Hernandez v. Sohnen Enterprises - Case Brief

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Case Number: B323303
Court: California Court of Appeal, Second Appellate District, Division Five
Date Filed: 2025‑08‑31

Holding

The court held that the parties’ arbitration agreement was governed exclusively by the Federal Arbitration Act, which preempted California Code of Civil Procedure section 1281.97; therefore the trial court’s order finding a material breach under § 1281.97 and permitting the plaintiff to withdraw from arbitration was reversed.

Narrative

Lead.
The California Court of Appeal’s decision in Hernandez v. Sohnen Enterprises sharpens the boundary between federal and state arbitration regimes, holding that a clear FAA‑governed agreement defeats the newly enacted California “fee‑pay‑or‑lose” statute, § 1281.97, and that orders arising under that statute are appealable as the functional equivalent of a denial of a petition to compel arbitration. The ruling reverberates through employment‑law practice, where employers routinely embed FAA language in arbitration clauses to sidestep California’s consumer‑friendly procedural safeguards.

Procedural backdrop.
Massiel Hernandez began working for Sohnen Enterprises in February 2015. After a five‑year tenure she filed a discrimination and Labor Code claim in July 2021. The parties stipulated to stay the litigation and arbitrate, attaching a written agreement that expressly stated, “This Agreement is governed by the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq.” The stipulation also incorporated the Federal Rules of Civil Procedure for the arbitration and required Sohnen to pay all filing fees and the arbitrator’s initial deposit.

JAMS issued a $1,750 filing‑fee invoice on April 7 2022, due “upon receipt.” Sohnen paid the invoice on May 13 2022—more than 30 days after receipt. Invoking California Code of Civil Procedure § 1281.97(a)(1), which treats a 30‑day failure to pay arbitration costs as a material breach that waives the drafting party’s right to compel arbitration, Hernandez moved to withdraw from arbitration and vacate the stay. The trial court, after brief oral argument, found that Sohnen’s late payment constituted a material breach, granted the motion, and imposed $1,230 in sanctions against Sohnen. Sohnen appealed the order under the appellate‑review provisions of § 1294(a).

Issues presented.

  1. Whether an order granting relief under § 1281.97 is appealable.
  2. Whether the parties’ arbitration agreement is governed by the FAA, thereby preempting § 1281.97.
  3. Assuming § 1281.97 applies, whether the FAA nonetheless preempts its mandatory breach‑finding provision.

Court’s analysis – Appealability.
The appellate panel began by confirming that an order permitting a party to withdraw from arbitration is the functional equivalent of a denial of a petition to compel arbitration. The Court relied on Williams v. West Coast Hospitals (2022) and Gallo v. Wood Ranch USA, Inc. (2022), which held that § 1281.97 orders are appealable because they “effectively deny the drafting party’s right to enforce the arbitration agreement.” The Court noted that the Legislature’s amendment to § 1294(a) in 2024—SB 365—explicitly left the functional‑equivalence rule untouched, indicating legislative acquiescence to the existing construction.

FAA versus California law.
The crux of the opinion turned on the parties’ choice‑of‑law language. The arbitration agreement’s opening clause—“This Agreement is governed by the Federal Arbitration Act”—mirrors the language in Rodriguez v. American Technologies (2006), where the California Court of Appeal held that such a clause “covers both the substantive and procedural provisions of the FAA.” The agreement further required that any dispute over the arbitrator’s appointment be resolved “pursuant to the FAA” and that the arbitration proceed under the Federal Rules of Civil Procedure. No provision referenced the California Arbitration Act (CAA) or § 1281.97.

The Court rejected Hernandez’s argument that the parties’ reference to Armendariz v. Foundation Health Psychcare Services—which sets a “fair‑arbitration” baseline for employment claims—implied incorporation of California procedural rules. The Court explained that Armendariz is a substantive standard for enforceability, not a choice‑of‑law directive, and that parties may satisfy Armendariz while still electing the FAA as the governing regime. Accordingly, the agreement was deemed an FAA‑governed contract, and the FAA’s substantive and procedural provisions controlled.

