Judge: Jon R. Takasugi, Case: 21STCV18995, Date: 2022-09-22 Tentative Ruling

Case Number: 21STCV18995    Hearing Date: September 22, 2022    Dept: 17

Superior Court of California

County of Los Angeles

DEPARTMENT 17

TENTATIVE RULING

Defendant’s motion for summary judgment is DENIED. Summary adjudication of the first cause of action is DENIED. Summary adjudication of the second cause of action is GRANTED.

On 5/20/2021, Plaintiff Rick Espindola (Plaintiff) filed suit against Wismettac Asian Foods, Inc. (Defendant), alleging: (1) violation of CCP section 1281.98; and (2) breach of contract.

            Now, Defendant moves for summary judgment of Plaintiff’s Complaint.

Factual Background

            This action concerns the failed arbitration of the parties in a previous dispute (Previous Action). Specifically, the parties agreed to arbitrate the Previous Dispute, and an invoice was issued by JAMS to Defendant for the arbitrator fees. While there is dispute about whether or not Defendant was, in fact, late paying the arbitration fees, the scheduled arbitration hearing was cancelled and Plaintiff withdrew his claim from arbitration pursuant to section 1281.98. Now, Plaintiff seeks to recover an award of attorneys fees and costs associated with the abandoned arbitration.

Discussion

            Defendants argue that Plaintiff’s first cause of action fails as a matter of law because it is preempted by the FAA and violates the United States and California Contract Clauses. Defendants argue that Plaintiff’s second cause of action fails because Plaintiff cannot establish a breach by Defendant of any provision in the arbitration agreement.

I.                   Violation of CCP section 1281.98

A.    Coverage under the FAA

The Federal Arbitration Act (FAA) governs arbitration in written contracts involving interstate commerce. (9 U.S.C. § 1). “[T]he phrase ‘involving commerce’ in the FAA is the functional equivalent of the term ‘affecting commerce,’ which is a term of art that ordinarily signals the broadest permissible exercise of Congress’s commerce clause power.” (Carbajal v. CWPSC, Inc. (2016) 245 Cal.App.4th 227, 238.) The FAA’s requirement of a nexus to interstate commerce is low; any contract that affects interstate commerce satisfies this requirement. (See Allied-Bruce Terminix Cos. v. Dobson (1995) 513 U.S. 265, 273-74.) A very minimal showing is required to demonstrate a “transaction involving commerce” under the FAA. (See EEOC v. Ratliff (9th Cir. 1990) 906 F. 2d 1314, 1316.)

Here, Defendant’s evidence supports a reasonable inference that the agreement is governed by the FAA: (1) the agreement specifically states it is governed by the FAA (UMF 4); (2) Wismettac is an importer, wholesaler, and distributer of Asian food products throughout the United States and Canada. (UMF 2); (3) As a nation-wide wholesaler and distributer, Wismettac’s business necessarily involves interstate commerce. It’s trucks and employees move Wismettac’s products across state lines to and from multiple states throughout the United States. (Ibid.); (4) In addition to shipping its products interstate, Wismettac also purchases products from various states throughout the United States and then distributes those across the US. (Ibid.); and (5) Plaintiff’s potential position as Vice President of Imports also would have directly involved interstate commerce. Plaintiff’s job duties would have required him to travel throughout the United States and internationally, procuring product for the company and selling Wismettac’s products to customers in multiple states. (UMF 3).

B.    Preemption

Section 2 of the FAA make arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. §2.)

Under the Constitution’s Supremacy Clause, U.S. CONST. Art. VI, cl. 2, Congress has the power to preempt state laws concerning matters that lie within its authority. (Crosby v. Nat’l. Foreign Trade Council (2000) 530 U.S. 363, 372). If Congress “enacts a law that imposes restrictions or confers rights on private actors” and “a state law confers rights or imposes restrictions that conflict with the federal law,” then “the federal law takes precedence and the state law is preempted.” (Chamber of Commerce of the United States v. Bonta (9th Cir. 2021) 13 F.4th 766, 773.) “…State law that conflicts with a federal statute is ‘ “without effect.” ’ (citing Cipoollone v. Liggett Group, Inc. (1992) 505 U.S. 504, 516, (citation omitted).”(Jevne v. Superior Court (2005) 35 Cal.4th 935, 949). “”A state law, however clearly within a state's acknowledged power, which interferes with or is contrary to federal law is void under the supremacy clause of the United States Constitution [citations].” (citation omitted).” (Smith v. Alum Rock Union Elementary School Dist. (1992) 6 Cal.App.4th 1651, 1655.)

Although the FAA “contains no express preemptive provision,” courts have long recognized that the FAA broadly preempts state laws inconsistent with the FAA’s pro-arbitration objectives. (See Volt, 489 U.S. at 477–79.) A state law can be preempted by the FAA in two ways. First, under the “equal footing” principle, a state law is preempted if it “singles out arbitration agreements for disfavored treatment.” (Kindred Nursing Ctrs. Ltd P’ship v. Clark (2017) 137 S. Ct. 1421, 1425). Second, under the separate and independent obstacle test, a state law is preempted if it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” in enacting the Federal Arbitration Act. (AT&T Mobilitiy LLC v. Concepcion, 563 U.S. 333, 352).

