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