ case. The AAA will not grant any extensions to this payment deadline.”  (Boldface and underline in original.) Like the letter requesting payment from plaintiff, this letter also specified that Wood Ranch’s payment “should be submitted by credit card or electronic check” and that “[a] secured paylink” would “be forthcoming.”  The November 4 due date came and went without any payment from Wood Ranch.   On November 9, 2020, AAA sent a further letter to counsel for both parties reminding Wood Ranch that it had not yet paid and informing Wood Ranch, again in boldface, that “in accordance with California Code of Civil Procedure 1281.97 and 1281.98, the AAA will close its case on December 4, 2020 if payment is not received.”  All of these letters were sent to a partner of the law firm representing Wood Ranch, but the partner—for reasons unknown—never forwarded any of this correspondence to the law firm associate handling the case on a day-to-day basis or to the assigned law firm secretary.   The December 4 due date came and went without any payment from Wood Ranch.  Four days after that second due date, the law firm associate representing Wood Ranch contacted AAA about the missed deadline. Two days later—on December 10, 2020—Wood Ranch paid the $1,900 fee.  . . . On December 16, 2020, plaintiff filed a motion to vacate the trial court’s prior order compelling arbitration. Invoking sections 1281.97 and 1281.99, plaintiff argued that Wood Ranch’s late payment of its share of the initiation fees constituted a material breach of the arbitration agreement, and declared plaintiff’s election to withdraw from arbitration and pursue her case in court.  After further briefing, and a hearing, the trial court granted the motion. The court rejected both of Wood Ranch’s main defenses to the motion. The court ruled that sections 1281.97 and 1281.99 were not preempted by the FAA because those provisions “enforce[], rather than frustrate[], the purpose of the FAA.” The court also ruled that Wood Ranch had no viable excuse for its late payment, as there was “no competent evidence of pandemic-related excuses, whether due to a closed restaurant . . . or internal office problems” because the assigned partner at the law firm Wood Ranch retained had been “included on all correspondence.”  The court also imposed monetary sanctions of $2,310 reflecting the attorney fees and costs plaintiff incurred as a result of Wood Ranch’s breach of the arbitration agreement. The court declined to impose any evidentiary or terminating sanctions.

On appeal, the defendant who faced the now-revoked arbitration order argued that California’s statutory penalties were preempted by the FAA.  The Court of Appeal disagreed, ruling:

Under the law set forth above, the FAA does not preempt sections 1281.97 and 1281.99.  Sections 1281.97 and 1281.99 undeniably single out arbitration insofar as they define procedures that apply only to arbitrated disputes. But, as noted above, that they are arbitration-specific is not sufficient to warrant preemption by the FAA. Critically, sections 1281.97 and 1281.99 do not commit the additional—and, as noted above, necessary for preemption—sin of outright prohibiting arbitration or more subtly discouraging arbitration. Instead, sections 1281.97 and 1281.99 define the procedures governing the date by which the party who drafted an agreement to arbitrate against an employee or consumer must pay the initial fees and costs to arbitrate, and specify the consequences of untimely payment. (§§ 1281.97, 1281.99.) In this respect, sections 1281.97 (and its attendant sanctions-provision, section 1281.99) are akin to a statute of limitation. (E.g., PGA West Residential Assn., Inc. v. Hulven International, Inc. (2017) 14 Cal.App.5th 156, 176 [noting how a “garden-variety statute of limitations is procedural,” but also implements substantive policy]; see cf. Lehto v. Underground Constr. Co. (1977) 69 Cal.App.3d 933, 942-945 [section 1288’s 100-day limitations period to vacate or correct arbitration preempted by the federal Labor Management Relations Act because that act permits litigation of claims in both federal or state fora, and shorter 100-day period cuts off a worker’s rights in one forum but not the other].) Just as the FAA does not preempt the CAA’s procedures for confirming arbitration awards, including its statutes of limitations periods for doing so (Swissmex-Rapid S.A. de C.V. v. SP Systems, LLC (2012) 212 Cal.App.4th 539, 544-547), the FAA does not preempt sections 1281.97 and 1281.99. More broadly, sections 1281.97 and 1281.99 are part of the CAA and thus help to define what it means to