California Supreme Court Narrows Statute Governing Timely Payments of Arbitration Fees in an Attempt to Avoid Federal Preemption

On August 11, 2025, the California Supreme Court decided Hohenshelt v. Superior Court, which addresses whether the Federal Arbitration Act (FAA) preempts a California statute known as Senate Bill 707 (SB 707) that regulates the timing of payment of arbitration fees. Since the statute was enacted in 2019, nearly a dozen lower appellate courts in California had interpreted SB 707 to impose an inflexible mandate, requiring findings of material breach and waiver of arbitration agreements whenever a business failed to make timely payment of arbitration fees, regardless of the reason or the length of the delay.

By a 5-2 vote, the California Supreme Court rejected that inflexible reading of SB 707, instead holding that the statute should be interpreted to result in automatic waiver of arbitration only when “nonperformance is willful, grossly negligent, or fraudulent.” The majority then held that the statute, construed under that narrower interpretation, is not preempted by the FAA.

Some key takeaways from Hohenshelt for businesses include:

• The Court’s decision leaves open the possibility that parties may contract around the operation of SB 707 altogether by selecting the FAA’s procedures instead of California arbitration law.
• When the statute does apply, courts must consider on a case-by-case basis whether to apply the statute’s penalties, rather than inflexibly invalidating arbitration agreements on a hair-trigger basis.
• The decision will surely lead to further litigation over whether—and under what circumstances—the untimely payment of arbitration fees results in the loss of the right to arbitrate or trigger the statute’s sanctions. Disputes over how to apply SB 707 in particular cases will be especially consequential in the context of mass arbitrations.

Background

California’s SB 707, as amended by subsequent legislation, is codified at Sections 1281.97-1281.99 of the California Code of Civil Procedure. Those sections are found in California’s arbitration statute, the California Arbitration Act (CAA).

Section 1281.98, which applies in the context of consumer or workplace arbitrations, provides that a business’s failure to pay arbitration fees within 30 days of the due date for payment places the business in “material breach” of the arbitration agreement, and waives the business’s right to enforce that agreement—instead allowing the consumer or worker to decide whether to go to court or remain in the arbitration. Section 1281.97 contains similar provisions in the context of fees to initiate the arbitration.

By default, arbitration fees are due upon receipt of the arbitration provider’s invoice, but SB 707 was amended by subsequent legislation that allows parties to specify a different due date in their arbitration agreements.

When a business is declared in material breach under the above sections, Section 1281.99 provides for mandatory sanctions, including attorneys’ fees due to the breach, and authorizes courts to impose additional discretionary sanctions.

Prior to the California Supreme Court’s decision, almost all lower courts had interpreted SB 707 to treat any non-payment of arbitral fees by the business—no matter the amount or the reasons for non-payment—as a per se material breach that waives the business’s right to arbitrate and subjects the business to statutory sanctions.

Hohenshelt itself is a prime example. The trial court held that the defendant’s modest delay in submitting a payment was excusable—indeed, it did not appear to have any effect on the scheduled hearing date for the arbitration—and rejected the plaintiff’s attempt to avoid his arbitration agreement. But the California Court of Appeal reversed, holding that Section 1291.98 did not allow for any exceptions.

While lower courts had largely agreed that SB 707 created inflexible, bright-line rules for material breach and waiver, they disagreed on whether the FAA preempts the statute. At least 10 intermediate California appellate courts, including the court in this case, issued published opinions holding that the FAA did not preempt SB 707, with only one appellate court going the other way. By contrast, most federal district courts have held that the FAA preempts SB 707.

Against this backdrop, the California Supreme Court granted review to address the FAA preemption issue.

The California Supreme Court’s Opinion

In an opinion by Justice Liu, the Court reversed and remanded the case for the trial court to decide whether the defendant should be excused from its untimely payment.

As an initial matter, the Court assumed that the CAA applies, concluding that the defendant failed to properly raise the arguments that the CAA was displaced by the arbitration agreement’s selection of the FAA and the rules of the arbitration provider to govern the arbitration.

The Court then rejected the California intermediate appellate courts’ overly “rigid” interpretation of SB 707 as “impos[ing] an inflexible and sometimes harsh rule resulting in loss of arbitral rights.” The Court acknowledged that the text of SB 707 itself contains no exceptions, but concluded that the statute could be harmonized “with background statutes and principles that allow relief from forfeiture where nonperformance is not willful, fraudulent, or grossly negligent.” Those background statutes include California Civil Code Section 473 (discretionary relief from an order or judgment because of “mistake, inadvertence, surprise, or excusable neglect”), Section 3275 (forfeitures excused after full compensation to the other party, “except in case of a grossly negligent, willful, or fraudulent breach of duty”), and Section 1511 (excusing performance when performance would be impossible, illegal, or impracticable).

