Arbitration

The SEC has long had a policy that effectively prohibited public companies from requiring arbitration of shareholder claims under the Securities Act[1] and Securities Exchange Act.[2] Last month, the SEC announced a change to that policy. In its September 17, 2025 Policy Statement, the SEC stated that, effective September 19, 2025, “the presence of an issuer-investor mandatory arbitration provision will not impact decisions [on] whether to accelerate the effectiveness of a registration statement under the Securities Act.”

The SEC’s Policy Statement eliminates one of the most significant impediments to public companies requiring arbitration for securities claims. But it leaves unresolved several important issues concerning the viability and impact of issuer-investor arbitration clauses.  Continue Reading SEC Changes Policy on Issuer-Investor Arbitration Provisions With Important Implications for Securities Class Actions

The California Supreme Court held in Hohenshelt v. Golden State Foods Corp., __ P.3d __, 2025 WL 2302229 (Cal. Aug. 11, 2025) that the Federal Arbitration Act (“FAA”) does not preempt Section 1281.98 of the California Arbitration Act (“CAA”), a provision providing that, under certain circumstances, a party that fails to pay arbitration fees promptly has waived its right to arbitrate. 

Hohenshelt saved Section 1281.98 from preemption by rejecting a strict interpretation of the statute, holding that a party that fails to pay arbitration fees on time may avoid waiver by invoking other provisions of the California Civil Code.  California Courts of Appeal were previously split on the question of whether the FAA preempts Section 1281.98 of the CAA.  A split remains among U.S. federal district courts on the preemption question, although the California Supreme Court’s interpretation of the statute will govern in those courts going forward.

The defendant in Hohenshelt successfully compelled arbitration of its former employee’s lawsuit pursuant to an arbitration clause that required the employer to pay certain “reasonable fees and costs unique to arbitration as well as the costs of the arbitrator.”  Id. at *2 (quoting the arbitration agreement).  After the employer did not pay two invoices for arbitrator fees by the statutory deadline, the employee filed a motion in superior court to withdraw his case from arbitration and proceed in court under Cal. Code Civ. Proc. § 1281.98.

Section 1281.98 states that where “an employment or consumer arbitration…requires the drafting party” to “pay certain fees and costs,” those fees or costs must be “paid within 30 days after the due date.”  If the fees are not timely paid, “the drafting party is in material breach of the arbitration agreement,” and “waives its right to compel the employee or consumer to proceed with that arbitration.”  Lower courts had interpreted the statute as creating a bright-line rule that foreclosed any inquiry into the defendant’s reason for delay.  For example, one court found that a party waived its arbitration rights where its payment was six days late because its counsel was “caught in the throes of a natural disaster.”  Colon-Perez v. Security Industry Specialists, Inc., 108 Cal.App.5th 403 (2025). 

The California Supreme Court rejected this strict interpretation.  The Court concluded that Section 1281.98 did not displace background legal principles that prevent “unjust forfeiture of contractual rights,” for example where the breach results from “good faith mistake, inadvertence, or other excusable neglect” and the nonperforming party “adequately compensates” the nonbreaching party for any harm caused by the delay.   Hohenshelt, at *7.  The Court determined that the California Legislature did not intend to penalize such inadvertent delay but was instead “concerned about cases where willful nonpayment” was used as a “tactic to indefinitely postpone resolution of employee or consumer claims.”  Id. at *10.  Accordingly, the Court “constru[ed] section 1281.98 in harmony with background statutes and principles that allow relief from forfeiture where nonperformance is not willful, fraudulent, or grossly negligent.”  Id. at *12.

Having harmonized the statute with “generally applicable state law contract principles,” id. at *1, the Court held that Section 1281.98 did not run afoul of the U.S. Supreme Court’s “equal treatment” principle requiring arbitration agreements to be enforceable on the same grounds as those that apply to other contracts, and thus was not preempted by the FAA.  Id.  

The exact dividing line between excusable neglect and the type of breach that will result in waiver is not clear from the Court’s opinion and will surely be the subject to future litigation. 

A party drafting an employee-facing or consumer-facing arbitration agreement may mitigate the risk of waiver by expressly extending the number of days in which the parties to the arbitration must pay any required fees or costs, which Section 1281.98 permits.  Parties may even be able to avoid Section 1281.98 entirely by stating expressly that their agreement to arbitrate is governed by the FAA, not the CAA, though the Court expressly left open the question of whether parties may contractually opt out of Section 1281.98 altogether. Continue Reading CA Supreme Court Smooths Edges of Arbitration Invoice Payment Statute to Save it from Federal Preemption

