Judge: Stephen P. Pfahler, Case: 21STCV15142, Date: 2025-04-08 Tentative Ruling

Case Number: 21STCV15142    Hearing Date: April 8, 2025    Dept: 68

Dept. 68

Date: 4-8-25

Case: 21STCV15142

Trial Date: Not Set

CANCEL/REMOVE FROM ARBITRATION

MOVING PARTY: Plaintiff, Juan Guevara

RESPONDING PARTY: Defendant, Westlake Services, LLC

RELIEF REQUESTED

Motion to Cancel/Remove the Action from Arbitration

SUMMARY OF ACTION

On April 21, 2021, Plaintiffs Juan Guevara and Jose Oliva filed a PAGA complaint both individually and on behalf of Aggrieved Employees. On July 16, 2021, Plaintiffs filed a first amended complaint.

On September 28, 2021, Defendants Westlake Services, LLC and Don Hankey filed a 170.6 challenge to the assigned judicial officer, thereby leading to reassignment from Department 12 to Department 17. On October 8, 2021, Plaintiffs filed a 170.6 challenge, thereby leading to reassignment from Department 17 to Department 68.

On February 22, 2022, the court overruled the demurrer to the first amended complaint brought by Westlake Services, LLC. Defendant answered the first amended complaint on March 25, 2022.

On October 14, 2022, the court granted the motion to compel arbitration as to the individual PAGA claims, and stayed the case on the representative PAGA action. The court also denied the motion for protective order.

RULING: Granted.

Notwithstanding the caption of the motion to lift the stay on the representative action, the notice of motion indicates Plaintiff Juan Guevara moves to remove the case from arbitration due to the failure of Westlake Services, LLC to pay required arbitration fees. Plaintiff also moves for $50,713.75 in attorney fees.

Defendant Westlake Services, LLC in opposition denies any material breach of the arbitration agreement on grounds of contract interpretation under Federal Arbitration Act (FAA) standards. According to Defendant, FAA preempts Code of Civil Procedure section 1281.98.

Defendant maintains the first payment of $750 billed on December 6, 2023, was accepted on January 16, 2024, following an extension of time granted by Plaintiff, and the second invoice for $6,250 was also paid upon receipt, with any delays the result of the change to assigned counsel.

Plaintiff in reply reiterates the claim of material breach of the arbitration agreement, due to the failure to pay arbitration fees, and denies any extension for payment. Plaintiff contends Defendant lacks any valid excuse for the admittedly late payments. Plaintiff challenges any exclusion or preemption of Code of Civil Procedure section 1281.98.

The requested relief arises under Code of Civil Procedure section 1291.98 regarding consumer and employment arbitrations.

“(a) In an employment or consumer arbitration that requires, either expressly or through application of state or federal law or the rules of the arbitration provider, 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 or consumer to proceed with that arbitration as a result of the material breach.

(b) If the drafting party materially breaches the arbitration agreement and is in default under subdivision (a), the employee or consumer may unilaterally elect to do any of the following:

(1) Withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction. If the employee or consumer withdraws the claim from arbitration and proceeds with an action in a court of appropriate jurisdiction, the statute of limitations with regard to all claims brought or that relate back to any claim brought in arbitration shall be tolled as of the date of the first filing of a claim in any court, arbitration forum, or other dispute resolution forum.

(2) Continue the arbitration proceeding, if the arbitration company agrees to continue administering the proceeding, notwithstanding the drafting party's failure to pay fees or costs. The neutral arbitrator or arbitration company may institute a collection action at the conclusion of the arbitration proceeding against the drafting party that is in default of the arbitration for payment of all fees associated with the employment or consumer arbitration proceeding, including the cost of administering any proceedings after the default.

(3) Petition the court for an order compelling the drafting party to pay all arbitration fees that the drafting party is obligated to pay under the arbitration agreement or the rules of the arbitration company.

(4) Pay the drafting party's fees and proceed with the arbitration proceeding. As part of the award, the employee or consumer shall recover all arbitration fees paid on behalf of the drafting party without regard to any findings on the merits in the underlying arbitration.

