The court in De Leon v. Juanita's Foods, Inc., No. B315394 (Cal. Ct. App., Nov. 23. 2022) made it clear that if a business or employer fails to pay its arbitration fees on time, it will be found in material breach of the arbitration agreement. Juanita's Foods paid its arbitration fees a few days late and despite its assurances that payment was coming and a subsequent payment in fact made, the court held that it was in material breach and refused to consider any other factors to mitigate the late payment. Following clear precedent, the clear language of the statute, and stated legislative intent, the court found that Code of Civil Procedure sections 1281.97 and 1281.98 provide a bright line rule that courts must follow to the letter.
De Leon brought a suit against Aerotek, Inc. and Juanita's Foods which contained twenty allegations regarding his previous employment. Aerotek filed a motion to compel arbitration and Juanita's Foods joined in the motion pursuant to an arbitration agreement entered into between the parties. The arbitration agreement stated, "De Leon enters into the agreement as consideration for his application and/or his employment with Aerotek, Inc…..De Leon will arbitrate all disputes, claims, complaints, or controversies he has against Aerotek and/or any of its clients or customers." The agreement also required that the parties use JAMS arbitration and mediation services. The parties stipulated that the arbitration agreement was governed by the provisions of the Federal Arbitration Act, 9 U.S.C. §1 et seq. (FAA) and conceded that the arbitration agreement applies to De Leon's complaint against Juanita's Foods as well as Aerotek.
The court granted the motion to compel arbitration and both Aerotek and Juanita's Foods were identified as respondents. JAMS sent invoices to both Aerotek and Juanita's Foods for the amount of $1,300 each. Both paid their filing fee in a timely manner. JAMS then sent a letter to all parties confirming the start of arbitration and also notifying them that the "only fee a consumer employee may be required to pay is $400 of the filing fee and that all other costs, including the remainder of the filing fee, must be borne by the company." Soon thereafter, JAMS sent invoices to Aerotek and Juanita's Foods for $5,000 each. This fee was a "deposit for services" and would cover items such as session time, pre and post session reading, research, preparation, conference calls, travel. etc. The letter also instructed that all fees were due before services could be rendered. JAMS sent the parties a follow-up letter informing them that they had not received the "initial retainer deposit" from Juanita's Foods. Counsel for Juanita's Foods responded the same day stating that it had advised their client to pay the fees as soon as possible.
De Leon advised that he planned to file a motion to terminate the arbitration proceedings due to Juanita's Food's failure to pay the fee. Juanita responded that it intended to pay the fee in "the immediate future" and asked that the arbitration commence as planned. Initially, JAMS responded that it would schedule the arbitration management conference based on Juanita Food's assurance that it would pay. Before that could be accomplished, however, De Leon filed a motion to vacate the order compelling arbitration. JAMS then notified the parties that it would not proceed with arbitration until the motion was decided.
What Happens When One Party Fails to Pay Arbitration Fees?
Code of Civil Procedure sections 1281.97 and 1281.98 state that if the business that drafts the arbitration agreement fails to pay its portion of the required arbitration fees or costs within 30 days after they are due, the business is in “material breach” of the arbitration agreement. (Code Civ. Proc., §§ 1281.97, subd. (a)(1); 1281.98, subd. (a)(1).1) When such a material breach occurs, an employee or consumer can withdraw their claim from arbitration and seek relief in court. (§§ 1281.97, subd. (b)(1); 1281.98, subd. (b)(1).)
In the case at hand, the court concluded that arbitration could move forward between De Leon and Aerotek because Aerotek had timely paid the required fees. In addition, the trial court ruled that Juanita's Foods failure to pay the required fees was a material breach of the arbitration agreement. It found that, "A defendant is automatically in material breach of the arbitration agreement once the defendant fails to pay the arbitration fees or costs within 30 days of the due date." Juanita's Foods implored the court to consider additional factors, such as whether the late payment caused a further delay in the arbitration proceedings or substantially prejudiced another party- in addition to the fact of the late payment, but the court denied their request. It found Juanita's Foods argument that the legislature only intended the statute to apply when the arbitration proceeding was delayed or otherwise prejudiced by one party's nonpayment invalid. Juanita's Foods appealed the trial court's decision, which is the subject of the appeal in this case.
On appeal, the court agreed with the lower court's decision and found that the late payment qualified as a material breach under section 1281.98 and no other factors need be considered in finding the material breach occurred.
Legislative Intent Also Supports the Finding of a Material Breach
Section 1281.98 provides that a "company's failure to pay the fees of an arbitration provider as required by an arbitration agreement or applicable law hinders the efficient resolution of disputes and contravenes public policy." Further Subdivision (a)(1) of section 1281.98 states, "In an employment or consumer arbitration that requires, either expressly or through application of federal or state law, or the rules of the arbitration provider, 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 thirty days of 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 the arbitration as a result of the material breach." If an employee or consumer find themselves in this situation where the company has committed a material breach, it has several options, including:
- Withdraw the claim from arbitration and proceed in court.
