As many readers are aware, arbitration agreements are often found in employment contracts, requiring disputes to be solved outside of court. The applicable laws for these agreements (state or federal) can greatly impact the efficiency and fairness of the process. The case of Massiel Hernandez v. Sohnen Enterprises, Inc. (2024) illustrates this point by focusing on the enforcement of an arbitration agreement governed under the Federal Arbitration Act (FAA) and the impact of California Code of Civil Procedure Section 1281.97, which allows employees to withdraw from arbitration if the employer fails to pay fees on time.

The case began when Hernandez filed a complaint against Sohnen for disability discrimination and other California Labor Code violations. The parties initially agreed to stay the trial and proceed to arbitration as per their contract. However, Sohnen failed to pay the required arbitration fees within the stipulated timeframe. Citing Section 1281.97, Hernandez moved to withdraw from arbitration and proceed in state court.

At trial, the court ruled in Hernandez's favor, finding that Sohnen had breached the agreement by not paying the fees promptly. Sohnen promptly appealed, arguing that the FAA preempts Section 1281.97 and that their agreement was governed by federal arbitration laws.

On appeal, the Court of Appeal determined that the order allowing Hernandez to withdraw was indeed appealable, likening it to denying a petition to compel arbitration. Additionally, the Court found that the parties' arbitration agreement explicitly stated it was governed by the FAA, thereby preempting Section 1281.97.

The Court of Appeal held that the FAA's provisions took precedence over the California statute, given that the FAA governs all aspects of arbitration agreements. The FAA's goal is to ensure that arbitration agreements are enforced similarly to other contracts, without hindrance from state laws that could impede the arbitration process. The Court noted that while California generally supports arbitration, it cannot impose additional requirements on FAA-covered agreements.

The Court of Appeal's decision here underscores the importance of precise language in arbitration agreements, particularly concerning the governing law. California employers must comprehend the interplay between state and federal arbitration laws and ensure their agreements comply with the governing law. Strict adherence to the terms of the agreement, especially payment deadlines, is crucial to avoid forfeiting the right to arbitration and facing litigation in state courts.

For employees, the Court's decision highlights the significance of understanding their rights under both state and federal laws. While Section 1281.97 provides an avenue to withdraw from arbitration if an employer fails to pay fees on time, this option may be unavailable if the arbitration agreement falls under the FAA. Thus, employees must diligently monitor compliance with the terms of their arbitration agreements and be aware of how federal law may affect their options.