Split state high court upholds employer arbitration payment deadline law

A divided California Supreme Court on Monday upheld a state law requiring employers and businesses to promptly pay arbitration fees in worker and consumer disputes, rejecting claims it is preempted by the Federal Arbitration Act.

The majority ruling drew a separate concurring and a dissenting opinion.

The majority opinion, written by Justice Goodwin Liu, clarified that Code of Civil Procedure Section 1281.98 does not automatically strip a drafting party of arbitration rights for late payments when the delay stems from a good-faith mistake, inadvertence or other excusable neglect.

The majority found that the statute is meant to deter strategic nonpayment designed to stall proceedings, not penalize minor or unintentional lapses.

The dispute stems from a lawsuit filed against Golden State Foods Corp., a quick service restaurant services company, by former sanitation worker Dana Hohenshelt, who claimed he was wrongly fired. Hohenshelt v. Superior Court ex rel. Golden State Foods Corporation., S284498 (Cal. Sup. Ct. filed April 8, 2024).

Justices Carol Corrigan and Martin J. Jenkins dissented, contending the state law is unfair because it treats arbitration more harshly than other contracts and should be preempted under federal law.

"The party holding the purse strings should not be permitted to delay the resolution of claims against it through a strategic refusal to pay arbitration costs. But by making arbitration contracts unenforceable on grounds that do not apply to other contracts, section 1281.98 runs afoul of the FAA," Corrigan wrote.

Another grouping of justices, Joshua Groban and Kelli M. Evans, filed a concurring opinion that agreed with Liu but argued that an analysis of the Federal Arbitration Act was not needed because the parties incorporated the California Arbitration Act into their agreement.

Kelly Riordan Horwitz of Benedon & Serlin LLP, one of Golden State Foods' lead attorneys, applauded the majority decision saying that "common sense prevailed" in an email Monday.

"The area of arbitration waiver has seen significant developments in the last few years. The majority opinion in Hohenshelt provided a well-reasoned approach to harmonizing what otherwise were potentially conflicting legal trends," the email stated. "By making clear that traditional common law contract principles apply to CCP 1281.98, the California Supreme Court has allowed trial courts to forgive a brief delay in payment of an arbitration fee rather than impose the unduly harsh consequence of unwinding all progress in arbitration and requiring the parties to start over in the superior court. Common sense has prevailed."

Melvin Felton, equity partner at Sanders Roberts LLP and another of Golden State Foods' lead attorneys, said in a text message to the Daily Journal on Monday night: "We think there were ample grounds for the Court to find preemption in this case, but are still very happy with the result. Now, Courts must apply general contractual defenses, which judges previously thought were unavailable. That is a win for everyone."

Liu, who was joined in concurrence by Chief Justice Patricia Guerrero and Justice Leondra R. Kruger, called the California law "inflexible and sometimes harsh" but went on to explain why the court still upheld the rule.

"Although section 1281.98 has been interpreted by various Courts of Appeal to impose an inflexible and sometimes harsh rule resulting in loss of arbitral rights, we reject that rigid construction and instead conclude that the statute does not abrogate the longstanding principle, established by statute and common law, that one party's nonperformance of an obligation automatically extinguishes the other party's contractual duties only when nonperformance is willful, grossly negligent, or fraudulent," Liu wrote.

Nicholas John Scardigli of Mayall Hurley PC in Stockton, lead attorney for Hohenshelt, could not be reached for comment Monday.

In addition to Felton, these are the Sanders Roberts LLP attorneys who represented Golden State Foods: Reginald Roberts, Tyler S. Dobberstein and Anand Singh. Wendy S. Albers Benedon & Serlin LLP in Woodland Hills also represented Golden State Foods.