The Supreme Court has reinforced a position that a state law cannot unilaterally add terms to, or prohibit the effectuation of an arbitration agreement. The Concepcion Court noted that there is “’a liberal federal policy favoring arbitration,’ (citation omitted) and the ‘fundamental principle that arbitration is a matter of contract.’” (Concepcion, at p. 339, (citation omitted)). The Court further stated that, “[i]n line with these principles, the court must place arbitration agreements on an equal footing with other contracts, (citations omitted), and enforce them according to their terms.” (citations omitted)(emphasis added)(Ibid.); “When a state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA (citation omitted).” (Id. at p. 341); “Although 9 U.S.C.S. § 2’s savings clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the Federal Arbitration Act’s objectives.” (Id. at 343); “The principle purpose of the []FAA is to ensure that private arbitration agreements are enforced according to their terms.” (Id. at p. 344.) “Arbitration is a matter of contract, and the []FAA requires court to honor parties’ expectations.” (Id. at p. 351). “States cannot require a procedure that is inconsistent with the Federal Arbitration Act, even if it is desirable for unrelated reasons.” (Ibid.)

      As such, the question is whether or not CCP section 1281.98 falls into the category of state rules which are preempted for disfavoring arbitration. For the following reasons, the Court concludes that it does not.

As noted by Plaintiff in opposition, the Court has already considered and rejected this argument at the demurrer stage. There, the Court wrote:

As for preemption, the Court concludes that Plaintiff’s Complaint is not preempted by federal law. As the District Court noted in Dekker v. Vivant Solar, Inc. (2020) 479 F.Supp.3d 834 (emphasis removed), “section 1281.97 [et seq.] is not ‘to the contrary’ of [federal policy favoring arbitration]. Rather, in enacting the statute it was the intent of the legislature to better enforce the federal policy of fast and inexpensive dispute resolution.”

Finally, the Court declines to find SB 707 unconstitutional. The only case cited to by Defendant in support of this contention was a case from 1983 which predates the passage of SB 707 in 2019 by several decades.  Without more, it would be a vast overstep for this Court to conclude SB 707 was unconstitutional as a matter of law.

            While the Dekker opinion was overturned by the district court in an unpublished opinion, that holding dealt solely with issues of a delegation clause within that particular arbitration agreement, namely whether the question was properly presented to the district court or should have been decided by the arbitrator. Given that preemption was in no way a part of the Ninth Circuit’s ruling, the Court has no reason to believe that its ruling displaces the Dekker Court’s preemption conclusion. Moreover, while Defendant is correct that the Court’s demurrer analysis is not binding here, the persuasive value of Dekker remains the same.

However, the Court need not even rely on Dekker to conclude that Plaintiff’s section 1281.98 claim is not preempted by federal law. On 7/25/2022, after Defendant’s motion for summary judgment was filed, the California Court of Appeal published its opinion in Gallo v. Wood Ranch USA Inc. (2022) 81 Cal. App. 5th 621. Gallo was the first time a California reviewing court had been presented with the question at issue here. It came to the same conclusion this Court reached on demurrer: “that the FAA does not preempt section 1281.97 [et seq.]” Gallo, 81 Cal. App. 5th at 8. While the Gallo court recognized “no California appellate court has yet addressed this issue,” they “are not alone in concluding that the FAA does not preempt section 1281.97 [et seq.]” (Id.) Specifically, the Gallo court noted that “the federal district courts have uniformly rejected [this] precise challenge.” (Id.) (citing Postmates, Inc. v. 10,356 Individuals, No. CV-20-2783-PSG, 2021 WL 540155 (C.D.Cal. Jan. 19, 2021); Agerkop v. Sisyphian LLC, No. CV-19-10414-CBM), 2021 WL 1940456 (C.D.Cal. Apr. 13, 2021))

            In opting to follow Gallo and Dekker on the issue of preemption, the Court notes that these decisions dealt with section 1281.97, and this matter presents under section 1281.98. However, as noted by Plaintiff, “The two sections are near twins of one another; the only core difference being that one deals with fees required to initiate arbitration, and the other pertains to fees required to continue arbitration. Moreover, the Gallo court discusses the sections’ history, effect, and purpose in concert as one. (Gallo, supra, 81 Cal. App. 5th at 1.) Nothing in the minute differences between Sections 1281.97 and 1281.98 are of any consequence, particularly as to the issue of preemption. To that end, the Dekker district court opinion relied upon by the Court at demurrer was also a case dealing with Section 1281.97, but presented no meaningful difference preventing the Court from relying upon in looking here at Section 1281.98.” (Opp., 6: 24-28.) In reply, Defendant did not present any argument which persuades this Court that there are material differences in section 1281.97 and 1281.98 such that one would not be preempted and the other would be.

            Moreover, there are a number of reasons why section 1281.98 does not appear to fall into the category of cases that disfavor arbitration, such that they violate the “equal footing” principle or the “obstacles” test.

