Hohenshelt v. Superior Court
§1281.98 Arbitration-Fee Deadlines Survive FAA Preemption — Without Automatic Forfeiture
Hohenshelt v. Superior Court (2025) 18 Cal.5th 310
PUBLISHED.
California Supreme Court
Reversed & remanded
In brief. The California Supreme Court held that Code of Civil Procedure section 1281.98 — which makes a drafting party’s failure to pay arbitration fees within 30 days a waiver of its right to compel arbitration — is not preempted by the Federal Arbitration Act, but only as narrowed. Rejecting the rigid, automatic-forfeiture reading that several Courts of Appeal had adopted, the Court construed the statute against background anti-forfeiture principles: a late payment forfeits arbitration only when the nonpayment is willful, grossly negligent, or fraudulent, not where it stems from a good-faith mistake, inadvertence, or excusable neglect. The Court reversed the order lifting the litigation stay and remanded so the trial court could decide whether the employer’s late payment was excusable and whether the delay caused compensable harm.
Facts
Golden State Foods Corp. hired Dana Hohenshelt as a sanitation employee in 2018. Before starting, he signed a pre-dispute arbitration agreement covering all employment claims, governed by the FAA, under which the employer agreed to pay the fees and costs unique to arbitration, including the arbitrator’s costs. Hohenshelt alleged that in late 2019 he reported a sanitation lead’s sexual harassment of a coworker, that management failed to act, and that the company retaliated and terminated him in April 2020. He sued in 2020 for retaliation, failure to prevent harassment and retaliation, and Labor Code violations; the employer compelled arbitration without opposition, and JAMS arbitration began in 2021. After about a year, the arbitrator issued two fee invoices (July 29 and August 29, 2022). Because more than 30 days passed without payment, Hohenshelt moved on September 30 to withdraw from arbitration and proceed in court under section 1281.98. Golden State then paid and objected, citing its counsel’s understanding that the arbitrator was unavailable and counsel’s impending leave. (18 Cal.5th at pp. 323–325.)
Procedural history
The trial court denied the motion to lift the stay, reading the case law to allow payment within 30 days of a new due date. The Court of Appeal reversed, holding that the invoices were due on receipt, that the statutory deadline ran from the original invoices, that the late payment was a material breach, and that section 1281.98 is not preempted by the FAA; it directed the trial court to lift the stay. (Hohenshelt v. Superior Court (2024) 99 Cal.App.5th 1319, 1322–1326.) The Supreme Court granted review to resolve whether the FAA preempts section 1281.98, on which the Courts of Appeal had divided. (18 Cal.5th at pp. 325–326.)
Issue
Whether the Federal Arbitration Act (9 U.S.C. § 1 et seq.) preempts Code of Civil Procedure section 1281.98, which provides that a drafting party who fails to pay required arbitration fees within 30 days of the due date materially breaches the agreement and waives its right to compel arbitration. (18 Cal.5th at p. 323.)
Holding
- Section 1281.98, properly construed, is not preempted by the FAA. (P. 323.)
- The statute does not impose automatic forfeiture for any late payment. It must be read against the long-standing principle that one party’s nonperformance extinguishes the other’s contractual duties only when the nonperformance is willful, grossly negligent, or fraudulent — so a good-faith mistake, inadvertence, or other excusable neglect does not necessarily forfeit the right to arbitrate. (P. 323.)
- So construed, the statute applies generally applicable contract principles, does not disfavor arbitration or interfere with its fundamental attributes, and is therefore not preempted. (P. 323.)
- The Court reversed the Court of Appeal’s order directing that the litigation stay be lifted and remanded for the trial court to consider whether Golden State may be excused for its late payment and whether the delay caused compensable harm. (Conclusion, at p. 349.)
- The Court disapproved a line of Court of Appeal decisions — including Gallo, Espinoza, De Leon, Williams, Suarez, and Hernandez — to the extent they were inconsistent with this construction. (P. 349.)
Reasoning
Under FAA section 2 and the United States Supreme Court’s equal-treatment principle, a state rule is preempted if it singles out arbitration agreements or interferes with the fundamental attributes of arbitration, but not if it applies a generally applicable contract rule. (18 Cal.5th at pp. 323–324, discussing AT&T Mobility LLC v. Concepcion, Morgan v. Sundance, and Viking River Cruises v. Moriana.)
The Court concluded that several Courts of Appeal had wrongly read section 1281.98 to impose an inflexible, automatic forfeiture of arbitral rights for any late payment regardless of cause. Read correctly, the statute does not abrogate California’s background anti-forfeiture law, under which nonperformance discharges the counterparty’s duties only when it is willful, grossly negligent, or fraudulent. The Legislature’s purpose was to deter strategic nonpayment used to trap claimants in “procedural limbo,” not to strip a drafting party of arbitration for an innocent, inadvertent, or excusable late payment. (Id. at p. 323.)
So understood, section 1281.98 operates like generally applicable contract principles, does not disfavor arbitration, and survives preemption. Because the lower courts had applied the rigid construction, the Court reversed and remanded for an excusal analysis and a determination of compensable harm. (Id. at pp. 323, 349.) The dissent (Corrigan, J., joined by Jenkins, J.) would have held the statute preempted, reasoning that even as narrowed it does not place arbitration agreements on equal footing with other contracts.
Key quote
The Court framed its holding directly: “section 1281.98, properly construed, is not preempted by the FAA.” (18 Cal.5th at p. 323.)
Practice pointer
- The fee-payment lever survives — but it is no longer automatic. When the employer drafted the arbitration agreement and misses the 30-day fee deadline, the employee may still move to withdraw and return to court; but the employer can now seek to be excused by showing the late payment was a good-faith mistake, inadvertence, or excusable neglect.
- Build the record on willfulness and harm. For the employee, develop facts that the nonpayment was strategic, willful, grossly negligent, or fraudulent — and that the delay caused compensable harm. For the employer, document the innocent explanation contemporaneously.
- The rigid-forfeiture authorities are gone. Decisions applying automatic forfeiture (e.g., Gallo, Espinoza) were disapproved to the extent inconsistent; do not cite them for an automatic-waiver rule.
- Mind the open questions. The decision turns on an excusal analysis the trial court must conduct on remand; the standard’s contours will develop case by case.
Open questions
- What evidentiary showing establishes that a late payment was “willful, grossly negligent, or fraudulent” versus a good-faith mistake or excusable neglect — and who bears the burden — remains to be worked out on remand and in later cases.
- Justice Groban’s concurrence flagged a significant question the majority left open regarding the statute’s operation; the dissent (Corrigan, J., with Jenkins, J.) would have found the statute preempted notwithstanding the majority’s narrowing construction.
- How the section 1281.99 monetary sanctions interact with the narrowed forfeiture rule is not fully resolved.