arbitrate under the CAA. In this regard, despite dealing with a different aspect of arbitration, they are functionally indistinguishable from other provisions of the CAA—such as sections 1281.2 and 1281.6, discussed above—that have been repeatedly found not to be preempted by the FAA, at least where, as here, the parties have agreed to incorporate the CAA into their agreement to arbitrate. These sections also do not disfavor arbitration because the consequences of blowing the payment limitations period they erect do not necessarily end the nascent arbitration: Section 1281.97 gives the employee or consumer the option of continuing in arbitration or returning to a judicial forum. (§ 1281.97, subd. (b).)   Nor do sections 1281.97 and 1281.99 stand as an obstacle to the accomplishment of either of the FAA’s objectives.   Applying these sections in this case does not interfere with the FAA’s first goal of honoring the parties’ intent. That is because the parties in this case signed an arbitration agreement that incorporated the “California Arbitration Act . . . to conduct the arbitration and any pre-arbitration activities.” To be sure, sections 1281.97 and 1281.99 were not part of the CAA at the time plaintiff agreed to the arbitration policy drafted by Wood Ranch. However, where, as here, the parties to a contract incorporate a law that is to be used at some time in the future (here, at the time the arbitration takes place), the parties are deemed to have contemplated—and hence, consented to—the incorporation of postcontract changes to that law. (Torrance v. Workers’ Comp. Appeals Bd. (1982) 32 Cal.3d 371, 379 [“‘[When] an instrument provides that it shall be enforced according . . . to the terms of a particular . . . statute, the provision must be interpreted as meaning the . . . statute in the form in which it exists at the time of such enforcement.'”]; United Bank & Trust Co. v. Brown (1928) 203 Cal. 359, 362-363 [same]; see generally, Swenson v. File (1970) 3 Cal.3d 389, 393-395 [when parties do not reference the law to be used at a future time, “[t]he parties are presumed to have had existing law in mind when they executed their agreement”]; Doe v. Harris (2013) 57 Cal.4th 64, 70 [“as a general rule, contracts incorporate existing but not subsequent law”].) Further, applying section 1281.97 and 1281.99 is fully consistent with the parties’ more general intent to arbitrate because the parties’ agreement was to arbitrate the dispute, not let it die on the vine and languish in limbo while the party who demanded arbitration thereafter stalls it by not paying the necessary costs in a timely fashion. Applying these sections in this case does not interfere with the FAA’s second goal of safeguarding arbitration as an expedited and cost-efficient vehicle for resolving disputes. That is because sections 1281.97 and 1281.99 facilitate arbitration by preventing parties from insisting that a dispute be resolved through arbitration and then sabotaging that arbitration by refusing to pay the fees necessary to move forward in arbitration. And although these sections only regulate the payment of fees by the drafters of agreements (rather than the employees or consumers who are required to sign them), this reflects the reality that an employee or consumer would never want to stall their own claim in arbitration (by not paying the dues) because doing so would afford them no relief.  As our analysis implies, the FAA does not have a third goal of “favoring arbitration under a certain set of procedural rules” because, as explained above, “the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate.” (Volt, supra, 489 U.S. at pp. 476, 479.) Here, the parties have expressed their intent to incorporate the CAA—which included sections 1281.97 and 1281.99 by the time Wood Ranch sought to enforce the agreement to arbitrate. Thus, plaintiff’s insistence upon employing these provisions as a means of facilitating the arbitration to which the parties agreed in no way frustrates the FAA’s goals of honoring the parties’ intent or safeguarding arbitration as a means of expediting the resolution of their dispute.  We are not alone in concluding that the FAA does not preempt section 1281.97 or section 1281.99. Although no California appellate court has yet addressed this issue, the federal district courts have uniformly rejected Wood Ranch’s precise challenge. (See Postmates, Inc. v. 10,356 Individuals (C.D.Cal. Jan. 19, 2021, No. CV-20-2783-PSG) 2021 U.S.Dist. Lexis 28554, *21-*22 [so holding]; Agerkop v. Sisyphian LLC (C.D.Cal. Apr. 13, 2021, No. CV-19-10414-CBM) 2021 U.S.Dist. Lexis 93905, *11-*13 [same].)

