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September 29, 2023
On September 8, 2023, the California Court of Appeals for the First District ruled that an employer’s failure to pay an arbitration invoice within the time required by California statute resulted in a material breach of the arbitration agreement between the parties and a waiver of the employer’s right to compel arbitration, allowing the employee to avoid enforcement of the arbitration agreement. Doe v. Superior Court of the City and County of San Francisco, et al., No. A167105 (September 8, 2023).
Factual and Procedural Background of the Case
On November 22, 2021, Petitioner Jane Doe (Doe) filed a complaint against her former employer, Na Hoku, Inc. (Na Hoku), and her former manager, Ysmith Montoya (Montoya) (Na Hoku and Montoya are collectively referred to herein as Na Hoku) in the San Francisco City & County Superior Court, asserting multiple claims stemming from Montoya’s alleged sexual harassment and assault of Doe.
Na Hoku moved to compel the case to arbitration, and the trial court ordered the case to binding arbitration with the American Arbitration Association (AAA). On May 16, 2022, AAA sent the parties a letter confirming the rules for arbitration and seeking payment of the initial administrative fees by June 15, 2022. On May 24, 2022, Na Hoku paid the initial administrative fees by credit card.
On September 1, 2022, AAA sent the parties a letter and an invoice seeking payment of the remaining fees and costs for the arbitration from Na Hoku.[1] The letter, which provided instructions for online payment and other payment options, stated that payment was due upon receipt of the letter and that, because this arbitration was subject to Section 1281.98(a) of the California Code of Civil Procedure,[2] “payment must be received 30 days from the date of this letter to avoid closure of the parties’ case.”[3]
On September 28, 2022, AAA sent an email reminder to Na Hoku that the last day to remit payment of the arbitration fees and costs was October 3, 2022. The same payment instructions and options included with the September 1 letter were included in the email. Despite having the ability to submit payment by credit card, electronic check, or wire transfer, Na Hoku opted to mail a check to AAA on Friday, September 30, 2022. AAA did not receive the check until October 5, 2022, two days after the 30-day deadline.
Doe then moved to vacate the trial court’s order compelling arbitration on the basis that Na Hoku materially breached the arbitration agreement by failing to pay the arbitration fees and costs within 30 days as required by California statute. The trial court denied the motion, finding that Na Hoku remitted payment of the arbitration fees and costs by October 3, 2022, thereby satisfying the due date imposed by AAA and complying with Section 1281.98(a).[4] The trial court added that Section 1281.98(a) requires the payment to be “paid,” not necessarily “received,” within the 30-day period.
Following the trial court’s ruling, Doe filed a petition with the California Court of Appeals for the First District (Appellate Court) seeking to vacate the trial court’s order denying her motion to vacate. Doe argued that the trial court misinterpreted Section 1281.98(a) in allowing Na Hoku more than 30 days to pay AAA’s arbitration fees and costs. The Appellate Court agreed with Doe.
The Analysis of the California Court of Appeals
In this case, September 1, 2022 was the “due date” for Na Hoku to pay the arbitration fees and costs at issue. No dispute existed that Na Hoku mailed a check on September 30, 2022 and that AAA received the check and applied payment on October 5, 2022. The issue before the Court was whether Na Hoku’s payment was “paid within 30 days after the due date” and thus was timely pursuant to Section 1281.98(a).
Upon review of the statute, the Appellate Court found the language of Section 1281.98 concerning the meaning of “paid within 30 days after the due date” to be unclear. Turning to the tenets of statutory interpretation, including a review of the legislative history of Section 1281.98, the Appellate Court determined that one of the Legislature’s main objectives in enacting Section 1281.98 was “to deter employers from strategically withholding payment of arbitration fees so that they could no longer stymie the ability of employees to assert their legal rights.” To achieve this objective, “the Legislature established strict breach provisions for nonpayment that did not involve any inquiry into the intent or good faith of an employer or the reasons for nonpayment.” Rather, any untimely payment constitutes a material breach of the parties’ arbitration agreement regardless of the circumstances or status of the arbitration proceedings.
Further, the Appellate Court found that the interpretation offered by Doe—that payment must be made and received within 30 days of the due date—best effectuates the Legislature’s purpose for enacting Section 1281.98. The Appellate Court stated that this interpretation provides a clear bright-line rule for determining compliance with the 30-day statutory grace period for payment of arbitration fees—that is, if such fees are not received by the end of the 30-day grace period, the employee may immediately seek relief from the court. Citing to California case law, the Appellate Court stated that Doe’s interpretation of Section 1281.98 also aligned with the general principle that “depositing a check in the mail does not constitute payment.”
The Appellate Court rejected Na Hoku’s argument that the final sentence of AAA’s September 28, 2022 courtesy reminder stated that October 3, 2022 was the last day to “remit” payment. The Appellate Court concluded that, even if AAA’s courtesy reminder created “some unfortunate confusion” as to whether payment had to be received or just mailed by that date, there was no indication that this reminder superseded AAA’s September 1, 2022 letter dictating when payment was to be “received.” Nevertheless, the Appellate Court determined that the term “remit” was not part of the text of Section 1281.98 and thus, the plain meaning of the term did not control the construction of what the Legislature meant by “paid within 30 days of the due date.”
The Appellate Court commanded the trial court to set aside its order denying Doe’s motion to vacate the order compelling arbitration, and to enter a new order granting Doe’s motion and addressing Doe’s request for sanctions.
Employer Takeaways
California employers who require arbitration agreements as a condition of employment must strictly abide by the California Arbitration Act. Remain diligent and thoroughly review all notices and correspondence from the arbitration provider because a simple late payment can turn a private dispute before a neutral arbitrator into an expensive, time-consuming, public airing of grievances before a jury.
The author of this article, Peter Nakonechni, is a member of the Bars of New Jersey and Pennsylvania. This article is designed to provide one perspective regarding recent legal developments, and is not intended to serve as legal advice in New Jersey, Pennsylvania, California, or any other jurisdiction, nor does it establish an attorney-client relationship with any reader of the article where one does not exist. Always consult an attorney with specific legal issues.
[1] In California, employers are permitted to require job candidates and employees to sign arbitration agreements as a condition of employment. However, those employers are required to pay the full amount of costs associated with arbitration. Courts have reasoned that, because an employee, if not contractually prohibited from accessing a judicial forum, would not have to pay a judge to hear the case in court, they should not have to pay for the services of an arbitrator, which can be prohibitively expensive and have a chilling effect on employees pursuing statutory claims against their employers.
[2] Section 1281.98(a)(1) provides in relevant part: “In an employment or consumer arbitration that requires … 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.”
[3] Section 1280 et seq. of the California Code of Civil Procedure is also known as the California Arbitration Act.
[4] Though the trial court acknowledged a possible ambiguity as to whether “due” date meant the day payment had to be “remitted” or “received” by AAA, it concluded that AAA’s payment reminder email on September 28, 2022 clarified that the date was for remitting the payment.
