Seyfarth Synopsis: The California Supreme Court ruled 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 all arbitration invoices within thirty days of the due date in employment and consumer arbitrations. However, the California Supreme Court clarified that a party’s failure to timely pay for arbitration only extinguishes the other party’s obligation to arbitrate when the untimely payment is willful, grossly negligent, or fraudulent, but not where it is the result of a good faith mistake, inadvertence, or other excusable neglect. Hohenshelt v. Golden State Foods Corp.
The Facts
Plaintiff Dana Hohenshelt filed suit for employment related claims against his former employer after he was terminated. The employer moved to compel arbitration, which the plaintiff did not oppose.
The CAA states that arbitration fees must be paid within thirty days of the due date. If the party that drafted the agreement fails to do so, then the other party may choose to withdraw from arbitration and proceed in court.
In this case, after proceeding in arbitration for one year, the employer failed to pay the arbitration hearing fees within thirty days following the issuance of an invoice. Thereafter, the arbitration administrator sent the employer a letter stating that if the fees were not paid within twenty-eight days the arbitration could be cancelled.
The plaintiff immediately filed a motion in the trial court asserting that he was electing to proceed in that forum in lieu of arbitration, since the employer was “in default.” Shortly thereafter, the employer paid the fees and emailed the plaintiff that there had been no delays in the proceeding, and that the plaintiff’s participation in the arbitration amounted to a waiver of any technical objections to continuing in that forum rather than in court.
The Trial Court Decision
The trial court denied the plaintiff’s motion to lift the stay of court proceedings. The trial court concluded that the payment had been timely because the employer made the payment within the twenty-eight days specified in the arbitration administrator’s letter. Therefore, the employer had not waived the right to arbitration.
The Appellate Court Decision
The California Court of Appeal reversed the trial court, holding that the CAA expressly provides that any extension of time for arbitration fee payment shall be agreed upon by all parties, which had not occurred here. Pursuant to the plain language of the CAA, the employer had failed to make arbitration payments within the requisite thirty days, therefore the employer was in material breach of the arbitration agreement.
The Court of Appeal also held that the payment provisions of the CAA are not preempted by the FAA because the CAA’s procedures “further” rather than “frustrate” the objectives of the FAA to preserve arbitrations as a speedy alternative to dispute resolution.
The California Supreme Court Decision
On the employer’s appeal, the question before the California Supreme Court was whether the FAA preempts the CAA’s payment provisions. The Court held that it does not. However, the Court also held that the CAA’s payment provisions only extinguish an employee/consumer’s obligation to arbitrate if the employer/company intentionally fails to make timely arbitration payments.
The Court acknowledged that although the text of the CAA does not provide for exceptions to untimely payments, the legislative intent was to preclude companies from deliberately stalling arbitration by delaying payment. Waiver of the right to arbitrate was not the California legislature’s intent “where nonpayment of fees results from a good faith mistake, inadvertence, or other excusable neglect.” Consequently, the Court concluded that the CAA is not preempted by the FAA because the CAA is consistent with the “equal-treatment principle,” where a court may invalidate an arbitration agreement based on contract defenses, but not on rules that apply only to arbitration.
The Court noted that, under both general contract law principles (as well as the CAA), one party can bind another to the terms of a contract if the drafting party acts in good faith. Thus, when a party breaches its contractual obligations “willfully, fraudulently, or with gross negligence, it cannot escape the consequences.” The Court concluded that, rather than impose a higher standard, the CAA makes arbitration contracts enforceable on the same grounds that apply to other contracts.
Based on its interpretation of CAA, the California Supreme Court affirmed the Court of Appeal’s determination that the CAA not preempted by the FAA. However, the Court directed the Court of Appeal to remand the case back to the trial court to determine if the employer could be excused for its failure to timely pay the arbitration fees.
What Hohenshelt Means for Employers
Employers should ensure arbitration fees are paid promptly. Noncompliance can lead to waiver of the right to arbitrate—as well as the expense associated with related motion practice.
But this decision serves as a beacon of hope for employers seeking to avoid the draconian consequences of the literal text of the CAA. When payments are delayed, employers should make documented good faith efforts to correct such delays as soon as practicable. Evidence of these efforts may enable an employer to remain in arbitration.