The Court also concluded—contrary to some lower courts that had authorized larger attorneys’ fee awards—that the mandatory sanctions in Section 1281.99 should be limited to what is necessary to make the consumer or worker “whole” from the delay in payment.

The Court determined that this narrower interpretation was necessary to avoid serious “preemption concerns:” “if section 1281.98 were construed to mean that any failure to make timely payment, regardless of the circumstances, invariably results in forfeiture of arbitral rights, the statute would be anomalous in the context of general contract law principles.” (Emphasis added).

The Court then held that, as construed more narrowly, SB 707 does not run afoul of the FAA. The Court repeatedly observed, for example, that parties are free to contract for an “alternative payment deadline” rather than the default rule that arbitration fees are due upon receipt of an invoice, and that courts should honor parties’ reasonable exercise of that discretion. The Court further stated that, under its interpretation, SB 707 allows “a breaching party [to] be relieved from forfeiting its right to enforce an arbitration agreement based on the circumstances, as provided by longstanding legal principles,” and therefore does not make arbitration agreements easier to invalidate than other types of contracts.

Justice Groban, joined by Justice Evans, concurred. In their view, SB 707 is one of the “CAA’s procedural rules” that apply by default in California state courts, and that there should be no FAA preemption issue unless the parties’ arbitration agreement reflects an “express indication” that the CAA should not apply. That view also suggests, in accordance with prior California Supreme Court precedent, that when parties do expressly select different procedures to apply, such as the “FAA’s procedural provisions,” then California courts should honor the parties’ choice.

Justice Corrigan dissented, joined by Justice Jenkins, expressing the view that SB 707 “runs afoul of the FAA.” The dissenters explained that, in their view, the text of SB 707 did not support the majority’s interpretation of the statute to authorize exceptions to mandatory sanctions, but that even under “the majority’s amendatory interpretation,” the statute treats arbitration agreements differently from contracts in general and therefore is preempted.

Key Takeaways

The California Supreme Court overturned 11 published California Court of Appeal decisions, and incorporated multiple exceptions into SB 707 to save it from federal preemption. The decision has several important ramifications for businesses:

• Businesses should consider expressly selecting the FAA’s procedural provisions and expressly disclaiming application of the CAA in their arbitration agreements. The Court expressly left open the question whether parties can contract around application of SB 707 in their arbitration agreements. But a count of the votes, including those of the concurring Justices necessary to the majority, suggests that it is a real possibility, so long as the arbitration agreement is sufficiently clear.
• Businesses should consider contracting for extended payment schedules. The Court also expressly endorsed arbitration agreements that allow for extended payment schedules. While that endorsement is no doubt subject to some limits, businesses are not stuck with the statutory default that arbitration invoices are due immediately upon receipt.
• Businesses can obtain relief from harsh and inflexible applications of the statute. The upshot of the Court’s decision is that courts must now go case-by-case instead of invalidating arbitration agreements automatically. Businesses now have powerful arguments that foot faults and other minor or inadvertent delays in payment should not result in losing their contractual right to arbitrate, and that courts may not impose sanctions, including attorneys’ fees, that punish the business for untimely payment; instead, mandatory sanctions under the statute should be limited only to what, if anything, is necessary to make the claimant whole for the delay in payment.
• Timely payment remains the safer course in light of uncertainties over how SB 707 will be applied in the lower courts going forward. By requiring case-by-case determinations, the Court’s interpretation of SB 707 will inevitably breed further litigation, and there is no guarantee that courts will agree with the justifications for untimely payment offered by a business. And even if the business prevails, the costs and delays associated with ancillary litigation may erode arbitration’s benefits. Furthermore, arbitration providers like the American Arbitration Association and JAMS may impose consequences for untimely payment separate from application of SB 707.
• Businesses can continue to argue for FAA preemption in federal court. The California Supreme Court’s interpretation of how SB 707 operates as a matter of California state law is controlling on both state and federal courts. But federal courts are not bound by the California Supreme Court’s holding on federal preemption, and—as the dissent reflects—businesses have strong arguments that SB 707 remains preempted even under the Court’s narrower interpretation. Those arguments may be even stronger in particular cases where application of SB 707 patently disfavors arbitration.

*The authors of this Legal Update filed an amicus curiae brief in Hohenshelt on behalf of the Chamber of Commerce of the United States of America, the California Chamber of Commerce, the Restaurant Law Center, and CTIA-The Wireless Association. Mayer Brown partner Dan Jones argued on behalf of the amici in the California Supreme Court.