The California Supreme Court recently held that the state’s requirement for timely payment of arbitration fees isn’t preempted by the Federal Arbitration Act (the “FAA”). The FAA prohibits state laws that disfavor arbitration agreements.
On August 11, 2025, the Supreme Court decided Hohenshelt v. Superior Court, in which the Court decided whether the FAA preempts a California statute, Senate Bill 707. That law regulates the timing of payment of arbitration fees. Since its enactment in 2019, a number of decisions by Courts of Appeal said that SB 707 imposed a rigid requirement that there be findings of material breach and waiver of arbitration agreements if an employer did not make timely payment of arbitration fees, no matter the reason or the length of the delay.
But in Hohenshelt, the Supreme Court rejected such an inflexible reading of SB 707 by a 5-2 vote, holding instead that the statute should be interpreted to result in automatic waiver of arbitration only when “nonperformance is willful, grossly negligent, or fraudulent.”
As such, the Supreme Court held that the statute, analyzed under that narrower interpretation, isn’t preempted by the FAA.
The Court’s Explanation
The Supreme Court reasoned that California Code of Civil Procedure § 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,” and “the arbitration provider shall issue all invoices to the parties as due upon receipt.”
Further, the parties can contract around the default rule by specifying in their agreement “the number of days in which the parties to the arbitration must pay any required fees or costs” or by agreeing to an “extension of time for the due date.” But if the drafting party fails to make timely payment, it “waives its right to compel the employee or consumer to proceed with that arbitration,” and the employee or consumer may choose to “withdraw the claim from arbitration” and proceed in court “[c]ontinue the arbitration” if the arbitrator agrees.”
The Supreme Court said, in the opinion written by Justice Goodwin Liu, that the Legislature sought to deter companies and employers from engaging in strategic nonpayment of arbitration fees. As such, the Court found no indication that it intended to strip employers of their contractual right to arbitration where nonpayment of fees results from a good faith mistake, inadvertence, or other excusable neglect.
The Court then reasoned that because the strict reading of the payment provisions would raise preemption concerns, it should, if reasonably possible, construe the statute “in a manner that avoids any doubt about its constitutional validity.”
Employer Relief from Arbitration Forfeiture
The Court identified several reasons that may excuse the late payment of arbitration fees. An employer may be relieved from forfeiture of arbitration in the following circumstances:
- Civil Code § 1511 provides that a breach may be excused when performance of the contractual obligation would be impossible, illegal, or impracticable “because of extreme and unreasonable difficulty, expense, injury, or loss involved.”
- Civil Code § 3275 excuses a failure to perform an “obligation,” which is defined as “a legal duty, by which a person is bound to do or not to do a certain thing.” An obligation arises either from a contract or from the operation of law. The requirement to timely pay arbitration fees under § 1281.98 is a legal duty that arises from the operation of law and is thus an “obligation” within the meaning of these statutes. If § 3275 is operative as a background statute here, then a drafting party that has not acted willfully, fraudulently, or with gross negligence in making a late payment “may be relieved” from forfeiting their right to continue the arbitration “upon making full compensation to the other party” for any losses resulting from the delay.
- Civil Code § 473(b): “The court may, upon any terms as may be just, relieve a party or his or her legal representative from a judgment, dismissal, order, or other proceeding taken against him or her through his or her mistake, inadvertence, surprise, or excusable neglect.”
Bottom Line
The Hohenshelt decision overturned nearly a dozen published California Courts of Appeal decisions, and incorporated the stated exceptions into state law to preserve it from federal preemption. And while employers are still responsible for paying arbitration fees on time, not every late payment will automatically mean a forfeiture of arbitration. As mentioned above, a lapse or delay in payment that’s excusable, unintentional, minor, or due to an oversight may not put at risk the right to proceed in arbitration.
Employers should continue to promptly pay arbitration fees and should consider revising arbitration agreements to extend the deadline for paying arbitration invoices. In addition, employers should review their arbitration invoice procedures to reduce risks of delay. Finally, if a payment is late, employers should detail the reasons, as courts will now determine if the delay was excusable, especially if it arises from a good faith mistake or oversight.
Businesses should make certain they promptly pay arbitration fees and comply with the FAA and SB 707. Reach out to the attorneys at Eanet, PC for help.