On June 28, 2023, the California Second District Court of Appeal issued a decision interpreting the scope of California Code of Civil Procedure section 1281.98(a)(1), a recently amended California statute that requires employers to pay all arbitration costs and fees within 30 days of the due date, or risk being in material breach of the arbitration agreement.  In Cvejic v. Skyview Capital, the court held that an arbitrator cannot cure a missed or late arbitration fee payment. Not only does this ruling reaffirm the importance of paying arbitration fees on time, but it also demonstrates the court’s willingness to limit the power of an arbitrator over their own proceedings. Now, more than ever, employers must be acutely attentive to arbitration fee deadlines to avoid costly penalties for late payments.

Background

The plaintiff sued his former employer in state court after his termination from employment. The court ordered the case to arbitration pursuant to the parties’ arbitration agreement. The case went before a panel of arbitrators with a final hearing on the merits scheduled for August 5, 2021. As part of the arbitration process, the defendant employer was required to pay arbitration fees by June 4, 2021; however, the company failed to do so. During a call with the arbitration case manager and plaintiff’s counsel after the arbitration fee deposit deadline, defendant’s counsel reported there was “no further explanation” for his clients’ failure to pay the fees. The arbitrator panel also confirmed that the deadline for making the deposits had passed. The panel then set a new deadline of July 14 for fee payments. The defendant eventually paid the fees prior to the new July 14 deadline.

Despite the new fee deposit deadline, the plaintiff’s counsel informed the arbitration panel that he would be withdrawing from the arbitration under California Code of Civil Procedure section 1281.98. Under the statute, if the party who compels arbitration fails to pay the costs required to continue the arbitration within 30 days of the deadline, then that party is in material breach of the underlying arbitration agreement and waives the right to compel arbitration. The arbitration panel ruled that section 1281.98 was not applicable because the defendant had paid the arbitration fees before the new July 14 deadline. The plaintiff then directly filed a 1281.98 Election to Withdraw from Arbitration with the trial court. The trial court granted the plaintiff’s request to withdraw from arbitration and awarded the plaintiff reasonable expenses. The defendant appealed.

The court of appeal agreed with the lower court and allowed the plaintiff to withdraw from arbitration. The court of appeal also affirmed the trial court’s award of expenses against the defendant.

The court of appeals decision emphasized the legislative intent behind section 1281.98. According to the court, the legislature implemented this section to prevent parties from forcing arbitration but then refusing to pay the requisite fees and continuously asking for extensions from their respective arbitrators, thus placing the matter in “procedural purgatory.” The defendant argued that it had complied with the arbitration’s new fee deadline, however, the court responded that the statute does not grant the arbitrator power to cure a party’s missed payment, explaining that if an arbitrator were allowed to do so, then a defendant would be able to avoid violations and continue to push the arbitration down the road. This, according to the court, would be especially true if the defendant was friendly with the arbitrator, or the arbitrator was motivated to keep the defendant’s business. Essentially, section 1281.98 would have no “meaning, force, or effect,” and plaintiffs would be without relief and in limbo if an arbitrator had the power to move the fee deadline after a payment was missed.

The defendant argued that the court was required to respect the arbitrators’ decision to move the fee deadline in this case because this was a procedural decision made by the arbitrators in their own proceedings, but the court quickly dismissed this argument, stating that it was ruling on a court filing submitted by the plaintiff, not a procedural issue in the realm of the arbitrators. In addition, the defendant argued that the language in the arbitration agreement signed by the plaintiff entitled the arbitrator to rule on all breach of contract issues, but the court disagreed, and again referenced the legislative intent, noting that the legislature wanted to “specifically take this issue away from arbitrators who may be financially interested in continuing the arbitration and in pleasing regular clients.”

Practical Effect for Employers

What does this mean for companies that regularly enter into arbitration agreements with their employees? At the most basic level, this case reinforces the importance of making timely arbitration fee payments. Companies should not expect to rely on relief from arbitrators to cure late payments by setting a new payment deadline after the original payment is late. While arbitrators do have broad powers in arbitration over procedural matters, this decision curbs that authority by making it clear that arbitrators cannot cure violations of the statute due to late fee payments.

This decision does not mean that companies will have no recourse for late payments, however. Defendants will be able to seek a stipulation with opposing counsel to proceed with arbitration even if a payment is late or missed, and section 1281.98 itself gives the nonbreaching party the option to proceed with litigation or continue with arbitration, although if the non-breaching party elects to continue with arbitration they will be entitled to attorney fees. Additionally, the language of 1281.98 appears to allow the employer to change the presumptive invoice due date to a later date. “To avoid delay, absent an express provision in the arbitration agreement stating the number of days in which the parties to the arbitration must pay any required fees or costs, the arbitration provider shall issue all invoices to the parties as due upon receipt.” Cal. Civ. Code. § 1281.98(a)(2) [emphasis added]. Thus, careful drafting of the arbitration agreement potentially allows employers to extend the presumptive 30-day due date.

Employers seeking to distinguish this decision should be aware that the court relied on specific facts to make its decision: the parties did not dispute the initial fee payment deadline, the defendant admitted that the payment was late, and the arbitrator panel confirmed payment was late before setting a new, extended deadline without the plaintiff’s approval. Future cases may be decided differently if the facts allow, particularly if the parties dispute the payment due date. The court highlighted that the defendant forfeited its federal preemption argument by failing to raise the issue in its briefing, leaving the door open for employers to make a preemption argument in future cases.¹ Employers may have more success arguing that pursuant to a valid delegation provision² in the arbitration agreement, the arbitrator, rather than the court, should resolve fee disputes.³

While it is unlikely that this is the last California court to review section 1281.98, for now, employers operating in this jurisdiction will need to pay their arbitration fees on time, full stop, or risk an expensive litigation bill.