Cali Supreme Court Rules State Law on Arbitration Fees Is Not Preempted by the FAA

The California Supreme Court, in an opinion authored earlier this month by Justice Goodwin Liu, delivered a highly anticipated arbitration decision in Hohenshelt v. Superior Court of Los Angeles County, 15 Cal.5th 698 (Aug. 11) (available at https://bit.ly/4mAygjr).

A 5-2 majority ruled that the Federal Arbitration Act does not preempt California Code of Civil Procedure section 1281.98, thereby upholding a law requiring prompt payment of arbitrator fees and potential loss of an arbitration right for noncompliance. 

Dana Hohenshelt, a former employee of Golden State Foods Corp., an Irvine, Calif., food services supplier, had filed suit for discriminatory retaliation against the company, which required arbitration according to an agreement Hohenshelt signed when he was hired.. Golden State Foods, as the employer and drafting party of the arbitration agreement, was responsible for paying the arbitrator's fees.

But the company failed to pay two invoices on time, about a year into the arbitration, prompting Hohenshelt to file a motion asking the trial court to lift the litigation stay and proceed, instead, in court. The court denied Hohenshelt’s motion to lift the stay-of-court proceedings. The California Court of Appeal reversed, and Golden State Foods asked the state Supreme Court to review the case.

Hohenshelt argued that Golden State Foods’ actions constituted a waiver of the right to compel arbitration under California Code of Civil Procedure section 1281.98, as they were in "material breach of the arbitration agreement," as the law states. The argument was based on a strict interpretation of the statute, which states that if a company that drafted an arbitration agreement fails to pay the required fees within 30 days, the company is in material breach and waives its right to arbitration.

Golden State Foods countered that section 1281.98 is preempted by the Federal Arbitration Act because the statute imposes a harsh, inflexible, and sometimes automatic forfeiture of the right to arbitrate. It argued that this violates the FAA's principle of "equal treatment" for arbitration agreements, which mandates they be treated like any other contract.

The argument was that the California law was one-sided, imposing severe penalties on the drafting party for noncompliance. Golden State Foods contended that a rigid application of the statute would strip a company of its right to arbitration for a minor mistake or unintentional late payment, which was contrary to the FAA’s purpose.

For more details on the parties' positions, see Leila Orina, "To Pay or Not to Pay? Cali Supreme Court Weighs Arbitration Process Forfeiture for Withholding Fees," CPR Speaks (June 11) (on the oral arguments)(available at https://bit.ly/3HJSJU3). 

The central question was whether the FAA preempts California Code of Civil Procedure section 1281.98, the 2020 law which provides that a company waives its right to compel arbitration if it fails to timely pay the arbitrator's fees.

In finding that the FAA does not preempt section 1281.98, the Court stated that the statute’s purpose is to deter "strategic nonpayment" to frustrate the arbitration process, not to punish good-faith mistakes. The Court analyzed the enactment of Senate Bill No. 707 (2019– 2020 Reg. Sess.) (Senate Bill 707), noting that the law was in response “to ‘a concerning and troubling trend’ in consumer and employment arbitration” which was employers “refusing to pay required fees to initiate arbitration, effectively stymieing the ability of employees to assert their legal rights.” (Quoting a state Senate Judiciary Committee bill analysis.)

The majority rejected lower courts’ holdings that any late payment automatically results in forfeiture. Instead, section 1281.98 must be harmonized with longstanding California doctrines (Civ. Code §§ 3275, 1511; CCP § 473(b)) that excuse non-performance if the failure is due to good-faith mistake, excusable neglect, or circumstances beyond control.

The statute aimed to prevent strategic nonpayment of arbitration fees, the Court found, explaining that it was not designed to punish minor or inadvertent delays.

Justice Liu, on behalf of the majority, analyzed legal principles, considering Civil Code section 3275, which allows a party to be relieved from forfeiture upon making full compensation to the other party, except in case of a grossly negligent, willful, or fraudulent breach of duty. The court also applied Code of Civil Procedure section 473, subdivision (b), which provides relief from forfeiture for excusable neglect.

The court concluded that when read in harmony with these principles, section 1281.98 does not treat arbitration agreements more harshly than other contracts, thus not violating the FAA's equal treatment principle. The court's interpretation was consistent with the FAA's goal of enforcing private agreements and promoting expeditious dispute resolution. The statute serves as a default rule incentivizing timely payment but allows relief from forfeiture where delay was not willful or grossly negligent.

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Justice Carol A. Corrigan, in a dissenting opinion, argued that section 1281.98 violated the equal treatment principle and was pre-empted by the Federal Arbitration Act.

First, the California law makes payment of arbitration costs presumptively due “upon receipt” and by imposing a short grace period that parties cannot alter with different contract terms. This, she found, converted all employment and consumer arbitration contracts into contracts that make time of the essence for paying arbitration fees, which was contrary to the general rule that time is not of the essence in a contract unless the parties so agree. 

Corrigan also stated that section 1281.98 “mandates findings of material breach and waiver for late payment that do not apply generally to all contracts or even to all arbitrations.” [Internal citation omitted.] The terms of section 1281.98 were stringent as compared to other contracts. The statute made contracts unenforceable on grounds that were specific to arbitration. Therefore, Justice Corrigan concluded, the FAA preempted section 1281.98.

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A concurring opinion by Justice Joshua Groban addressed a question that he said would be dispositive of FAA preemption challenges: whether the parties agreed that the California Arbitration Act’s rules would govern the dispute. He agreed with the majority conclusion that Golden State Foods waived the argument by not raising it in the lower courts. But where evidence shows that an arbitration agreement incorporates the California procedural rules, there would be no preemption concern, and “a California court will not need to engage in this analysis,” Groban wrote.

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The Supreme Court reversed the appeals court, remanding the case to the trial court to determine whether Golden State Foods' late payment was excusable under the Liu opinion, and whether the delay caused any “compensable harm” to Hohenshelt. 

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For further analysis of the case, see Marc D. Alexander, "Supreme Court saves an arbitration deadline from preemption by making it more palatable," Daily Journal (Aug. 18) (available at https://bit.ly/4mM1JY8). 

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The author, an LLM student at the Northeastern School of Law in Boston, is a 2025 CPR summer intern.

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