California Supreme Court Issues Decision Addressing Whether the FAA Preempts California's Rule Governing Late Payment of Arbitration Fees

The California Supreme Court issued its decision in Hohenshelt v. Superior Court, addressing whether the Federal Arbitration Act (FAA) preempts California's rule governing late payment of arbitration fees, Cal. Code Civ. Proc. § 1281.98.

What § 1281.98 means for employers:

Under the statute, if the drafting party (usually the employer) fails to pay the arbitrator's fees within 30 days of the due date, two consequences can follow:

1. The party may be deemed to have waived its right to arbitrate (i.e., the case returns to court for litigation).
2. The party may be required to pay all attorneys' fees and costs related to the abandoned arbitration.

The Supreme Court's decision:

The court held there is no FAA preemption with respect to this provision but clarified the statute's application. Drawing on California's general contract enforcement rules, the court found that parties may seek relief from forfeiture when the late payment was not willful, grossly negligent or fraudulent. In other words, arbitration agreements must be treated like any other contract.

Key takeaway for employers:

Whether arbitration rights are lost for late payments will now be decided case-by-case, considering the facts behind the delay in payment.