First and foremost, no portion of section 1281.98 seeks to invalidate arbitration agreements. Rather, the statute codifies a longstanding, generally applicable principle of California contract law: A party relinquishes its contractual rights when it acts inconsistently with an intent to enforce those rights. For example, a party can waive its right to invoke arbitration where it acts in ways materially inconsistent ways with the intent to arbitrate. That same interest is served by section 1281.98. As such, section 1281.98 embodies longstanding, generally applicable principles of black-letter contract law and does not disfavor arbitration agreements on its face.  

Second, the reason that public policy favors arbitration is because it promotes efficient resolution of disputes. Congress enacted the FAA to facilitate arbitration—“to achieve streamlined proceedings and expeditious results.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 346 (2011) (quotation marks omitted). In a Senate Judicial Committee Report, the California Legislature noted that California has witnessed “a concerning and troubling trend” that obstructs this goal: companies delaying or preventing arbitration through non-payment or late payment of arbitration fees. S. Judiciary Comm. (“Senate SB707 Rep.”), Analysis of S.B. No. 707, 2019-2020 Reg. Sess., at 6 (Cal. Apr. 11, 2019). This “strategic non-payment of fees and costs…hinders the efficient resolution of disputes and contravenes public policy.” (Sen. Bill 707 §§ 1(c) & (d), 2019-2020 Reg. Sess. (Cal. 2019). As such, section 1281.98 actually furthers, rather than impedes, the FAA’s interest in promoting streamlined proceedings and expeditious results.  

Based on the foregoing, the Court concludes that CCP section 1281.98 is not preempted. Accordingly, Defendant’s motion for summary judgment is denied. Summary adjudication is denied as to the first cause of action.

II.               Breach of Contract

Plaintiff’s second cause of action is based on allegations that Defendant breached the Agreement by not timely paying all costs and fees required to keep the Arbitration active.

Defendant argues that Plaintiff’s second cause of action fails is duplicative and  Plaintiff does not, and cannot, point to a specific provision in the arbitration agreement that was breached. This is because the obligation to pay arbitration fees within a certain time was not an obligation created by the agreement, but rather was imposed exclusively by CCP section 1281.98.

Paragraph 11 of the Agreement specifically states that the “[Agreement] can only be revoked or modified by a writing signed by the parties that specifically states an intent to revoke or modify this [Agreement].” (UMF 7.) As such, there is nothing in the agreement, or in the statutory language of CCP section 1281.98 that indicates that it can add terms to the underlying agreement which can then support a breach of contract cause of action.  Rather, CCP section 1281.98 provides its own mechanism for relief, which Plaintiff is already pursuing,

In opposition, Plaintiff points to section 10 of the agreement which required Defendant to cover “the costs of the Arbitrator and other incident costs of arbitration.” Plaintiff also argues that Plaintiff breached the agreement in that “in the arbitration agreement, Defendant mutually agreed with Plaintiff to arbitrate all claims and disputes related to Plaintiff’s employment. By falling into default of the arbitration, Defendant neglected and failed to arbitrate Plaintiff’s claims, as required of Defendant under Section 1 of the arbitration agreement.” (Opp., 18: 16-19.)

However, section 10 does not provide any deadline for payment of arbitrator fees. Here, Plaintiff has not submitted any evidence to indicate that Defendant refused to cover the costs of the Arbitrator. Moreover, Plaintiff’s argument that Defendant failed to comply with its obligation to arbitrate, ignores the fact that it was Plaintiff who availed himself of section 1291.98 and withdrew his claim from arbitration.

While Plaintiff insists there is a triable issue of fact as to whether or not Defendant breached the agreement, he cannot identify any provision of the agreement which was breached. And, but for section 1291.98, Plaintiff cannot identify any basis that would have allowed him to withdraw his claim from arbitration. This reinforces the idea that Plaintiff is entitled to recover under his first cause of action for violation of section 1281.98, but not for breach of contract.

Plaintiff did not produce any evidence that Defendant and Plaintiff agreed in writing to modify the Agreement to include any term that Plaintiff alleged Defendant breached, including the alleged violation of CCP § 1281.98. Since there is no provision in the Agreement that requires payment of any fees associated with the arbitration by a certain time, Plaintiff cannot established a breach of contract claim as the terms he is alleging Defendant breached do not exist within the four walls of the Agreement. (Archer v. Coinbase, Inc. (2020) 53 Cal.App.5th 266, 272.)

Conclusion

            Based on the foregoing, Defendant’s motion for summary judgment is denied. Summary adjudication of the first cause of action is denied. Summary adjudication of the second cause of action is granted.

It is so ordered.

Dated:  September    , 2022

   Hon. Jon R. Takasugi
   Judge of the Superior Court

Parties who intend to submit on this tentative must send an email to the court at smcdept17@lacourt.org by 4 p.m. the day prior as directed by the instructions provided on the court website at www.lacourt.org.  If a party submits on the tentative, the party’s email must include the case number and must identify the party submitting on the tentative.  If all parties to a motion submit, the court will adopt this tentative as the final order.  If the department does not receive an email indicating the parties are submitting on the tentative and there are no appearances at the hearing, the motion may be placed off calendar. 

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