On August 11, 2025, the California Supreme Court issued a decision in the matter of Dana Hohenshelt v. The Superior Court of Los Angeles, ruling that the Federal Arbitration Act (“FAA”) does not preempt the California Arbitration Act (“CAA”) provisions that require the drafter of the arbitration agreement to pay arbitration fees within thirty days of the due date in employment and consumer arbitration matters or face the loss of the right to compel arbitration. Furthermore, the Supreme Court concluded that a party’s failure to timely pay arbitration fees is subject to analysis by the fact finder on whether an untimely payment of arbitration fees was the result of willful, grossly negligent, or fraudulent conduct, or merely inadvertence or mistake.
Background
California Code of Civil Procedure Section 1281.98(a)(1), effective January 1, 2020, states in pertinent part that, “[i]n 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 provision was enacted to discourage abuse of the arbitration process by the party that prepared the arbitration agreement to stall the process by delaying payment. But as the California Supreme Court held and as further described below, the legislature intended to prevent strategic and purposeful abuse of the arbitration process.
Hohenshelt v. The Superior Court of Los Angeles – the California Supreme Court’s Holding
In Hohenshelt v. The Superior Court of Los Angeles, the California Supreme Court held that Section 1281.98, properly construed, is not preempted by the FAA. The California Supreme Court went on to state that it rejects the “rigid construction” of Section 1281.98 and instead concluded that the statute does not abrogate the longstanding principle, established by statute and common law, that one party’s nonperformance of an obligation automatically extinguishes the other party’s contractual duties only when non-performance is willful, grossly negligent, or fraudulent.
In November of 2020, Hohenshelt sued his former employer, Golden State, in superior court for allegations of discriminatory retaliation, failure to prevent harassment and retaliation, and various other Labor Code violations. Golden State moved to compel arbitration, which Hohenshelt did not oppose. After approximately one year in arbitration, Golden State received two invoices from the arbitrator, neither of which were timely paid. Thirty days passed from the dates of the two invoices and Hohenshelt filed a motion asserting that Golden State was in default for failure to timely pay the invoices. Golden State paid the invoices shortly thereafter and objected to Hohenshelt’ s request to withdraw from arbitration. While the trial court denied Hohenshelt’s motion to lift the stay of court proceedings and withdraw from arbitration, the Court of Appeal reversed due to its reliance on the language in Section 1281.98 and rejecting Golden State’s arguments that the FAA preempted Section 1281.98. Though the California Supreme Court agreed with the Court of Appeal that the FAA does not preempt Section 1281.98, it nevertheless overturned the Court of Appeal’s order instructing the trial court to vacate its order and lift the stay. Instead, the California Supreme Court remanded the case to the trial court to determine whether Golden State’s failure to timely pay the arbitration fees was excusable, and if so, return the matter to arbitration.
Looking Forward
Prior to this decision, parties attempting to avoid arbitration regularly relied on California Code of Civil Procedure Section 1281.98 to do so. Courts have historically held that late arbitration payments result in an automatic withdrawal of a party’s intent to arbitrate, with no meaningful analysis of the reasons why the payments were late (e.g., accidental late payment due to administrative error). While timely payment of arbitration fees and costs are still crucial and parties are not relieved of their obligation to make timely payments, the California Supreme Court has now carved out some critical language in its reading of Section 1281.98, essentially holding that intent matters and delays must be strategic and/or intentional as opposed to accidental before a party waives their arbitration rights. This certainly opens the door to litigation over what is considered strategic or intentional as opposed to excusable neglect or accidental. Accordingly, it is still critical that parties seeking to enforce arbitration agreements make timely payments to avoid additional litigation and battles. In addition, drafters of arbitration agreement should consider whether the arbitrator or the trial court who should decide the issue of whether failure to pay arbitration fees was excusable neglect—keeping the matter before the arbitrator—or willful conduct—sending the case back to the trial court.
[View source.]
