Hohenshelt v. Golden State Foods Corp.

What’s at Stake

Many companies now require their customers and workers to accept non-negotiable terms that mandate all disputes with the company must be resolved out of court in private arbitration. Arbitrators are not paid the same way as judges, and their hourly rates and other fees must be paid upfront. In recent years, many of the companies who draft mandatory arbitration into their contracts have also refused to pay their share of fees when an individual tried to initiate arbitration proceedings. The case would then hang in limbo or be closed for nonpayment before it began, effectively locking millions of consumers and workers out of any way to bring a claim.

To address this problem and ensure that arbitration agreements are actually carried out as promised, California passed a law that the drafter of a contract requiring arbitration must promptly pay its share of fees if the other party initiates arbitration proceedings. The statute, known as the Payment Law, defines “timely” as within 30 days of receiving an arbitration provider’s invoice. Not paying the fees within 30 days is considered a breach of the arbitration agreement and the other party can ask a court to hear their case instead. This law is being challenged in this case.

Background

In November 2020, Dana Hohenshelt filed a complaint in court against his former employer Golden State Foods. Golden State moved to compel Mr. Hohenshelt’s case out of court and into arbitration, invoking the mandatory arbitration provision in the standard agreements that every new employee must sign. The court granted this motion, and Mr. Hohenshelt initiated with arbitration provider JAMS. After the parties had begun the process, Golden State did not make on-time payments to JAMS. Exercising his rights under the Payment Law, Mr. Hohenshelt opted to have his case moved back to court, where it couldn’t be delayed or derailed over fees.

Because JAMS had granted extensions for some payment due dates, Golden State asked the trial court to deny Mr. Hohenshelt’s request, reasoning it had not been late under the extended deadlines. The trial court ruled for Golden State, and Mr. Hohenshelt appealed to the California Court of Appeals. The Court of Appeals reversed the trial court’s decision, stating that the Payment Law did not allow an arbitrator to cure a party’s missed payment (in this case, by granting an extension and creating a new due date). It also addressed new arguments from Golden State about the Payment Law itself.

Golden State appealed that decision to the Supreme Court of California. With the UC Berkeley Center for Consumer Law & Economic Justice and the California Employment Lawyers Association, we filed a brief in support of the Appeals Court’s decision. The Court heard arguments on May 21, and we await its decision.

Core Legal Issues

Besides the due date extension issue, on appeal, Golden State argued for the first time that the Payment Law is preempted by the Federal Arbitration Act (FAA) because it’s contrary to the FAA’s goal of arbitration. This is the focus of our amicus brief, which explains how California’s Payment Law is a complement to the FAA. When a defendant refuses to honor the terms of their own arbitration agreement to delay or avoid it altogether, they undermine the Congressional intent of the FAA: to enforce arbitration agreements according to their terms. By defining and deterring this behavior, the Payment Law advances the purposes of the FAA.

We also argue that the law is grounded in California’s bedrock contract principles of material breach, default, and waiver. It simply reflects a legislative determination of what it means to be in material breach in the context of arbitration, where the expected benefit under the agreement is the ability to arbitrate.

Drafters of arbitration agreements who want the statutory authority of the FAA should carry out those agreements according to their terms, including actually participating in the kind of arbitration the FAA promotes: speedy, efficient, extant. California’s Payment Law is a complement to the FAA because it fights against the misuse—and disuse—of arbitration to deflect claims and consequences.