(c) If the employee or consumer withdraws the claim from arbitration and proceeds in a court of appropriate jurisdiction pursuant to paragraph (1) of subdivision (b), both of the following apply:

(1) The employee or consumer may bring a motion, or a separate action, to recover all attorney's fees and all costs associated with the abandoned arbitration proceeding. The recovery of arbitration fees, interest, and related attorney's fees shall be without regard to any findings on the merits in the underlying action or arbitration.

(2) The court shall impose sanctions on the drafting party in accordance with Section 1281.99.

(d) If the employee or consumer continues in arbitration pursuant to paragraphs (2) through (4) of subdivision (b), inclusive, the arbitrator shall impose appropriate sanctions on the drafting party, including monetary sanctions, issue sanctions, evidence sanctions, or terminating sanctions.”

Code Civ. Proc., § 1281.98

Following the October 14, 2022, order compelling arbitration, Plaintiff submitted a demand for arbitration on December 29, 2022. [Declaration of David Van Pelt.] An invoice was for sent with a due date of July 18, 2024. While the parties executed a stipulation for an extension of an evidentiary hearing, no extension of the payment deadline was contained in the agreement. [Id., ¶¶ 5-7, Ex. A, C.] On July 19, 2024, Westlake requested an extension for payment, which was declined by Plaintiff. [Id., ¶ 7, Ex. D.] On August 12, 2024, Plaintiff informed the arbitrator of withdrawal.

Authority on the subject of compliance allows for strict enforcement of the statutory 30-day deadline regardless of excuses tendered by responding parties for delays in payment. “Courts that have considered the legislative history of sections 1281.97 or 1281.98 share these views. The court in De Leon, supra, 85 Cal.App.5th 740, 301 Cal.Rptr.3d 678, observed that section 1281.98’s ‘30-day deadline establishes a clear-cut rule for determining if a [company] is in material breach of an arbitration agreement.’ (De Leon, at p. 755, 301 Cal.Rptr.3d 678.) The statute's ‘legislative history indicates the California Legislature sought a clear and unambiguous rule for courts to apply in determining whether late payment of arbitration fees by a drafting party constituted a material breach of an arbitration agreement.’ (Id. at p. 756, 301 Cal.Rptr.3d 678.) The court in Cvejic v. Skyview Capital, LLC (2023) 92 Cal.App.5th 1073, 309 Cal.Rptr.3d 891 (Cvejic), observed that ‘the Legislature sought a clear rule for determining whether the late payment of a fee by a drafting party constituted a material breach’ and further observed that the legislative history and caselaw directed strict enforcement of section 1281.98. (Cvejic, supra, at p. 1078, 309 Cal.Rptr.3d 891.) In construing section 1281.97, the court in Espinoza v. Superior Court (2022) 83 Cal.App.5th 761, 299 Cal.Rptr.3d 751 (Espinoza), remarked: ‘[T]he Legislature intended the statute to be strictly applied whenever a drafting party failed to pay by the statutory deadline.’ (Id. at p. 776, 299 Cal.Rptr.3d 751.) In short, the courts that have examined the legislative history agree the Legislature sought to establish a clear and unambiguous rule for determining a breach based on nonpayment as well as strict enforcement of the statute. (Doe v. Superior Court (2023) 95 Cal.App.5th 346, 357–358.)” Reviewing courts reject discretionary arguments for statutory fulfilment, such as claims of substantial compliance based on representations of inadvertence or lack of material prejudice. (Id., at pp. 358-359.)

Strict enforcement of the statute arises from concern of employers strategically delaying payment of fees or non-payment. The lack of any address in the statute allowing for a mistake or excusable neglect exemption constitutes an intentional reflection of the public policy disfavoring any such potential imposition of burden on the employee and imposing the consequences on the non-complying party. (Espinoza v. Superior Court , supra, 83 Cal.App.5th 777.) Defendant/Respondent implicitly acknowledges the strict enforcement, and instead relies on deflection of fault to AAA.

Defendant challenges enforcement of this California statute on grounds of FAA governing all rules regarding the arbitration. Section 3 of the agreement states: “This agreement is governed by the FAA and the substantive law of the state in which the claim arose, where not preempted by the FAA.” [Declaration of Jessica Lauro, Ex. A.]

