Arbitration is intended to be a quicker, less expensive, and more confidential alternative to traditional courtroom litigation. But what happens if one of the parties seems to be gaming the arbitration system to delay the proceedings?
That was the issue recently presented to the California Court of Appeal (Hohenshelt v Golden State Foods.)
Dana Hohenshelt, an employee of Golden State Foods Corp., sued his employer in November of 2020, alleging various violations of the California Fair Employment and Housing ACT (FEHA), including failure to provide him with copies of wage statements.
Golden State asked the Los Angeles Superior Court to compel Hohenshelt to submit the dispute to arbitration, as required by the company’s employee agreement. On April 1, 2021, the court granted the company’s motion.
Arbitration was scheduled to commence on August 3, 2021, before an arbitrator provided by Judicial Arbitration and Mediation Services (JAMS), a private arbitration service.
The company’s contract stated that “All fees are due and payable in advance of services rendered.” JAMS sent an invoice to Golden State for $43,300 on July 29, 2022, and another invoice for $11,760 on August 29, 2022. Both invoices were marked “due upon receipt” and were due to be paid within 30 days.
On September 30, 2022, after receiving no payment from Golden State, JAMS sent the company a letter that appeared to extend the payment deadline. “Pursuant to our fee and cancellation policy, all fees must be paid in full by October 28, 2022, or your [arbitration] hearing may be subject to cancellation,” the letter stated.
Also on September 30, Hohenshelt notified the trial court and JAMS that, because Golden State had not paid the arbitration fee within the time required, he was withdrawing his claim from arbitration and intended to litigate the dispute.
On October 5, 2022, Golden State sent Hohenshelt an email stating “all outstanding fees have been paid (to JAMS) in full.” The following day Hohenshelt asked the court to proceed with the litigation, removing the stay it had imposed pending arbitration.
Four months later the court denied his request. Based on the September 30 letter from JAMS, “the arbitrator seemingly set a new due date of October 28, 2022,” the court said, so the payment was not late.
Hohenshelt then appealed, petitioning the appellate court to reverse the trial court’s ruling and order it to allow him to proceed with litigation rather than arbitration.
The appellate justices noted that this case involved an issue that California’s legislature had addressed with new rules in 2019. Lawmakers had been concerned that one party could force a dispute into arbitration but, once there, refuse to pay the arbitration fees. This could effectively stall the matter, the justices said, “stymying the plaintiff's effort to obtain relief” and leaving the dispute in “procedural limbo.”
The legislature revised the arbitration rules to require payment of arbitration fees within 30 days after the due date. If a party failed to pay its fees on time, it would be in default of the arbitration and would effectively have waived its right to compel the other party to proceed with the arbitration. The other party would be free to go to court or, if it preferred, to continue with arbitration.
In 2022, a further amendment to the law said, “Any extension of time for the due date shall be agreed upon by all parties.”
The trial court’s ruling “ignored the clear language” of the statutes, the appellate justices said. Golden State missed the deadline for its payment, and Hohenshelt did not agree to any extension of the due date, so the arbitration was canceled.
An arbitrator does not have the power to cure a party’s missed payment, the justices noted. “There is no escape hatch for companies that may have an arbitrator’s favor,” they said, nor “for an arbitrator eager to keep hold of a matter.”
Any interpretation of the rules that allowed one party to delay the proceedings by failing to pay arbitration fees on time would render meaningless the statutory requirement that all parties must agree to an extension of the payment deadline, they said.
The two invoices from JAMS to Golden State were due on August 29 and September 28 of 2022, the justices noted. The September 20, 2022, letter from JAMS allowing payment until October 28, 2022, “in no way” altered Golden State’s obligation under the law or the effect of its missed payment.
Golden State argued that California’s statutes regarding payment deadlines are preempted by the Federal Arbitration Act (FAA), noting that the Supremacy Clause of the Constitution declares that laws enacted by Congress have greater force than conflicting state laws.
The justices said this issue has been addressed in several previous cases, and that courts have ruled that California’s procedures “further rather than frustrate” the objective of the FAA, which is to “honor the parties’ intent to arbitrate, and to preserve arbitration as a speedy and effective alternative forum for resolving disputes.”
The majority of the justices granted Hohenshelt’s request, ordering the trial court to hear the dispute. It awarded him costs on appeal.
One justice disagreed. In a lengthy dissent, he said tactics aimed at delaying an arbitration could be discouraged with fines rather than by canceling the arbitration. He also said the United States Supreme Court has in half a dozen cases disagreed with California rulings on arbitration that conflict with the FAA, leading him to conclude that the “state statute is invalid because it violates a clear federal rule.”
By Laurie Murphy