The Court of Appeal further addressed the Defendant’s specific arguments and facts applicable to this case.

The California Legislature had a good reason for declaring untimely payment a material breach as a matter of law rather than leaving materiality a question of fact in this context: Employees and consumers were facing either the complete denial of any relief or delays in obtaining relief by virtue of the “‘perverse incentive'” companies and businesses had to push claims into arbitration and then to refuse to pay the resulting arbitration fees; in such circumstances and to combat those incentives, the Legislature reasoned, no breach was immaterial to the stranded employee or consumer. (Assem. Com. on Judiciary, Analysis of Sen. Bill No. 707 (2019-2020 Reg. Sess.) as amended May 20, 2019, p. 8.)  The mere fact that application of section 1281.97 in this case deprives Wood Ranch of the arbitral forum that it initially invoked does not warrant the conclusion that section 1281.97 is preempted by the FAA. As noted above, section 1281.97 is one of several statutes that are part of the CAA, which defines the very procedures by which arbitration is to be conducted under California law. These statutes, by definition, set up different procedures from those governing litigation in the California courts. In any given case (and thus in every single case), one of the parties to an arbitration will be able to show that it was harmed by being subject to those arbitration-specific procedures: A party who might have obtained a reversal due to legal or factual error in the trial court will be denied that reversal under the more limited review provisions of section 1286.2, just as Wood Ranch is now arguing that it might not have been found in material breach of the arbitration agreement had it been in court (and not subject to section 1281.97), where it could have advanced its counsel’s inattentiveness as a possible excuse for its 36-day-late payment. If that showing were enough to justify preemption under the FAA, then preemption would be found in every case and the CAA would cease to exist. This is contrary to the law, explained above, which has repeatedly rejected FAA preemption challenges to the CAA’s provisions defining how arbitration is to proceed. (Volt, supra, 489 U.S. at pp. 470, 477-479; Cronus, supra, 35 Cal.4th at pp. 391-394; Siegel, supra, 67 Cal.App.4th at pp. 1282-1283.) We decline Wood Ranch’s invitation to stab this body of precedent in the back.   Second, Wood Ranch argues that section 1281.97 frustrates the FAA’s accomplishment of its objectives. Wood Ranch asserts that section 1281.97 frustrates the FAA’s objective of honoring the parties’ intent because section 1281.97 had the effect of ending the arbitration in this case. However, this assertion ignores that the parties agreed to be bound by the CAA when arbitrating their dispute, that the CAA at the time of arbitration in this case included section 1281.97, that it was Wood Ranch’s 36-day-late payment that triggered section 1281.97, and that the parties did not agree to let Wood Ranch commit such violations of section 1281.97 with impunity. It appears that what Wood Ranch is really seeking is a right to keep the dispute in arbitration without following the arbitration rules of the CAA that Wood Ranch expressly agreed to. The FAA does not sanction this outcome, for the FAA’s goal is put arbitration “on equal footing” with other contracts, not to put one of the parties to the arbitration on better footing. (Cronus, supra, 35 Cal.4th at p. 384 [“the FAA’s purpose is not to provide special status for arbitration agreements, but only ‘to make arbitration agreements as enforceable as other contracts, but not more so.'”], quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967) 388 U.S. 394, 404, fn. 12.) Wood Ranch also contends that section 1281.97 is contrary to the FAA’s objective of providing for a speedier and more efficient dispute resolution mechanism because Wood Ranch only missed the deadline by a few days. However, this contention ignores that Wood Ranch missed AAA’s deadline by 36 days, and more importantly that section 1281.97’s procedures putting a business’s feet to the fire to pay on time facilitates the resolution of disputes with alacrity. Wood Ranch posits that section 1281.97 is “hostile” to arbitration. However, this position ignores our prior conclusion that this statute, when incorporated into an agreement by the parties, honors the parties’ intent and results in a faster proceeding; in this situation, section 1281.97 is a friend of arbitration and not its foe.