The distinction between the rules governing entry into arbitration versus conducting the arbitration itself constitutes a material distinction. Absent a direct conflict with FAA where FAA occupies the entire field of individual PAGA claim arbitration, motions to compel arbitration with an FAA clause remain governed by California law standards. (Adolph v. Uber Technologies, Inc. (2023) 14 Cal.5th 1104, 1119; Viking River Cruises, Inc. v. Moriana (2022) 142 S.Ct. 1906; Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University (1989) 489 U.S. 468, 477–479; Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, 346; Truly Nolen of America v. Superior Court (2012) 208 Cal.App.4th 487, 498; see AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 341-346.) As addressed further below, the court therefore finds no basis of FAA preemption simply on the basis of the conditional FAA clause in the agreement and lack of evidence of FAA application.

While the plain language of the agreement provides for Federal Arbitration Act (FAA) governance over the agreement, a party must still establish applicability of FAA rules. (Hoover v. American Income Life Ins. Co. (2012) 206 Cal.App.4th 1193, 1207.) Defendant represents interstate commerce engagement based on the “acquisition of automotive retail installment sales contracts from all over the country and dealing with consumers and automobile dealers in all 50 states.” [Opposition 4:8-10], Defendant offers no actual evidence in support of this business operation and therefore FAA governance triggered by engagement in interstate commerce in any substantial way. [See Lauro Decl.] Further, a review of the October 14, 2022, order compelling arbitration shows consideration and lack of acknowledgment of FAA preemption. The court declines to effectively reconsider the order for a retroactive finding of FAA preemption. The court therefore finds no application of FAA rules governing the order compelling arbitration.

Even accepting the reference of interstate commerce as sufficiently establishing FAA application, the Second Appellate District, the Appellate District governing this court, categorically rejected FAA preemption of Code of Civil Procedure section 1281.97. (Espinoza v. Superior Court (2022) 83 Cal.App.5th 761, 771; Gallo v. Wood Ranch USA, Inc. (2022) 81 Cal.App.5th 621, 644-645.) The relied upon United States District Court opinion only constitutes persuasive authority, and the court declines to adhere to the reasoning under the “equal treatment principle” given the much more substantively addressed and reviewed cases in California. “As a practical matter, a superior court ordinarily will follow an appellate opinion emanating from its own district even though it is not bound to do so. Superior courts in other appellate districts may pick and choose between conflicting lines of authority.” (McCallum v. McCallum (1987) 190 Cal.App.3d 308, 315 (footnote 4).)

Meanwhile a case also out the Second Appellate District directly distinguishes the prior cases also from the district, and finds certain contractual language regarding the FAA governing in fact precludes application of Code of Civil Procedure section 1281.97. (Hernandez v. Sohnen Enterprises, Inc. (2024) 102 Cal.App.5th 222, 243.) The California Supreme Court granted review of this case however, but curiously not the prior cases distinguished by the court albeit in the same district.

“Grant of review by the Supreme Court of a decision by the Court of Appeal does not affect the appellate court's certification of the opinion for full or partial publication under rule 8.1105(b) or rule 8.1110, but any such Court of Appeal opinion, whether officially published in hard copy or electronically, must be accompanied by a prominent notation advising that review by the Supreme Court has been granted. [¶] (2) The Supreme Court may order that an opinion certified for publication is not to be published or that an opinion not certified is to be published. The Supreme Court may also order depublication of part of an opinion at any time after granting review.” (Cal. Rules of Court, rule 8.1105(e)(1)(B), (e)(2).) “Pending review and filing of the Supreme Court's opinion, unless otherwise ordered by the Supreme Court under (3), a published opinion of a Court of Appeal in the matter has no binding or precedential effect, and may be cited for potentially persuasive value only. Any citation to the Court of Appeal opinion must also note the grant of review and any subsequent action by the Supreme Court.” (Cal. Rules of Court, 8.1115(e)(1).) The case is not ordered depublished, but the court remains limited in consideration to persuasive authority.

