California is famously inhospitable to arbitration. In fact, the U.S. Supreme Court struck down California laws disfavoring arbitration on no fewer than six occasions between 1987 and 2022.
The California Supreme Court has a new opportunity to re-evaluate that stance in considering Hohenshelt v. Superior Court ex rel. Golden State Foods Corporation. The case, which is currently being briefed, examines whether the Federal Arbitration Act (FAA) preempts a series of recently enacted amendments to a pair of California state statutes. These amendments provide for the swift and irrevocable forfeiture of the right to arbitrate if the party who drafted the arbitration agreement does not pay the arbitrator within thirty days of being invoiced — no matter how inadvertent or de minimis that party’s late payment might be, and even if the arbitrator sets a later due date. The disputed amendments have been around for less than a year, having only taken effect on January 1, 2024.
The state Supreme Court took up the case after a divided panel of the California Court of Appeal in Los Angeles examined the amendments to sections 1281.97 and 1281.98 of the California Code of Civil Procedure and concluded they were not preempted by the FAA. A biting dissent by Justice John Shepard Wiley Jr. — himself a former U.S. Supreme Court clerk — pointedly summarized the previous six instances in which the U.S. Supreme Court had invalidated California statutes on FAA preemption grounds, commenting: “After six epistles, we should get the message.”
Justice Wiley’s dissent also explained that the forfeiture amendments in sections 1281.97 and 1281.98 singled out arbitration agreements for disfavored treatment, by rendering them unenforceable even in the context of the most inconsequential untimeliness of payments. As Justice Wiley explained: “No other contracts are voided on a hair-trigger basis due to tardy performance. Only arbitration contracts face this firing squad.”
Justice Wiley’s dissent clearly got the California Supreme Court’s attention. In June 2024, the court granted a petition for review filed by Golden State Foods Corporation seeking to invoke its binding arbitration clause in connection with an employment lawsuit filed by a former employee. Golden State Foods had paid the arbitrator’s invoices in a timely fashion according to the arbitrator’s own rules, but not within the thirty-day period required by section 1281.98. The California Supreme Court is now considering whether this supposedly “late” payment, which resulted in the instant forfeiture of Golden State Foods’s entire right to arbitration, will stand, as the court of appeal concluded, or whether the federal FAA preempts the California legislature’s recently promulgated amendments.
This is an important case to watch for any industry that depends heavily on arbitration, including the consumer financial services industry.