The California Supreme Court has issued its long-awaited opinion resolving the split in authority regarding whether Code of Civil Procedure sections 1281.97 and 1281.98 are preempted by the Federal Arbitration Act. The Court found that the FAA does not preempt section 1281.98 (although the Court’s opinion focuses on 1281.98 preemption, the same analysis is applicable to 1281.97). However, the Court rejected the statute’s “rigid construction” and lack of relief for late payments that are not “willful, fraudulent, or grossly negligent.”
Key Points in the Court’s Opinion
- 98 is not preempted by the FAA because 1281.98 furthers the goals of the FAA by seeking to keep the process working by requiring timely payment of invoices.
- Late payment of invoices can be excused when the untimely payment is “not willful, fraudulent, or grossly negligent” consistent with relief under CCP §§ 473, 3275 and Civ. Code § 1511.
Background on CCP 1281.97 & 1281.98
In 2019, the California Arbitration Act was amended to add sections 1281.97 through 1281.99 to the Code of Civil Procedure (Sections 1291.97 and 1282.98 have been subsequently amended). This amendment sought to address concerns that in employment and consumer arbitrations, the party who drafts and is obligated to pay fees could improperly delay arbitration proceedings by failing to timely pay arbitration fees (both initial filing fees and ongoing fees during the arbitration). The bill’s statutory history indicates that it was in response to “a concerning and troubling trend” whereby “employers are refusing to pay required fees to initiate arbitration, effectively stymieing the ability of employees to assert their legal rights.” (Sen. Judiciary Com., Analysis of Sen. Bill No. 707 (2019–2020 Reg. Sess.) as amended Apr. 11, 2019, p. 6 (Senate Judiciary Committee Analysis); Sen. Rules Com., Off. of Sen. Floor Analyses, 3d reading analysis of Sen. Bill. No. 707 (2019–2020 Reg. Sess.) as amended May 20, 2019, p. 4 (Senate Rules Committee Analysis).)
To address this concern, Sections 1281.97/98 required that, absent an express provision in the arbitration contract regarding the due date of arbitration invoices, “the arbitration provider shall issue all invoices to the parties as due upon receipt.” Sections 1281.97/98 further provide that a drafting party who fails to pay arbitration invoices within 30 days of their due date is in material breach of the arbitration agreement, allowing the non-breaching party various relief, including the option to withdraw from arbitration.
Split in Authority Regarding FAA Preemption
A split in authority has developed regarding whether Sections 1281.97/98 are preempted by the Federal Arbitration Act.
On one hand is a line of cases that hold that Sections 1281.97/98 are not preempted by the FAA, primarily reasoning that Sections 1281.97/98 further (rather than hinder) the goals of the FAA, and thus are not preempted by the FAA. See, e.g., Colon-Perez v. Security Industry Specialists, 108 Cal. App. 5th 403 (2025); Sanders v. Superior Court, 110 Cal. App. 5th 1304, 1325 (2025); Hohenshelt v. Superior Court, 99 Cal. App. 5th 1319, 1326 (2024); Keeton v. Tesla, 103 Cal. App. 5th 26 (2024); Gallo v. Wood Ranch USA, Inc., 81 Cal. App. 5th 621, 643 (2022). The courts that have gone in this direction generally reason that Sections 1281.97/98 further the FAA by requiring prompt payment of invoices, thus keeping arbitrations moving forward without unnecessary delay, and because they are not a hindrance to arbitration, they are not preempted.
On the other side are cases that hold that Sections 1281.97/98 are preempted by the FAA, primarily reasoning that Sections 1281.97/98’s mandatory breach language violates the equal-treatment principle of the FAA (the idea that arbitration agreements should receive equal treatment to other contracts). See e.g., Belyea v. GreenSky, Inc., 637 F. Supp. 3d 745, 756 (N.D. Cal. 2022); Hernandez v. Sohnen Enterprises, 102 Cal. App. 5th 222 (2024). These cases take the position that Sections 1281.97/98 are anti-arbitration, placing them at odds with the FAA’s equal treatment principles and favoring of arbitration.
Key Takeaways
The Court found that 1281.98 was not preempted by the FAA (this holding will presumably apply to 1281.97 as well). Like many of the Court of Appeal decisions before it, the Court determined that 1281.98 furthered, and did not hinder, the goals of the FAA – namely the speedy and efficient arbitration process.
The Court, however, rejected 1281.98’s “rigid construction,” taking issue with its draconian repercussions that ignore whether the untimely payment was willful. In rejecting this, the Court allowed for a party who untimely pays an invoice the opportunity to show that its untimely payment was excusable. As the Court explained, “the Legislature sought to deter companies and employers from engaging in strategic nonpayment of arbitration fees; we find no indication that it intended to strip companies and employers of their contractual right to arbitration where nonpayment of fees results from a good faith mistake, inadvertence, or other excusable neglect.”
Employers should remain cognizant of arbitration fee deadlines and should consider including explicit terms in arbitration agreements regarding the due date for invoices, as this could affect whether the “due on receipt” default under sections 1281.97/98 applies. (The Court notes that “parties are free to contract for any due date they want by adopting their own ‘provision in the arbitration agreement stating the number of days in which the parties to the arbitration must pay any required fees or costs.’”). Practitioners may wish to monitor all deadlines and keep clients informed of all applicable deadlines. In situations where a client’s payment of an invoice is untimely, it may be beneficial to address the payment promptly and be prepared to demonstrate that any delay was not willful, fraudulent, or grossly negligent.