Until recently, there has been a split of authority in California as to whether the trial court or the arbitrator determines whether the claimant is unable to pay arbitration costs. However, on March 28, 2022, Division Four of the First Appellate District tackled this issue and determined the trial court should decide.[i]
Prevailing Case Law Before Aronow Decision
Prior to the Aronow decision, there was a split of authority as to who decides whether a claimant is unable to pay arbitration costs. One view followed MKJA, Inc. v. 123 Fit Franchising, LLC, which held a trial court does not have jurisdiction to lift a stay despite a claimant’s claim he cannot afford to pay arbitration fees. MKJA involved a suit by franchisees who claimed the franchisor fraudulently induced them to enter into the relationship and failed to provide operational support.[ii] The matter was sent to arbitration based on a provision in the agreement between the franchisees and franchisor.[iii]
The other view reached by the court in Weiler v. Marcus & Millichap Real Estate Investment Services, Inc. held the stay on the trial court following the matter being sent to arbitration should be lifted, reasoning that requiring the claimant to remain in the arbitration may lead to depriving the claimant of a forum to resolve her grievances.[iv] In Weiler, claimant brought a declaratory relief action against an investment services company that represented her.[v]
In Aronow, claimant sued his former attorneys for legal malpractice.[vi] The respondent filed a motion to compel arbitration based on the retainer agreement, which included an arbitration provision.[vii] After advising the arbitrator that it was unable to pay the arbitration fees, claimant filed a motion for a fee or cost waiver or alternatively to lift the court stay.[viii] The court followed MKJA, holding a trial court does not have jurisdiction to lift a stay, despite a plaintiff’s claim he cannot afford to pay arbitration fees.[ix] The trial court also found that claimant had not established he was unable to pay the arbitration costs.[x] Claimant filed a writ of mandate.[xi] Thereafter, the appellate court held: “a court may not engage in such outsourcing in the case of in forma pauperis litigants when the practical effect is to deprive such litigants of the equal access to justice that in forma pauperis status was intended to afford.”[xii] The court reasoned that California has a long standing public policy of ensuring all litigants have access to the justice system, regardless of their financial means.[xiii] The Aronow court further instructed that a stay which is in place because a matter is in arbitration may be lifted so the court can conduct an evidentiary hearing as to whether the claimant is indigent.[xiv] As explained by the Aronow court, the evidentiary hearing may include the claimant’s declarations and exhibits, as well as respondent’s limited discovery into the claimant’s finances.[xv]
As a result of the Aronow decision, if a claimant successfully demonstrates it is indigent, the respondent can either agree to pay 100% of the arbitration costs or waive its right to arbitration. If a claimant is able to establish it is indigent, the Aronow decision effectively voids the arbitration provision in contracts. One possible way to avoid the ramifications of a voided arbitration provision due to an indigent claimant is by drafting an arbitration provision which expressly precludes a party from claiming indigency in the future or otherwise specifying terms in the arbitration provision for cost sharing if the claimant is indigent. The Aronow court did not address the use of this strategy or how to avoid voided arbitration provisions in this situation but further litigation is expected to clarify.
[i] Aronow v. The Superior Court of San Francisco County (Emergent, LLP Real Party in Interest, Case No. CGC-19-579853)
[ii] MKJA, Inc. v. 123 Fit Franchising, LLC (2011) 191 Cal.App.4th 643.
[iv] Weiler v. Marcus & Millichap Real Estate Investment Services, Inc. (2018) 22 Cal.App.5th 970, 978 quoting Roldan v. Callahan & Blaine (2013) 219 Cal.App.4th 87, 96.
[v] Weiler v. Marcus & Millichap Real Estate Investment Services, Inc. (2018) 22 Cal.App.5th 970
[vi] Aronow v. The Superior Court of San Francisco County (Emergent, LLP Real Party in Interest, Case No. CGC-19-579853)
[xii] Aronow, supra, citing Jameson v. Desta (2018) 5 Cal.5th 594.
[xiii] Aronow, supra quoting Roldan v. Callahan & Blaine (2013) 219 Cal.App.4th 87, 94.
[xiv] Aronow, supra.