To Pay or Not to Pay? Cali Supreme Court Weighs Arbitration Process Forfeiture for Withholding Fees
In a long-running clash between the Federal Arbitration Act and state law, the California Supreme Court heard arguments in Hohenshelt v. S.C. (Golden State Foods Corp.), S284498 (docket page at https://bit.ly/3Tjk41m), last month.
At the center of the dispute is whether the FAA preempts California Code of Civil Procedure--CCP §1281.98, which provides a forfeiture of the right to arbitration under a private contract when the fees for the alternative dispute resolution process aren’t paid under the contract terms.
Employee and consumer advocates among the amicus parties argue that businesses were delaying fulfilling arbitration obligations they took on with mandatory contracts in the hopes of avoiding hefty filing fees and, ultimately, the ADR process itself. Business interests counter that plaintiffs really want litigation, and the harsh forfeiture results for minor procedural mishaps hurt arbitration’s contractually chosen path in contravention of U.S. Supreme Court mandates to treat the ADR process equally.
The specific issue before the California Supreme Court on May 21 was “Does the Federal Arbitration Act (9 U.S.C. § 1 et seq.) preempt state statutes prescribing the procedures for paying arbitration fees and providing for forfeiture of the right to arbitrate if timely payment is not made by the party who drafted the arbitration agreement and who is required to pay such fees?”
California’s top Court was asked to review a state appellate court decision that allowed petitioner Dana Hohenshelt to litigate his case in court instead of proceeding with arbitration as required by an agreement between the parties. The petitioner had filed employment and labor claims against the defendant company in Superior Court, which stayed the matter pending arbitration with ADR provider JAMS Inc.
The defendant company, however, failed to pay the arbitration fees within 30 days as required by CCP § 1281.98(a)(1), which states:
In an employment or consumer arbitration that requires, either expressly or through application of state or federal law or the rules of the arbitration provider, that the drafting party pay certain fees and costs during the pendency of an arbitration proceeding, if the fees or costs required to continue the arbitration proceeding are not paid within 30 days after the due date, the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel the employee or consumer to proceed with that arbitration as a result of the material breach.
The statute also contemplates the withdrawal and termination of the case.
Although defendant Golden State Foods finally paid the fee, the trial court, upon an application by the petitioner, declined to lift the litigation stay and ordered that the matter proceed to arbitration.
The petitioner appealed the order to the California Court of Appeal, which lifted the stay of litigation. The appeals court held that since no arbitration fee had been paid within 30 days, the claimant was entitled to proceed to court. Hohenshelt v. Golden State Foods Corp., No. B327524 (Feb. 27, 2024) (available at https://bit.ly/4mWJ0t6). The defendant appealed the decision to the California Supreme Court.
Golden State Foods’ attorney, Melvin Felton, a partner in the Los Angeles office of Sanders Roberts, argued that the FAA preempts a state law if it invalidates an arbitration agreement. He contended that arbitration contracts must be treated like all other contracts and the court ought to enforce only the parties’ agreement. He said that California law violated the equal treatment principle for arbitration as established by the U.S. Supreme Court.
Daniel E. Jones, counsel on behalf of amicus curiae, the U.S. Chamber of Commerce, and a partner in the Washington, D.C., office of Mayer Brown, argued in support of the defendant's position. Jones said the law is one-sided since it imposed severe penalties on the defaulting party and excused noncompliance by the other party. He emphasized that the parties should be free to contract according to their own terms, just like other contracts.
The legislature, Jones argued, needs “to fix the preemption process it poses.” He added later that the statute is designed to make arbitration less attractive.
California Supreme Court Chief Justice Patricia Guerrero suggested that the statute reads into contracts a “time is of the essence” provision. Jones responded, “It makes the preemption case clearer.”
Nicholas Scardigli, a shareholder in Lodi, Calif.’s Mayall Hurley, and counsel for the petitioner, early in his argument disputed that the law disfavored arbitration or treated it unequally. Instead, argued Scardigli, the California civil procedure code does not favor arbitration contracts but instead favors the goals of the arbitration process. He argued that the payment issue is unique to the arbitration process, hence why the law’s provisions were necessary and, indeed, supportive.
California Deputy Solicitor General Julie Veroff, who is based in San Francisco, arguing on behalf of the state as an amicus party, explained that the legislature proposed the law because arbitrations were stalling because of nonpayments, and justice for plaintiffs was being delayed. She argued that the payment time limit makes arbitration more available for parties. She said that was important under questioning from Justice Goodwin H. Liu because, unique to arbitration, parties don’t get a rights hearing.
* * *
A video of the argument was archived and is available for viewing at https://bit.ly/43HEw2c. A decision is expected later this year.
* * *
The author, an LLM student at the Northeastern School of Law in Boston, is a 2025 CPR summer intern. Alternatives to the High Cost of Litigation editor Russ Bleemer contributed to this report.
[END]