The Sixth Circuit recently reversed a denial of a motion to compel arbitration in an MDL, where the district court had raised the issue of waiver of arbitration rights on its own and ruled defendant had waived the right even when there was no evidence it had knowledge of the right.  In Re Chrysler Pacifica Fire Recall Products Liability Litigation, — F.4th —-, 2025 WL 1904525 (6th Cir. Jul. 10, 2025).Continue Reading Sixth Circuit Enforces Arbitration Agreement After Lower Court Sua Sponte Found Waiver

The enforceability of an arbitration clause is often a hotly disputed issue in class action lawsuits. But may a party who is not a signatory to a contract invoke its arbitration provisions to compel the arbitration of claims brought by a party who is? The First Circuit recently held that a defendant was unable to meet the high burden to enforce an arbitration agreement based on a contract that it is not a party to in Morales-Posada v. Cultural Care, Inc., 2025 WL 1703513 (1st Cir. June 18, 2025).Continue Reading Non-signatory Defendant Unable to Meet High Burden for Compelling Arbitration

Companies who rely on arbitration agreements that select the American Arbitration Association (AAA) consumer arbitration rules for dispute resolution should take note of a recent decision by the Eleventh Circuit affirming the denial of a motion to compel arbitration and emphasizing the importance of proactively complying with the AAA’s rules and policies.
Continue Reading Eleventh Circuit Decision Underscores Importance of Complying with AAA Rules

Companies with arbitration agreements should carefully consider potential arbitration providers’ mass arbitration procedures and fee structures if they could be at risk of becoming the target of a mass arbitration. FedArb, an ADR provider, recently updated its consumer and employment Mass Arbitration Rules to include a robust affirmation requirement, similar to the “reasonable inquiry” standard embodied in Federal Rule of Civil Procedure 11. Specifically, the new rules require claimants’ counsel to (1) submit a spreadsheet identifying each claimant and (2) submit a sworn declaration averring that the information in both the arbitration demand and the spreadsheet is true and correct to the best of counsel’s knowledge after an inquiry reasonable under the circumstances. It also empowers the arbitrator to impose sanctions for violation of the affirmation requirement, including dismissal of the claim or payment of attorney’s fees.Continue Reading FedArb Updates Mass Arbitration Rules to Incorporate Affirmation Requirement

A court in the Northern District of California recently denied Google’s request to prevent more than 69,000 putative class members from opting out of a certified class in favor of pursuing individual arbitration of their claims against Google.  See In re Google Assistant Privacy Litig., 2025 WL 510435, at *1 (N.D. Cal. Feb. 14, 2025)Continue Reading California Federal Court Permits Thousands of Arbitration Opt-Outs from Certified Class

Companies whose agreements with consumers contain an arbitration clause that delegates certain decisions to an arbitrator to resolve should be mindful of a recent Fourth Circuit decision clarifying what disputes may be resolved by a court and what disputes may be resolved by an arbitrator.

In Modern Perfection, LLC v. Bank of America, N.A., — F. 4th –, 2025 WL 77181 (4th Cir. 2025), plaintiffs entered into two contracts with a financial institution:  a deposit agreement that contained an arbitration provision, and a promissory note related to a loan program that did not.  Plaintiffs filed a lawsuit against the financial institution, and the institution sought to enforce its arbitration provision. Continue Reading A Closer Look: Fourth Circuit Upholds Unambiguous Delegation Clause post- Coinbase

Plaintiffs sometimes try to sidestep an arbitration agreement with one company by suing only a second company for interrelated conduct.  Last month, a California federal court applied principles of fairness under the doctrine of “equitable estoppel” to reject this tactic, holding that a software vendor (Twilio) could enforce a plaintiff’s arbitration agreement with a website operator (Keeps) that was not named as a defendant.  Perry-Hudson v. Twilio, Inc., 2024 WL 493333 (N.D. Cal. Dec. 2, 2024).Continue Reading California Federal Court Allows Software Vendor to Enforce Website Operator’s Arbitration Agreement in Privacy Lawsuit

The Court of Appeal for Ontario dismissed Binance’s appeal after a lower court declined to stay a proposed class action and enforce an arbitration agreement contained in Binance’s terms and conditions. The decision carries implications for companies who do retail business or distribute products in multiple jurisdictions, including in Canada.

Background

As a Cayman Islands company, Binance Holdings Limited (“Binance”), together with associated companies, marketed and sold cryptocurrency derivative contracts to Canadian retail investors though the Binance website. In the wake of Binance’s exit from the Ontario market, in June 2022 a proposed class filed an action against Binance in the Superior Court of Justice of Ontario. The proposed class of retail investors argued that Binance distributed securities and investment contracts under Canada’s securities laws, but failed to file or deliver a prospectus required by law.Continue Reading Canadian Appellate Decision Highlights Class Action and Mass Arbitration Risks for Companies in Operating in Multiple Jurisdictions