California Supreme Court Confirms the FAA does not Preempt CCP Section 1281.98

In Hohenshelt v. Superior Court, Case No. S284498 (Decided August 11, 2025), the California Supreme Court held that the Federal Arbitration Act ("FAA"), U.S.C. § 1 et seq., does not preempt California Code of Civil Procedure section 1281.98, a provision of the California Arbitration Act ("CAA") that governs the payment of fees in employment and consumer arbitrations. Although parties may contract otherwise, Section 1281.98 establishes a default rule that when the party who drafted an arbitration agreement is responsible for paying fees and costs to an arbitrator, that party must pay an arbitrator’s invoice “within 30 days after the due date.” Section 1281.98, subds. (a)(1). Section 1281.98 also provides that “the arbitration provider shall issue all invoices to the parties as due upon receipt.” Id. at subd. (a)(2).

In response to Hohenshelt's complaint, Golden State (the employer) filed a motion to compel arbitration and stayed the matter in the superior court. Hohenshelt did not oppose. A year into the arbitration, Golden State failed to pay invoices from JAMS within 30 days after the due date. Hohenshelt then filed a motion in superior court to lift the stay, asserting Golden State was “in default of the arbitration” and that he was electing to “withdraw his claims from arbitration and proceed in . . . court.” Although the trial court denied Hohenshelt's request, the Court of Appeal reversed, observing that both invoices provide payment is "due upon receipt,” that Golden State did not pay the invoices within 30 days after the due date, and “the trial court’s ruling ignored the clear language of section 1281.98, subdivision (a)(2), which expressly provides that ‘[a]ny extension of time for the due date shall be agreed upon by all parties.'” (Hohenshelt v. Superior Court (2024) 99 Cal.App.5th 1319, 1322, 1324 (Hohenshelt).) Per the Court of Appeal, that provision “would have no meaning, force, or effect if the arbitrator could simply issue a 'new due date' without the other party’s consent." (Id. at p. 1324.) Based on this reasoning, the Court of Appeal held that Golden State’s payment was untimely and resulted in “material breach” under section 1281.98, thus allowing Hohenshelt to return to the superior court. (Hohenshelt, at p. 1325.) The Court of Appeal also held the FAA did not preempt Section 1281.98.

While the California Supreme Court agreed with the Court of Appeal and held the FAA does not preempt Section 1281.98, its holding did not stop there. Rather, the Court held that Section 1281.98's default rule will only apply if the party's failure to pay invoices was done "willfully, fraudulently, or with gross negligence" and that "short of such wrongful conduct, a breaching party may be relieved from forfeiting its right to enforce an arbitration agreement based on the circumstances, as provided by longstanding legal principles." At a minimum, this holding erases the clarity that previously existed in the interpretation of Section 1281.98 by the Courts of Appeal. Violations of Section 1281.98 will devolve into side litigation regarding the reasons/justifications for the employer/corporate defendant's failure to timely pay invoices. Now, when an employer or corporate defendant fails to timely pay invoices in an arbitration, the employee/consumer must prove both the failure to comply with Section 1281.98 and also that this failure was done "willfully, fraudulently, or with gross negligence." As a result of this additional requirement, Hohenshelt's victory appears to be pyrrhic.