83 Cal.App.5th 761
Cal. Ct. App.2022Background
- Espinoza (employee) sued Centinela (employer) for discrimination/retaliation; court compelled arbitration and stayed the action.
- The AAA issued an initial invoice (due May 31, 2021); Centinela failed to pay within 30 days after the due date and paid after the 30-day window (payment confirmed July 9, 2021).
- Espinoza moved under Cal. Civ. Proc. Code §1281.97 to lift the stay and proceed in court, arguing Centinela’s nonpayment was a statutory material breach that waived the right to compel arbitration.
- Centinela defended on grounds the delay was inadvertent/clerical, caused no prejudice, and argued (later) that §1281.97 is preempted by the Federal Arbitration Act (FAA); it also pointed to AAA rules regarding suspension for nonpayment.
- The trial court denied Espinoza’s motion, finding substantial compliance and no material prejudice; the Court of Appeal granted mandamus, holding §1281.97 requires strict application and is not preempted by the FAA.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §1281.97(a)(1) permits exceptions (substantial compliance, inadvertence, lack of prejudice) to the 30-day payment rule | Espinoza: statute is unambiguous; any nonpayment within 30 days is a material breach and triggers remedies — no exceptions | Centinela: statute should be read to avoid punishing inadvertent/immaterial delays; general contract principles allow excuse/substantial compliance inquiries | Held: Statute is plain and was intended as a bright-line rule; courts may not create exceptions for inadvertence, substantial compliance, or lack of prejudice. |
| Whether strict application of §1281.97 is preempted by the FAA | Espinoza: §1281.97 is procedural, furthers arbitration by preventing fee-sabotage, and does not conflict with FAA | Centinela: statute singles out arbitration, displaces ordinary contract defenses, and discourages arbitration — thus preempted | Held: FAA does not preempt §1281.97. The statute regulates arbitration procedure (like other CAA provisions), furthers FAA objectives, and does not outlaw or unduly discourage arbitration. |
| Whether the parties’ arbitration agreement incorporated California Arbitration Act (CAA) procedures (so §1281.97 applies) | Espinoza: absent an express choice of another jurisdiction’s procedural law, California procedural law (CAA) applies by default in state court | Centinela: agreement incorporated AAA rules and referenced federal law; AAA Rule 47 gives arbitrator discretion, so parties did not consent to §1281.97’s strict court remedies | Held: CAA procedure applies by default in state court when no contrary procedural choice is made; AAA rules do not waive Espinoza’s right to invoke court powers under §1281.97. |
| Remedy on remand — sanctions under §1281.99 | Espinoza: after showing material breach, she is entitled to withdraw to court and to monetary and possible additional sanctions under §1281.99 | Centinela: argued delay was excusable so sanctions inappropriate | Held: Trial court erred by denying relief under §1281.97; case remanded for the trial court to lift the stay and to consider Espinoza’s §1281.99 sanctions request. |
Key Cases Cited
- Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal.4th 83 (2000) (mandatory employment arbitration cannot impose costs on employees that would not exist in court)
- Brown v. Dillard's, Inc., 430 F.3d 1004 (9th Cir. 2005) (employer’s refusal to participate in arbitration can constitute material breach)
- Sink v. Aden Ent., Inc., 352 F.3d 1197 (9th Cir. 2003) (failure to pay arbitration fees may be material breach)
- Gallo v. Wood Ranch USA, Inc., 81 Cal.App.5th 621 (2022) (upholding §1281.97 against FAA preemption; statute is procedural and furthers arbitration)
- Kindred Nursing Ctrs. Ltd. v. Clark, 137 S. Ct. 1421 (2017) (FAA preemption limited to rules that single out arbitration or interfere with arbitration’s attributes)
- AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (state rules that prevent enforcement of arbitration agreements can be preempted)
- Valencia v. Smyth, 185 Cal.App.4th 153 (2010) (California procedural arbitration statutes apply by default in state court absent express choice otherwise)