On Aug. 11, 2025, in Hohenshelt v. Superior Court, the California Supreme Court held that the Federal Arbitration Act does not preempt California Code of Civil Procedure Section 1281.98. The statute, intended to deter the “strategic nonpayment of arbitration fees,” provides that a business or employer materially breaches its arbitration agreement if it fails to pay required arbitration fees within 30 days of the due date. Upon the resulting breach, a plaintiff may proceed in court and pursue sanctions against the defendant or seek an order compelling the defendant to pay the required fees and proceed in arbitration. Plaintiffs’ firms strategically leveraged these provisions to avoid arbitration, leading corporate defendants to argue that the FAA preempts the statute.
This question percolated in California appellate and federal courts with differing results. The California Courts of Appeal held that the FAA does not preempt the California statute while federal courts in California held the opposite. This split led the California Supreme Court to take up the issue in Hohenshelt.
The California Supreme Court held that the FAA does not preempt Section 1281.98, but explained that Section 1281.98 does not create a strict, unwaivable 30-day deadline to pay. The Court’s opinion does not disturb existing federal case law holding that Section 1281.98 is preempted by the FAA. The U.S. Supreme Court will likely need to take up the issue to fully resolve the question. Until then, businesses should consider procedures that limit or mitigate their potential liability related to arbitration fees.
Background
Section 1281.98 provides that “if a company or business that drafts an arbitration agreement does not pay its share of required arbitration fees or costs within 30 days after they are due, the company or business is in ‘material breach’ of the arbitration agreement. In the case of such a material breach, an employee or consumer can, among other things, withdraw his or her claim from arbitration and proceed in court.” The employee or consumer can also bring a petition for “an order compelling the drafting party to pay all arbitration fees that the drafting party is obligated to pay.”
The California Courts of Appeal interpreted the 30-day requirement to be a strict, unwaivable deadline, requiring that fees be received before the 30-day deadline with no exceptions for good cause. The statute provided plaintiffs’ firms a potent weapon in the arbitration space, particularly in the context of mass arbitrations.
In mass arbitrations, plaintiffs’ law firms file thousands of individual claims before a single arbitral forum and seek to leverage the threat of millions of dollars in arbitration fees to extract an early settlement from corporate defendants. Corporate defendants argue that these claims often are baseless, include claimants who never signed an arbitration agreement with the defendant, were not customers of the defendant or do not exist. In response to this tactic, corporate defendants at times refused to pay the hefty arbitration invoices, and plaintiffs’ firms used Section 1281.98 to obtain an order compelling the defendants to pay. If defendants continue to refuse to pay and plaintiffs proceed to court, the plaintiffs’ firms often relied on Section 1281.98 to argue in favor of sanctions under Section 1281.99 that might include a court-ordered prohibition on conducting discovery or a judgment of default. In response, corporate defendants invoked the protections of the FAA and argued that it preempts Section 1281.98.
Hohenshelt Litigation
In Hohenshelt, the plaintiff’s sexual harassment claims against his former employer were compelled to arbitration before JAMS pursuant to a pre-dispute arbitration agreement. The court case was stayed pending the arbitration. On July 29, 2022, JAMS sent an invoice to the employer defendant, and the employer failed to pay that invoice within 30 days. The plaintiff withdrew from the arbitration, citing Section 1281.98, and filed a motion to lift the stay in the trial court. Although the trial court denied the motion, the appellate court reversed, reasoning that Section 1281.98 does not empower the arbitrator to cure a party’s missed payment. The appellate court rejected the defendant’s argument that the FAA preempts Section 1281.98.
The California Supreme Court agreed and held that “section 1281.98, properly construed, is not preempted by the FAA.” The Court explained that California appellate courts have incorrectly interpreted the statute “to impose an inflexible and sometimes harsh rule resulting in loss of arbitral rights.” The Court rejected rigid construction of the statute and held that it “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 nonperformance is willful, grossly negligent, or fraudulent.”
The statute was intended to deter “strategic nonpayment of arbitration fees” and not “to strip companies and employers of their contractual right to arbitration where nonpayment of fees results from a good faith mistake, inadvertence, or other excusable neglect.” With this construction in mind, the California Supreme Court concluded that Section 1281.98 is not preempted because it does not deviate from general state contract law principles, disfavor arbitration or invent a special arbitration-favoring rule. The statute’s default 30-day timeline encourages the speedy resolution and “makes arbitration contracts enforceable on the same grounds as those that apply to other contracts: When a party breaches its contractual obligations willfully, fraudulently, or with gross negligence, it cannot escape the consequences by pointing to a lack of harm to the other party.”
Implications
- The holding eliminates the threat of a claimant being able to escape arbitration due to a technically late payment that was due to neglect, inadvertence or an error by the arbitration provider. Plaintiffs will only be able to utilize Section 1281.98 upon a showing of intentional or grossly negligent conduct by a corporate defendant. There likely will be significant litigation over what counts as “grossly negligent” or “intentional.” The holding should limit some abusive practices by plaintiffs’ firms, but corporate defendants should remain mindful of the statute’s 30-day deadline given the present lack of authority on what qualifies as a good-faith failure to timely pay.
- The holding does not address mass arbitration and the reality that a corporate defendant may refuse to pay a multimillion-dollar invoice because plaintiffs’ counsel failed to make the baseline showing of real claimants with valid claims. Such a refusal could be seen as intentional, triggering Section 1281.98 and requiring further litigation on whether such a refusal could be protected from the 30-day deadline if deemed to be in good faith.
- Businesses should consider including procedures that limit and/or mitigate the risk of mass arbitration and the threat of an astronomical arbitration invoice. In addition, businesses should consider expressly adopting the FAA in their arbitration agreement rather than state law. Multiple courts explained that parties may avoid the application of Section 1281.98 by explicitly adopting the FAA and not California law as the controlling law in the arbitration. Justice Joshua Groban sanctioned this approach in his concurring opinion in Hohenshelt, but warned that California courts will apply California law by default, absent express agreement otherwise.
- The Court’s holding does not fully resolve the preemption issue, given that there is conflicting and binding federal case law that the FAA preempts the California statute. The question of preemption will only be fully resolved if /when the U.S. Supreme Court takes up the issue.
