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“Business Pays” Rule in California Facing Challenges

by Amy Schmitz

June 2020

Amy Schmitz

On January 1, 2020, a new law in California took effect to provide rights to consumers and employees facing arbitration.  The law requires that the business must pay the initial fees or costs of arbitration where the employees or consumers are to arbitrate any claims related to their contracts or state/federal law.  If the business doesn’t pay fees and costs within 30 days of their due date, the business is in default and waives its right to compel arbitration.  The consumer could then proceed in court or compel arbitration with the proviso that the business pay all reasonable attorney fees and costs related to the arbitration.

The question is whether this will be preempted by the Federal Arbitration Act (FAA) where the arbitration emanates from a contract impacting interstate commerce, which is true in most contracts.  Cases are starting to emerge.  In Abernathy v. DoorDash, Inc., the court dodged the question, ruling that the new law did not apply because the events all occurred prior to the California law’s enactment and the arbitrations were not currently pending before AAA. 

Postmates Inc. v. 10,356 Individuals, however, raised the issue again, asking whether the claim under the new “business pays” California law would be preempted by the FAA.  Postmates filed an ex parte application for a temporary restraining order and a preliminary injunction asking the court to stop the defendants from participating in the “de facto class arbitration” that was currently pending and from enforcing any new part of the California law requiring businesses to pay for arbitration.  Postmates argued that the claimants had to arbitrate individually under their contracts with Postmates, and that the FAA preempts application of the California law pertaining to arbitration. 

Nonetheless, the district court dodged the preemption issue by holding that the issues regarding class arbitration would be for the arbitrator to decide.  Furthermore, Postmates did not carry its burden of showing that it was likely to succeed in proving that there was a de facto class arbitration.  Accordingly, the court did not have to decide the preemption question, as the arbitrator had not yet addressed the issue.  
The parties filed appellate briefs to the Ninth Circuit in late April 2020. On appeal, Postmates argues that the district court was incorrect in saying that their agreement delegates the arbitrability and allowance of class procedure questions to an arbitrator.  They also argue again that the current arbitration proceedings resembled class arbitration in contravention of their agreement.  The respondents argue that the district court was correct, and that their arbitrations constituted individual arbitrations, not a class arbitration.  Nonetheless, the preemption issue seems to been laid to the sidelines.

Still, the issue is not over.  The California law requiring businesses to pay seems to set arbitration contracts out for special treatment, which raises the FAA preemption hackles. The U.S. Supreme Court has made clear that “state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives” are subject to federal preemption. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 343 (2011).

References

National Consumer Law Center, Consumer Arbitration Agreements (8th ed.), 2020, at 9.4.1.4, https://library.nclc.org/node/99496.
Abernathy v. DoorDash, Inc., C 19-07545 WHA, 2020 WL 619785, at *3 (N.D. Cal. Feb. 10, 2020).
Postmates Inc. v. 10,356 Individuals, CV202783PSGJEMX, 2020 WL 1908302, at *6 (C.D. Cal. Apr. 15, 2020).

Professor Amy Schmitz joined the University of Missouri School of Law and the Center for Dispute Resolution as the Elwood L. Thomas Missouri Endowed Professor of Law in 2016. Previously she was a Professor at the University of Colorado School of Law for over 16 years. Prior to teaching, Professor Schmitz practiced law with large law firms in Seattle and Minneapolis, and served as a law clerk for the U. S. Court of Appeals for the 8th Circuit.  Professor Schmitz teaches courses in Contracts, Lawyering, Online Dispute Resolution (ODR), AI, Data Analytics and the Law, Arbitration, International Arbitration, and Consumer Law. She has been heavily involved in ODR teaching and research for a long time and is a Fellow of the National Center for Technology and Dispute Resolution, as well as the Co-Chair of the ABA Technology Committee of the Dispute Resolution Section and the ODR Task Force.  She serves on the Association of American Law Schools Executive Committee on Commercial and Consumer Law, was an External Scientific Fellow of the Max Planck Institute Luxembourg, and is a researcher with the ACT Project exploring AI and ODR. Professor Schmitz has published over 50 articles in law journals and books, and a book, The New Handshake: Online Dispute Resolution and the Future of Consumer Protection, with Colin Rule.



Website: law.missouri.edu/person/amy-j-schmitz

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