- Continue with arbitration, if the arbitration provider agrees,
- Petition the court for an order compelling the drafting party to pay all arbitration fees, or
- Pay the drafting party's fee and continue with arbitration.
Subdivision (b) section 1281.98 (a).
The statute also allows the court it impose sanctions on the drafting party as a consequence to abandoning the arbitration proceedings. In enacting Senate Bill No. 707, the California legislature was addressing the fact that many companies force consumers and employees to sign arbitration agreements as a condition of working with them and to allow delays or the refusal to pay fees is unfair to those forced to submit to the process. "Granting deliverance from this procedural purgatory by deeming late payment to be a material breach of the arbitral agreement that gives the employee or consumer the choice to remain in the arbitration at the employer's cost or pursue his or her claims in court. Gallo v. Wood Ranch U.S. Inc., 81 Cal.App.5th 621, 634 (Cal. Ct. App. 2022).
Juanita's Foods argued that the trial court was incorrect in ruling that late payment was a material breach of the agreement because no prejudice or delay was caused by their nonpayment. Juanita's Foods points to several facts to support its contention.
- Aerotek and Juanita's Foods timely paid fees to initiate arbitration.
- The parties selected an arbitrator and initial proceedings were scheduled.
- Legal counsel for Juanita's Foods notified JAMS in a timely manner that Juanita's Foods would pay the remaining fees as soon as possible.
- JAMS was willing to move forward while waiting for Juanita's Foods payment.
- Juanita's Foods paid the fees shortly after the 30 day deadline had expired.
Juanita Food's further contends that if the arbitration proceedings are delayed, it is due to the actions of De Leon. He was never cooperative as to the arbitration process and forced Aerotek and Juanita's Foods to compel arbitration by refusing to submit to it willingly despite the agreement between the parties. He also filed the motion to vacate arbitration despite Juanita's Foods assurances of their willingness to pay the fees and in fact doing so as soon as possible after the deadline had passed.
Juanita's Foods claims that these facts are relevant and should be considered by the court in determining whether their late payment of the fee was a material breach of the arbitration contract.
Despite the factors posed by Juanita's Foods, on appeal the court found that the "clear and unambiguous" language of Section 1281.98 states that a failure to pay within thirty days is a material breach of the arbitration agreement. It goes on to describe what occurs when payment is not made within this time frame. The actions De Leon took were squarely within his right under the statute. "Under the plain language of the statute, the triggering event is nothing more than nonpayment of fees within the 30-day period- the statute specifies no other required findings, such as whether the nonpayment was deliberate or inadvertent, or whether the delay prejudiced the nondrafting party." Espinoza v. Superior Court (2022) 83 Cal.App.5th 761. The Espinoza court concluded that this clear language shows that the Legislature intended a strict application of the law for parties who fail to pay within the deadline.
The court in Gallo, supra, 81 Cal.App.5th at p. 631, case reached a similar conclusion. It found that "Section 1281.97 declares any payment that exceeds the arbitration provider's deadline and a statutorily granted 30-day grace period to be a material breach as a matter of law. It defines a material breach to be a failure to pay anything less than the full amount due by the expiration of the statutory grace period, rather than leaving materiality as an issue of fact for the trier of fact to determine."
Should the Court Consider Alternate Factors Presented by Juanita's Foods?
Based on this clear precedent, the court here concluded that despite the factors presented by Juanita's Foods, their failure to pay the full amount of fees due by the deadline was a material breach of the arbitration agreement. Juanita's Foods interpretation of the statute and legislative intent runs contrary to the clear and unambiguous nature of the statute as well as the expression of its underlying legislative intent and policy purpose. The fact that De Leon could have been patient and waited for Juanita's Foods to pay the fees does not change the fact that the statute clearly holds them in breach for their failure to make timely payment and affords De Leon several avenues of remedy including the one he chose by requesting to vacate the motion to compel arbitration.
Further, the underlying public policy of this statute is to prevent businesses who require their customers and employees to sign arbitration agreements to not enjoy the option of utilizing delay tactics once a complaint has been filed and reached the arbitration phase. "The legislative findings in support of the law emphasize that a company's failure to pay the fees of an arbitration service provider in accordance with its obligations… hinders the efficient resolution of disputes and contravenes public policy, and that a company's strategic non-payment of fees and costs severely prejudices the ability of employees or consumers to vindicate their rights…. this is a particularly unfair result when the party failing or refusing to pay those fees and costs is the party that imposed the obligation to arbitrate disputes." 12 (Stats, 2019, ch. 870 § 1(c ), (d).
Therefore, neither the legislative intent nor the clear language of the statute support Juanita's Foods contention that other factors should be considered in determining whether the late payment of fees constitutes a material breach. On the contrary, the statute and the legislature intended to protect employees and consumers from this very action by businesses. The trial court did not err in ruling that Juanita's Foods materially breached the arbitration agreement by paying the fees late. The order from the lower court vacating the order to compel arbitration is affirmed.