California employers gain relief in arbitration fee deadline ruling

In a highly anticipated decision, the California Supreme Court in Dana Hohenshelt v. Golden State Foods Corp. relieves some pressure for employers, holding that late payment of arbitration fees does not result in an automatic forfeiture of the employer’s right to arbitrate. In recent years, employers faced strict interpretation of the application of California Code of Civil Procedure section 1281.98 (“section 1281.98”), whereby plaintiffs seized the opportunity to haul a claim back to court, even when the employer was just a day late to pay arbitration fees. Employers now have some relief, but should heed the California Supreme Court’s holding on circumstances where waiver of arbitration is indeed appropriate.

Section 1281.98: A default fee regime

Section 1281.98 sets a default rule that when the party who drafted an arbitration agreement (the employer) is responsible for paying fees and costs to an arbitrator, it must pay the arbitrator’s invoice within 30 days after the due date, and that all invoices are due upon receipt. If the drafting party fails to make a timely payment, it (under the previous interpretation) automatically waives the right to compel the employee to arbitration. The employee can then choose to remove the claim from arbitration and proceed in court—a major setback for employers relying on arbitration agreements.

Although parties may contract around the default fee regime by either specifying the number of days upon which payment is due or agreeing to an extension of time for the due date, any such modification must be agreed upon by all parties, and obtaining mutual agreement is not always possible. Moreover, even if an arbitration provider agrees to extend the arbitration fee deadline, the nonpaying party must also agree to any extension to avoid a material breach. If the nonpaying party chooses to reject the extension, they will be able to unilaterally withdraw from arbitration and proceed with their claims in court.

Willful, grossly negligent, or fraudulent conduct may constitute a waiver of the right to arbitrate

Until Hohenshelt, the lower courts were divided as to whether the Federal Arbitration Act (“FAA”) preempted section 1281.98. In Hohenshelt, the California Supreme Court found that section 1281.98 is not preempted by the FAA. However, to bring a claim back into court, an employee must show the employer’s late or nonpayment of arbitration fees was due to willful, grossly negligent, or fraudulent conduct. In other words, there is evidence of late payment of arbitration fees to strategically delay or postpone the resolution of the employee claims.

Nonpayment: Excusable vs. Inexcusable

Emerging lower court decisions are expected to clarify the ambiguity in what sort of nonpayment is excusable or inexcusable. However, employers may anticipate the following:

A. Likely Excusable

1. Technical or Administrative Payment Error
2. External Circumstances. Medical emergencies and illnesses, natural disasters, personal crises, and power outages and system crashes are unexpected but possible events likely to cause delays.
3. Invoice Ambiguity. Arbitration providers are humans (at least for now) and may issue invoices with unclear due dates or conflicting payment instructions that employers reasonably rely on. While it is best practice for employers to review invoices upon receipt and to hash out any points of confusion in advance, it is not always possible to do so.

B. Likely Inexcusable

In enacting section 1281.98, the Legislature sought to deter companies and employers from engaging in strategic nonpayment of arbitration fees to delay or indefinitely postpone resolution of claims. Accordingly, conduct that appears to be (or is) a strategic nonpayment likely would not be excused.

1. Repeated Delays. Repeatedly missing fee deadlines may be a good cause for a finding of gross negligence.
2. Bad-Faith Withholding. Intentionally withholding payment to, for example, force a pre-arbitration settlement or delay discovery motions from being heard, will likely fall under the category of willful and/or fraudulent nonpayment.

Steps employers may consider to avoid Section 1281.98 pitfalls

1. Practice timely fee payment. Continue promptly paying arbitration invoices. If necessary, leave ample time to negotiate payment windows or extensions.
2. Tighten fee-payment provisions in arbitration agreements. For employers relying heavily on arbitration, consider re-drafting arbitration agreements to minimize risk.
   1. Add a clause for longer cure periods and/or express carve-outs for payment and invoicing disputes.
   2. Clearly specify payment periods (e.g. calendar days, business days) and delivery methods.
3. Document all communications and transactions. If an employee argues waiver due to late payment, employers are in a better position to preserve their right to arbitrate by showing any delay was the result of a good-faith mistake, inadvertence, or other excusable neglect. Documenting timely payment efforts and any disputes can help demonstrate absence of willful, grossly negligent, or fraudulent late payment.
4. Maintain internal accountability. Consider designating a team responsible for monitoring timely fee payments. Implement a payment portal into your organization’s structure to see that all payments are accounted for.
5. Monitor lower court decisions. Litigation over what constitutes “willful,” “grossly negligent,” or “fraudulent” late payment is likely. It is only a matter of time before lower courts begin releasing fact-specific rulings. Monitor evolving case law to continuously improve preventative practices and safeguard arbitration.

Conclusion

If you have any questions about the implications of the Dana Hohenshelt v. Golden State Foods Corp. decision, how to implement enforceable arbitration agreements, or maintain claims in arbitration, contact Monique Eginli (meginli@clarkhill.com), Liza Goldenberg (lgoldenberg@clarkhill.com), or another member of Clark Hill, LLP’s California Labor and Employment Practice Group.

This publication is intended for general informational purposes only and does not constitute legal advice or a solicitation to provide legal services. The information in this publication is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional legal counsel. The views and opinions expressed herein represent those of the individual author only and are not necessarily the views of Clark Hill PLC. Although we attempt to ensure that postings on our website are complete, accurate, and up to date, we assume no responsibility for their completeness, accuracy, or timeliness.