Hohenshelt v. Superior Court Confirms California Arbitration Fee Law Survives FAA Preemption Challenge

The court held that California Code of Civil Procedure section 1281.98, which governs the payment of arbitration fees, is not preempted by the FAA, provided it is construed to allow relief for good faith mistakes, inadvertence, or excusable neglect.

The dispute in Hohenshelt arose after Dana Hohenshelt’s employer failed to timely pay arbitration fees in an ongoing employment arbitration with his former employee. This prompted Hohenshelt to seek withdrawal from arbitration and a return to court under section 1281.98. The employer argued that the California statute was preempted by the FAA because it imposed strict, arbitration-specific consequences for late payment, including a waiver of the right to arbitrate.

Section 1281.98 establishes that, unless otherwise agreed, the party drafting the arbitration agreement must pay required arbitration fees within 30 days of the due date, with invoices deemed due upon receipt. Failure to pay on time constitutes a waiver of the right to arbitrate, allowing the employee or consumer to elect to proceed in court.

The California Supreme Court in Hohenshelt rejected a rigid interpretation of section 1281.98 that would automatically forfeit arbitration rights for any late payment, regardless of the circumstances. Instead, the court harmonized the statute with longstanding California contract principles, including Civil Code section 3275 (relief from forfeiture for non-willful breaches), Civil Code section 1511 (excuse for impossibility or impracticability), and Code of Civil Procedure section 473(b) (relief for mistake, inadvertence, or excusable neglect).

The court found no evidence that the legislature intended to disregard these background principles. Rather, the legislative history indicated that section 1281.98 was enacted to deter “strategic” or “willful” nonpayment of arbitration fees, not to penalize inadvertent or minor errors.

Addressing the preemption argument, the court concluded that section 1281.98, as properly construed, does not violate the FAA’s “equal-treatment principle.” The statute does not single out arbitration agreements for disfavored treatment, but rather applies generally applicable contract defenses. The court further held the statute does not interfere with the fundamental attributes of arbitration, such as streamlined procedures, and is consistent with the FAA’s policy of enforcing arbitration agreements according to their terms.

Moving forward, California courts must consider whether a late payment of arbitration fees was willful, grossly negligent, or fraudulent before finding a waiver of arbitration rights, and must allow for relief in cases of good faith mistake or excusable neglect. In reaching its conclusion, the California Supreme Court overruled several prior decisions from the lower courts of appeal that had rigidly enforced section 1281.98. In doing so, Hohenshelt gave employers and others who seek to enforce arbitration agreements a significant win by ending the worst impacts of an overly draconian statute.