Preemption of § 1281.97.
Even assuming the agreement fell under California law, the Court held that § 1281.97’s mandatory finding of a “material breach” and automatic waiver of the right to arbitrate is preempted by the FAA. The FAA’s “equal‑treatment” principle (9 U.S.C. § 2) bars state statutes that single out arbitration agreements for disparate treatment. The Court cited Viking River Cruises, Inc. v. Moriana (2022) and Directv, Inc. v. Imburgia (2020) for the proposition that state‑imposed penalties that apply only to arbitration contracts obstruct the FAA’s purpose of treating arbitration agreements like any other contract. Because § 1281.97 imposes a statutory breach finding—something the FAA reserves for general contract law—the provision is an obstacle to the FAA’s uniform enforcement scheme and therefore preempted.

Result.
The appellate panel reversed the trial court’s order, held that Sohnen had not materially breached the arbitration agreement under the FAA, and remanded with instructions to enforce the arbitration. Sohnen was awarded its costs on appeal; the $1,230 sanction against it was vacated.

Implications for practitioners.
Hernandez sends a clear message to California employment litigators: a plainly worded FAA clause—especially one that also incorporates the Federal Rules of Civil Procedure—will likely defeat attempts to invoke § 1281.97, even where the employer’s payment of arbitration fees is delayed. Employers can rely on such language to preserve the speed and finality of arbitration, while employees must scrutinize arbitration clauses for any express election of California procedural law if they hope to benefit from the fee‑pay‑or‑lose regime.

The decision also clarifies that orders under § 1281.97 are immediately appealable, reinforcing the functional‑equivalence doctrine. Plaintiffs should be prepared for an appellate step whenever they move to withdraw from arbitration on fee‑payment grounds, and defendants should anticipate that an appeal may not delay the underlying litigation if the trial court’s order is stayed under SB 365’s limited‑stay provision.

Unresolved questions.
The dissent, authored by Justice Baker, warned that the majority’s reliance on functional equivalence may run counter to the Legislature’s intent to expedite fee‑payment disputes. The dissent also argued that the agreement’s “Armendariz” reference created ambiguity that the majority glossed over. Whether future courts will require a more explicit “governed by California law” clause to preserve the application of § 1281.97 remains an open question. Moreover, the interplay between SB 365’s stay‑neutral language and the functional‑equivalence rule may prompt legislative clarification.

In sum, Hernandez reinforces the primacy of the FAA in California when parties expressly choose it, while simultaneously confirming that § 1281.97 orders are appealable. Attorneys must now assess arbitration agreements with heightened attention to choice‑of‑law language, and may need to draft supplemental provisions if they wish to retain the protective reach of California’s fee‑payment statutes.

Referenced Statutes and Doctrines

  • Federal Arbitration Act, 9 U.S.C. § 1 et seq. (substantive and procedural provisions)
  • California Code of Civil Procedure § 1281.97 (fee‑pay‑or‑lose statute) – subdivisions (a) and (b)
  • California Code of Civil Procedure § 1281.99 (sanctions for breach of arbitration‑fee obligations)
  • California Code of Civil Procedure § 1294(a) (appealability of orders denying or refusing to compel arbitration)
  • California Arbitration Act (CAA), §§ 1280‑1299 (general framework for private arbitration)
  • Armendariz v. Foundation Health Psychcare Services, 24 Cal.4th 83 (fair‑arbitration standards for employment claims)
  • Rodriguez v. American Technologies, Inc., 136 Cal.App.4th 1110 (FAA‑governed agreements preempt state law)
  • Williams v. West Coast Hospitals, Inc., 86 Cal.App.5th 1054 (appealability of § 1281.97 orders)
  • Gallo v. Wood Ranch USA, Inc., 81 Cal.App.5th 621 (preemption analysis of § 1281.97)
  • Viking River Cruises, Inc. v. Moriana, 596 U.S. 639 (FAA equal‑treatment principle)
  • Directv, Inc. v. Imburgia, 44 Cal.4th 1334 (state‑law preemption under the FAA)
  • Valencia v. Smyth, 185 Cal.App.4th 153 (procedural default of California arbitration law)
  • Belyea v. Green Sky, Inc., 637 F. Supp. 3d 745 (federal preemption of state arbitration statutes)
  • SB 365 (2023) – amendment to § 1294(a) limiting automatic stays on appeal.