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Court of Appeal:
Timing of Agreement to Arbitrate Affects Application of Law
Opinion Says Statute Permitting Employee to Withdraw From Arbitration if Drafting Employer Fails to Pay Fees Only Applies to Contracts Entered Before Dispute Erupts, Not to Post-Filing Stipulation
By Kimber Cooley, associate editor
Div. Eight of this district’s Court of Appeal has held that a statute providing that an employee who agrees to arbitrate employment disputes may withdraw from arbitration if the employer who drafted the contract fails to pay the associated fees does not apply if the agreement is entered into post-dispute or if the employee was responsible for its terms.
At issue is Code of Civil Procedure §1281.98, enacted by the Legislature in 2019 to curb an employer’s ability to delay arbitration proceedings by failing to pay their share of the fees. The section provides:
“In an employment…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 …to proceed with that arbitration as a result of the material breach.”
Subdivision (b) gives the employee the right to “unilaterally elect” to “[w]ithdraw the claim from arbitration” if the fees are not paid.
Sexual Harassment Claims
The question as to the applicability of the section arose after Stephanie Trujillo filed a complaint, on Jan. 12, 2021, against her former employer J-M Manufacturing Company (“JMM”), and former coworkers David Merritt, David Moore, David Christian, and Chuck Clark, asserting sexual harassment claims. JMM, a farm equipment manufacturer, asked Trujillo to submit to arbitration based on a 2012 employment agreement.
Trujillo contested the validity of the pre-dispute arbitration agreement but proposed “exploring a potential stipulation to arbitrate that would take the place of the claimed agreement.” In March, she circulated a draft of the proposed stipulation.
JMM took issue with a term providing that “[i]f for any reason, [JMM] fails to pay the arbitral fees within thirty (30) days of presentation, such failure may constitute a waiver of arbitration such that the Designated Arbitrator may order this matter immediately returned to the active docket of the Los Angeles Superior Court.”
Trujillo agreed to replace the disputed term with one simply requiring JMM to pay fees in a timely manner.
In April 2021, the parties executed the finalized stipulation. Los Angeles Superior Court Judge Jon R. Takasugi approved the stipulation and stayed proceedings in the trial court pending arbitration of Trujillo’s claims.
Late Payment
The matter was submitted to ADR Services Inc. for arbitration and JMM timely paid all invoices for over a year. On Oct. 18, 2022, ADR sent an email to all parties indicating that the arbitrator “completed the rulings” for two dates in October and would “release them” upon full payment on an outstanding invoice with a due date of Sept. 12.
JMM immediately paid the full amount. Later that evening, Trujillo sent an email notifying ADR and the JMM parties that she was unilaterally withdrawing her claims from arbitration based on §1281.98.
Trujillo filed a motion to withdraw in the Superior Court and Takasugi granted the motion and lifted the stay on the trial court proceedings. He pointed out that Trujillo suffered no prejudice from the delay since ADR was not threatening to terminate arbitration but said:
“[W]ere the Court to conclude that section 1281.98 was not triggered here, it would be, in effect, granting [JMM] an exception because the delay did not result in any prejudice. It is clear no such exception [to section 1281.98] is allowed under the law.”
Presiding Justice Maria E. Stratton authored the opinion, filed Monday, reversing the order, saying that “[w]e conclude the Legislature intended to limit section 1281.98’s applicability to arbitration arising from a pre-dispute agreement.” She determined that Trujillo, not her employer, was the “drafting party” under the unique circumstances of the case, so she could not rely on the section to opt out of arbitration.
Justices Elizabeth A. Grimes and John Shepard Wiley Jr. joined in the opinion.
Post-Dispute Agreement
Stratton wrote:
“We note that every single appellate opinion we reviewed…involved arbitration arising from a pre-dispute arbitration agreement. Not a single case considered or addressed a section 1281.98 issue arising from a post-dispute arbitration agreement.”
Unpersuaded by Trujillo’s contention that the post-dispute stipulation resulted from JMM’s attempt to enforce the pre-dispute agreement, she remarked:
“The record shows JMM emailed a copy of the 2012 agreement to Trujillo and asked her to submit to arbitration. Trujillo did not contest the validity or enforceability of the pre-dispute agreement in court. JMM never moved to compel arbitration based on the pre-dispute agreement. Instead, Trujillo drafted and circulated a post-dispute arbitration agreement to ‘agree on the governing terms of any arbitration.’ ”
The jurist pointed out that §1280(e) defines the term “drafting party” as “the company or business that included a predispute arbitration provision in a contract with a[n]…employee” and said:
“We conclude the Legislature intended to limit section 1281.98’s applicability to arbitration arising from a pre-dispute agreement. We so conclude because the Legislature provided us with a clear answer by reading section 1281.98 alongside section 1280.”
Drafting Party
Turning to the question of whether the statute applies when the employee drafted the agreement, Stratton commented:
“Here, the statutory language is clear. Section 1281.98 explicitly delineates the duty of the ‘drafting party’ to pay arbitration fees and costs within 30 days after the due date or else be deemed in material breach of the arbitration agreement….Some terms in the statutory scheme are defined…, and the term ‘drafting party’ is one of them.”
Under what she described as the “unique set of circumstances in the case before us,” the jurist opined:
“Trujillo was subject to the pre-dispute arbitration agreement she signed in 2012. However, the parties did not submit to arbitration based on that 2012 pre-dispute arbitration agreement. JMM never moved to compel arbitration based on that pre-dispute arbitration. The record shows that after having filed a civil complaint in court on January 12, 2021, employee Trujillo—by way of her counsel—drafted and circulated to JMM a post-dispute stipulation for arbitration on March 17, 2021….The parties submitted to arbitration based on that post-dispute stipulation primarily drafted by Trujillo.”
She declared:
“We conclude section 1281.98, subdivision (a)(1) does not apply here, because the parties did not submit to arbitration based on a pre-dispute arbitration agreement and because JMM was not the ‘drafting party’ as defined by section 1280, subdivision (e).”
Debated Issue
Stratton acknowledged in a footnote that “whether this statute is preempted by the Federal Arbitration Act is subject to much debate and is currently pending before our Supreme Court” in Hohenshelt v. Superior Court.
In the Hohenshelt opinion, also authored by Stratton, this district concluded that §1281.98 is not preempted because it furthers the objectives of the Federal Arbitration Act by honoring the parties’ intent and preserving arbitration as an effective forum for resolving disputes. Wiley dissented, saying “[w]hat preempts this statute is the decision to make arbitration the hostage of delay.”
The California Supreme Court granted review this past summer.
The case is Trujillo v. J-M Manufacturing Company Inc., B327111.
Trujillo was represented by Jason L. Oliver, John W. Dulton, and Matthew Sawaya McNicholas of the Westwood firm of McNicholas & McNicholas LLP. James R. Rosen and Francesca Noel Dioguardi of the El Segundo firm Rosen Saba LLP acted for the JMM parties.
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