Again, the subject clause under review states: “This agreement is governed by the FAA and the substantive law of the state in which the claim arose, where not preempted by the FAA.” [Lauro Decl., Ex. A.] The Hernandez court reviewed the clause governing: “‘This Agreement is governed by the Federal Arbitration Act (‘FAA’), 9 U.S.C. [section] 1, et seq.’ The agreement provided that ‘any disputes regarding the enforceability, interpretation, scope, applicability or coverage of this Agreement are reserved solely for the Court, not for arbitration.’ If the parties could not agree on an arbitrator, a party could ‘seek court appointment of an arbitrator pursuant to the FAA.’ The agreement explained that arbitration fees would be paid by Sohnen or other parties to the dispute, not by the employee, but parties choosing to be represented by an attorney would be responsible for their own attorney fees. During arbitration, the parties could conduct discovery and bring motions under the Federal Rules of Civil Procedure except as specifically provided otherwise in the agreement. The parties waived class or representative actions ‘to the fullest extent permitted by the FAA.’ The agreement also provided, ‘The arbitrator shall not have the power to commit errors of law or legal reasoning and the arbitrator's award may be vacated or corrected by a court of competent jurisdiction for any such error. The decision of the arbitrator can be entered and enforced as a final judgment in any court of competent jurisdiction.’” (Hernandez v. Sohnen Enterprises, Inc. (2024) 102 Cal.App.5th at p. 231.)

In reviewing the arbitration clause, the Hernandez court found the agreement indicated the parties’ intent for “substantive and procedural law of the FAA to govern their agreement, including the provision of the FAA that compelled arbitration under the circumstances of the case.” (Id. at p. 241.) The Hernandez court therefore effectively found the agreement completely encompassed all rules and procedures for FAA preemption of the California Arbitration Act (CAA), and found preemption of Code of Civil Procedure 1281.97, as a matter of law. (Ibid.)

The Hernandez court relied at least in part fundamental contractual interpretation principles, and strenuously emphasized the policy reasons of FAA arbitration for the purpose of efficient allocation of court resources and reduced costs for the parties. The court also court specifically disagreed with other court findings regarding removal from arbitration pursuant to Code of Civil Procedure 1281.97 as actually facilitating FAA goals of reduced costs and more efficient practice.

The court finds the reasoning in Gallo and Espinoza in fact correctly adhere to the intent of the statute regarding facilitation of arbitration and disincentivizing intentional delays in payment. (Espinoza v. Superior Court, supra, 83 Cal.App.5th at pp. 783-784; Gallo v. Wood Ranch USA, Inc., supra, 81 Cal.App.5th at pp. 642-643.) The obligations in the arbitration agreement itself establishes the contractual basis for obligation to perform (e.g. payment of fees). “In Valencia, we confronted whether the arbitration agreement at issue was governed by the procedural provisions of the CAA or the FAA. As we explained, ‘parties may “expressly designate that any arbitration proceeding [may] move forward under the FAA's procedural provisions rather than under state procedural law.” [Citation.] Absent such an express designation, however, the FAA's procedural provisions do not apply in state court.’” (Espinoza v. Superior Court, supra, 83 Cal.App.5th at p. 786.) Thus, the court reconciles the disparity between the cases on grounds of the contractual intent of the parties, as well as a finding that the public policy requiring prompt payment specifically and categorically exists to prevent potential abuses of the arbitration system with further delays. The court therefore declines to find any FAA preemption under the terms of the agreement and public policy, again, even if Defendant presented competent evidence of interstate commerce thereby establishing FAA application.

Finally, on the denial of any breach of the section even after admitting to presentation of a four (4) day late payment from the date of the invoice. [Lauro Decl., Ex. E.] Defendant relies on a position of substantial performance, and denies any waiver as a result of the delayed payment.

The court appreciates the position, but this exact argument has been rejected. Reviewing courts reject discretionary arguments for statutory fulfilment, such as claims of substantial compliance based on representations of inadvertence or lack of material prejudice. (Doe v. Superior Court, supra, 95 Cal.App.5th at pp. 357–358.) Again, strict compliance is the rule without discretion presented to the court.

The court therefore grants the motion to remove the case from arbitration based on the finding of a breach of the statute and lack of preemption. Because of the breach of the statute, and return of the case to the active civil calendar, the court must also impose sanctions against the drafting party (defendant/respondent).

(a) The court shall impose a monetary sanction against a drafting party that materially breaches an arbitration agreement pursuant to subdivision (a) of Section 1281.97 or subdivision (a) of Section 1281.98, by ordering the drafting party to pay the reasonable expenses, including attorney's fees and costs, incurred by the employee or consumer as a result of the material breach.

