Russell v. Siemens Industry Software Inc.

Background

Kelly Gordon Russell brought an employment dispute against Siemens Industry Software Inc. The parties previously agreed to stay the federal case and proceed in arbitration before JAMS, based on an arbitration agreement Russell signed with Siemens’s predecessor, Mentor Graphics Corporation, in 2008. The agreement covered disputes with specified exceptions and required arbitration under JAMS rules.

Russell submitted an arbitration demand and paid his share of the filing fee. JAMS later sent Siemens a demand for an additional $8,000 deposit for the arbitrator’s services. The invoice was sent on January 9, 2024. Siemens did not immediately pay it and paid the $8,000 on February 13, 2024, 35 days after the invoice was sent. The court stated that the precise sequence of some related events was unclear but not relevant to its ruling.

Russell moved to vacate the court’s stay and resume litigation under California Code of Civil Procedure section 1281.98. That statute provides, in specified employment and consumer arbitrations, that failing to pay arbitration fees within 30 days after they are due is a material breach and default in arbitration, and allows the employee or consumer to withdraw the claim from arbitration and proceed in court. Russell argued that Siemens’s payment was late and that the Federal Arbitration Act did not preempt section 1281.98.

Siemens argued that the Federal Arbitration Act preempts section 1281.98 because the statute treats arbitration agreements differently from other contracts. Siemens also raised arguments about whether the invoice was valid, whether payment was timely, whether Russell could invoke the statute after stipulating to arbitration, and whether the arbitration agreement delegated these issues to the arbitrator.

Court’s Analysis

The court did not decide whether the arbitration agreement delegated all section 1281.98 issues to the arbitrator. At the hearing, Siemens agreed that the court could decide whether the statute was preempted, and Russell consistently argued that the court should decide the motion. The court therefore addressed preemption without resolving the broader delegation questions.

The court held that section 1281.98 is preempted by the Federal Arbitration Act. The Federal Arbitration Act generally requires arbitration agreements to be enforced like other contracts and permits invalidation based on generally applicable contract defenses, but not rules that apply only to arbitration or derive their meaning from the existence of an arbitration agreement.

The court reasoned that section 1281.98 creates a bright-line, arbitration-specific rule: a missed fee deadline automatically becomes a material breach and results in waiver of the right to compel arbitration. The statute therefore creates a defense that can make an arbitration agreement unenforceable on grounds that do not apply to contracts generally. The court rejected the argument that promoting efficient arbitration saves the statute from preemption, explaining that the Federal Arbitration Act’s policy is equal treatment of arbitration contracts, not simply promoting arbitration.

The court also concluded that the Ninth Circuit’s decision in Sink v. Aden Enterprises, Inc. did not require a different result. Sink involved an arbitrator’s finding that a party had defaulted under the arbitration proceeding’s rules or generally applicable contract principles. It did not address California’s later-enacted arbitration-specific statutes. The court stated that Sink may permit litigation to resume after an arbitrator finds a default under the arbitrator’s rules or ordinary contract principles, but it does not preserve section 1281.98.

Disposition

The court denied Russell’s motion to vacate the prior order staying the case and referring the parties to arbitration. The order was without prejudice to Russell making arguments to the arbitrator about the consequences of Siemens’s delayed payment under JAMS rules or generally applicable contract principles. It was also without prejudice to Russell bringing a renewed motion to lift the stay if the arbitrator refuses to proceed or finds that Siemens defaulted. Magistrate Judge A. J. Cisneros did not decide the remaining factual and legal issues concerning the payment, invoice, or delegation of those issues.