In Hohenshelt v. Superior Court, No. S284498, the Supreme Court of California addressed whether the Federal Arbitration Act (“FAA”) preempts California Code of Civil Procedure section 1281.98, a provision within the California Arbitration Act that governs the payment of fees in employment and consumer arbitrations. In 2019, the California Legislature enacted section 1281.98, which seemed to address the purported problem of employers failing to pay required fees in arbitration and thereby stymieing employees’ ability to enforce their legal rights. Section 1281.98 provides that failure by an employer to pay arbitration fees within 30 days of the due date – deemed the date of receipt of the invoice – is considered a material breach of the arbitration agreement, causes an employer to forfeit its right to require arbitration, and permits an employee to “unilaterally elect” to withdraw his or her claims from arbitration and to proceed in court, or to continue the arbitration. The statute also permits an employee to file a motion in court seeking an award of attorneys’ fees and costs incurred in the abandoned arbitration proceeding and gives the court discretion to enter evidentiary, terminating, or contempt sanctions against an employer.

The Supreme Court of California concluded, by a 5-2 vote, that Section 1281.98 is not preempted by the FAA because it does not subject arbitration agreements to unique, adverse rules. Rather, the statute should be applied consistently with background legal principles – most notably those that prevent forfeiture of legal rights in circumstances when a party’s failure to perform a duty was inadvertent or otherwise excusable. Thus, according to the Court, failure to timely pay arbitration fees violates Section 1281.98 and results in forfeiture of the right to require arbitration only when the failure to pay is willful, grossly negligent, or fraudulent.

While the invalidation of Section 1281.98 would have been the optimal outcome for employers, employers may still cheer the decision in Hohenshelt because, at least in certain circumstances, it will allow employers to avoid forfeiture of their right to arbitrate due to an untimely payment of arbitration fees. Of course, employers should continue to take very seriously the 30-day deadline for payment of arbitration fees to avoid potential forfeiture of their right to arbitrate. Employers also should consider including within their California employment arbitration agreements language addressing the FAA’s procedural rules and section 1281.98.