(b) In addition to the monetary sanction described in subdivision (a), the court may order any of the following sanctions against a drafting party that materially breaches an arbitration agreement pursuant to subdivision (a) of Section 1281.97 or subdivision (a) of Section 1281.98, unless the court finds that the one subject to the sanction acted with substantial justification or that other circumstances make the imposition of the sanction unjust.

(1) An evidence sanction by an order prohibiting the drafting party from conducting discovery in the civil action.

(2) A terminating sanction by one of the following orders:

(A) An order striking out the pleadings or parts of the pleadings of the drafting party.

(B) An order rendering a judgment by default against the drafting party.

(3) A contempt sanction by an order treating the drafting party as in contempt of court.

Code Civ. Proc., § 1281.99

Plaintiff/Claimant moves for $50,713.75 in fees with an additional $310.50 in costs. Defendant presents no apparent challenge to the recovery of costs in the opposition. The points and authorities total less than 10 pages thereby allowing sufficient room to present a position. The court declines to speculate.

The request depends entirely on the declaration of Van Pelt. The fee statement represents a total of 72.35 hours on the case. Counsel presents a “blended” billing rate of $725/hour. [Van Pelt Decl., Ex. H.]

The court finds no authority equating the subject request to the standard as one for a motion for attorney fees, whereby the court would consider the entire course and scope of the conduct of the parties. The language of the statute requires compensation for costs caused by the breach, which the court interprets as limited to the actual breach of the clause following the order compelling arbitration.

When read in conjunction, both sections 1298.98 and 1298.99 apparently allow for the imposition of costs for both the underlying arbitration, as well as the separate and distinct costs resulting from the breach. The court therefore appreciates the distinctive bases and entitlement to recovery. The single paragraph summary and attached billing summary, whereby Van Pelt represents all work relates to the arbitration and in fact said billing summary “understates” total work, contains questionable entries.

The court lacks any basis of determination for the “blended rate,” in that neither Van Pelt nor the statement breaks out or identifies any counsel responsible for which tasks. A certain number of entries also appear to reference discovery. Given the lack of any arbitration occurring, it remains unclear how and why discovery would remain a pertinent topic, even if possibly anticipated. The October 14, 2022, order of the court compelling arbitration and declaring the motion for protective order regarding discovery moot also confirms the lack of an apparent nexus with the arbitration and discovery. The court will therefore deducts 15.1 hours or $10,950 from the statement. The court also deducts the mediation entry for an additional 0.5 hours and $363.

The summary also lists numerous entries regarding a “rule 27” motion, but the court cannot determine the basis of the entry. While the JAMS organization apparently utilizes a “rule 27” for determination of waiver of the right to arbitration, the American Arbitration Association employment rule 27 references the filing of a “dispositive motion,” again it remains unclear what was sought given the lack of any arbitration occurring. Thus, at a minimum, the court finds said entries without further explanation, moot for all intents and purposes and not dispositive towards the waiver of the arbitration by Defendant caused by the failure to pay the fees. The court therefore deducts 14.8 hours or $10,731. Total hours and fees deducted under the proposed “blended rate” therefore adds up to 29.9 hours or $21,681.

Subtracting said hours from the total of 72.35 equals a net of 42.45 hours. The court declines to otherwise proceed through a line by line analysis on behalf of Defendant. The court finds the remaining unchallenged entries within a sufficient range of reasonableness.

The court however finds the “blended rate” excessive and reduces rate to $450/hour. (See Center for Biological Diversity v. County of San Bernardino, supra, (2010) 188 Cal.App.4th 603, 619-620; see Lindy Bros. Builders, Inc. of Phila. v. American Radiator & Standard Sanitary Corp. (3d Cir. 1973) 487 F.2d 161, 167.) Total recovery is therefore awarded of $19,102.50 (42.45 multiplied by $450), with full unchallenged costs of $310.50. Total sanctions of $19,413 against both Defendant Westlake Solutions, Inc. and counsel of record joint and several, and payable within 30 days.

Because the amount of fees exceeds $5,000, the order is immediately appealable. (Code Civ. Proc., 904.1, subd. (a)(12); Doe v. Luster (2006) 145 Cal.App.4th 139, 146.)

The individual claim of Plaintiff Juan Guevara returns to the active civil calendar. OSC re: Arbitration Status set for July 22, 2025.

Plaintiff Juan Guevara to give notice.