California Supreme Court Holds State Law Requiring Timely Payment of Arbitration Fees Not Preempted by FAA

In Hohenshelt v. Superior Court, the California Supreme Court held that Section 1281.98 of the California Arbitration Act (CAA) is not preempted by the Federal Arbitration Act (FAA).

Section 12.81.98 provides that if a party that is required to pay arbitration fees under an arbitration agreement fails to do so within 30 days of the due date, they are subject to various sanctions, including waiver of any arbitration rights. At issue in Hohenshelt was whether Section 1281.98’s imposition of these automatic penalties for any delay in fee payment, regardless of the reason for or extent of the delay, violated the FAA’s “equal-treatment principle,” which prohibits states from placing special burdens on arbitration agreements that do not apply to other contracts.

In a partial win for California employers, the court found that Section 1281.98 was not preempted under its interpretation, and courts may excuse late payments or nonpayments in certain circumstances, such as where the failure to make a prompt payment was not willful, grossly negligent, or fraudulent, or was due to impossibility. However, employers should continue to be vigilant in paying arbitration fees in a timely manner to avoid any risk of waiver under this standard.

CAA SECTION 1281.98

Section 1281.98 was enacted by the California Legislature in 2019 in an effort to penalize employers for failing to timely pay required arbitration fees, regardless of the reason. Section 1281.98 thus provides that if an arbitration agreement in the employment or consumer context requires the party that drafted the agreement to “pay certain fees and costs during the pendency of an arbitration proceeding,” failure to pay those fees and costs within 30 days of the due date (i.e, the date of receipt of the invoice) constitutes a “material breach” of the agreement to arbitrate. The failure also waives the party’s “right to compel the employee or consumer to proceed with that arbitration” and permits an employee to “unilaterally elect” to withdraw their claims from arbitration and to proceed in court.

Additionally, Section 1281.98 allows employees to seek in court an award of attorney fees and costs incurred in the abandoned arbitration proceeding and provides courts discretion to enter evidentiary and other sanctions against employers for their failure to timely pay arbitration fees.

A SPLIT IN AUTHORITY

Since the enactment of Section 1281.98, lower courts interpreted and applied the statute strictly and without exception, preventing any inquiry into the reason for the delay in payment. One court even 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). California and federal courts were previously split on the question of whether the FAA preempts Section 1281.98. Those finding preemption reasoned that the statute imposed requirements and sanctions that specifically targeted arbitration agreements.

NO FAA PREEMPTION

In Hohenshelt, the California Supreme Court concluded, by a 5-2 vote, that Section 1281.98 is not preempted by the FAA because it does not deviate from generally applicable state law contract principles, disfavor arbitration, interfere with fundamental attributes of arbitration, or invent special arbitration-preferring procedural rules.

The court reached this holding by “constru[ing] section 1281.98 in harmony with background statutes and principles that allow relief from forfeiture where nonperformance is not willful, fraudulent, or grossly negligent.” It found that the legislature did not intend to penalize inadvertent delays and instead was “concerned about [employers using] willful nonpayment” strategically as a “tactic to indefinitely postpone resolution of…claims.”

The court essentially added this provision to the statute to save the law from preemption. Accordingly, the court rejected the argument that nonpayment of arbitration fees always results in waiver of the right to arbitrate under Section 1281.98, and held that Section 1281.98 does not demand waiver or monetary sanctions if a late payment is not willful, grossly negligent, or fraudulent or is excused by, for example, mistake, inadvertence, excusable neglect, impossibility, illegality, or impracticability.

Based on this reading of Section 1281.98, the court found that it did not run afoul of the “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.

KEY TAKEAWAYS

The decision provides some relief for employers, for whom inadvertent or excusable delays in payment of arbitration fees will not result in the automatic loss of their right to arbitrate. Nonetheless, employers need to remain vigilant about making timely payments of arbitration fees.

It is not clear what circumstances future courts will find constitute a “reasonable excuse” for a late payment, and employers will need to demonstrate that late payments are explained by a “reasonable excuse” or show that the late payments were not willful or grossly negligent. Employers should be prepared to provide an explanation for the delay, and thereafter tender performance promptly to help refute any allegations of willfulness or gross negligence.

To reduce risk of waiver, employers can include an extended period for paying fees in their arbitration agreements with employees, as the court notes that under Section 1281.98, “parties are free to contract for any due date they want.” For agreements governed by the FAA, employers can also consider stating that the agreement is governed solely by the FAA, not any state arbitration laws. The Hohenshelt court declined to address whether the CAA applied to the agreement at issue, and the concurrence notes that whether the CAA governs an agreement “will often be dispositive of FAA preemption challenges.”