In Hohenshelt v. Superior Court, a 5-2 Supreme Court today holds the Federal Arbitration Act doesn’t preempt Code of Civil Procedure section 1281.98, which allows a consumer or employee to cancel an arbitration and proceed in court if the “drafting party” is required to “pay certain fees and costs” and they “are not paid within 30 days after the due date.” But the court does so only after adopting a construction of the statute that excuses nonpayment under certain circumstances, an interpretation the court says avoids “preemption concerns.”
Although the statute provides without exception that a late payment renders the drafting party “in material breach” and “in default,” allowing the consumer or employee to withdraw from arbitration, the majority opinion by Justice Goodwin Liu holds the lack of a timely payment works a forfeiture “only when nonperformance is willful, grossly negligent, or fraudulent.” Looking to other, general statutes, the court “find[s] no indication that [the Legislature] intended to strip companies and employers of their contractual right to arbitration where nonpayment of fees results from a good faith mistake, inadvertence, or other excusable neglect.” As so construed, the court concludes, there’s no FAA preemption because section 1281.98 doesn’t disfavor arbitration; rather “the statute aims to ensure that arbitration fees are paid in a timely manner so that parties to an arbitration agreement can move forward in arbitration.”
Justice Joshua Groban, joined by Justice Kelli Evans, both of whom sign the majority opinion, writes a separate concurrence to assert that the preemption issue can be avoided altogether when an arbitration agreement incorporates the procedural rules of the California Arbitration Act.
Justice Carol Corrigan, joined by Justice Martin Jenkins, dissents. She believes section 1281.98 is preempted by the FAA “[e]ven with the ameliorative measures provided by the majority’s modifications.” She also doesn’t think the modifications are an appropriate way to interpret the statute. “[I]t appears the Legislature chose to enact a clear rule capable of expedient application,” Justice Corrigan writes. “It was ‘not interested in any excuses, even reasonable ones, as to why’ a payment might have been delayed [citation], nor does it appear to have contemplated allowing litigation on this subject.”
The court agrees with the Second District, Division Eight, Court of Appeal’s 2-1 published opinion that there’s no FAA preemption, but it reverses to the extent the appellate court directed an end to the arbitration without considering whether the defendant could be excused for not timely paying arbitration fees.
The court disapproves a bunch of Court of Appeal opinions that had not applied a mistake-inadvertence-or-excusable-neglect exception to the arbitration forfeiture provision: Gallo v. Wood Ranch USA, Inc. (2022) 81 Cal.App.5th 621 [Second District, Division Two], Espinoza v. Superior Court (2022) 83 Cal.App.5th 761 [Second District, Division One], De Leon v. Juanita’s Foods (2022) 85 Cal.App.5th 740 [Second District, Division Three], Williams v. West Coast Hospitals, Inc. (2022) 86 Cal.App.5th 1054 [Sixth District], Doe v. Superior Court (2023) 95 Cal.App.5th 346 [First District, Division Three], Suarez v. Superior Court (2024) 99 Cal.App.5th 32 [Fourth District, Division One], Keeton v. Tesla, Inc. (2024) 103 Cal.App.5th 26 [First District, Division One], Trujillo v. J-M Manufacturing Co., Inc. (2024) 107 Cal.App.5th 56 [Second District, Division Eight], Colon-Perez v. Security Industry Specialists, Inc. (2025) 108 Cal.App.5th 403 [First District, Division One], Sanders v. Superior Court (2025) 110 Cal.App.5th 1304 [Second District, Division Seven].
Keeton is a grant-and-hold for today’s decision. (See here.) So are Colon-Perez (see here) and Sanders (see here). The Supreme Court denied review in Williams. There was no petition for review in Gallo, Espinoza, De Leon, Doe, Suarez, or Trujillo.
The Supreme Court also disapproves one case finding FAA preemption of section 1281.98: Hernandez v. Sohnen Enterprises, Inc. (2024) 102 Cal.App.5th 222 [Second District, Division Five; 2-1 decision]. Hernandez is a grant-and-hold for today’s opinion. (See here.)
