Relying on Hohenshelt, California Court Reverses Sanctions Award Against Employer

In arbitration disputes, the California Supreme Court’s recent decision in Hohenshelt v. Superior Court is already proving beneficial to employers.

Anthony Wilson filed suit against his former employer, TAP Worldwide, alleging discrimination and harassment. The trial court compelled the matter to arbitration on the employer’s motion.

On June 7, 2023, the arbitration provider sent an invoice to all parties for arbitrator compensation. The invoice stated that payment was due 30 days from the invoice date.

According to a declaration by the employer’s counsel, he initiated an electronic bill payment for the invoice on July 7, a Friday. The payment was processed and the arbitration provider received it on Monday, July 10.

Wilson moved to vacate the order compelling arbitration. He argued the failure to pay the arbitration invoice within the 30-day deadline found in section 1281.98—which governs payment of fees during an ongoing arbitration—constituted a material breach entitling him, among other statutory sanctions, to return his case to court.

The trial court granted the motion and awarded Wilson sanctions of $1,7500 pursuant to section 1281.99, which entitles a plaintiff to the reasonable expenses, including attorney’s fees and costs, incurred as a result of the breach of the statute.

Wilson then moved for an award of $329,730 in attorney’s fees, $1,800 in expert fees and $9,634.95 in costs.

TAP Worldwide protested, contending that its counsel had made an honest mistake of law in believing that initiating payment within the 30-day deadline was sufficient, meaning it was entitled to mandatory and discretionary relief.

The court sided with Wilson but awarded reduced amounts totaling over $11,000. Wilson appealed that order.

In the meantime, the state’s highest court decided Hohenshelt.

That case involved the application of a 2019 amendment to section 1281.98, which the legislature adopted in response to “a concerning and troubling trend” in consumer and employment arbitrations, where employers were refusing to pay required fees, effectively stymieing the ability of employees to assert their legal rights.

In Hohenshelt, the California Supreme Court considered decisions finding that section 1281.98 imposes an inflexible rule that deems any failure to make timely payment a material breach, regardless of circumstances, with the consequence that the drafting party loses its arbitral rights, but rejected a strict construction of section 1281.98, finding no suggestion that the legislature intended that any instance of nonpayment—regardless of the circumstances—would result in loss of the right to arbitration.

“When a party breaches its contractual obligations willfully, fraudulently, or with gross negligence, it cannot escape the consequences by pointing to a lack of harm to the other party,” the California Supreme Court explained. “But short of such wrongful conduct, a breaching party may be relieved from forfeiting its right to enforce an arbitration agreement based on the circumstances, as provided by longstanding legal principles.”

Wilson told the court that Hohenshelt had no impact on the trial court’s decision because the order finding the employer in material breach of the arbitration agreement and returning the matter to court was long since final.

The court agreed but pointed out that the subsequent trial court order—with the award of roughly $11,000 in attorney’s fees and costs—was on appeal.

“We cannot ignore that this award is premised on an interpretation of section 1281.98 that our Supreme Court has since deemed not only incorrect, but also preempted by federal law,” the court said.

Remand was unnecessary because the trial court, in contrast to Hohenshelt, made findings that established “as a matter of law, that [the employer’s] untimely payment was not willful, grossly negligent, or fraudulent,” the court said.

“Under Hohenshelt’s interpretation of sections 1281.98 and 1281.99, [Wilson] would still be entitled to compensation for ‘any reasonable expenses incurred by the employee or consumer as a result of its failure to timely pay arbitration fees,’” the court wrote. “The trial court, however, did award such compensation when it imposed $1,750 in sanctions under section 1281.99 at the time it granted [Wilson’s] motion to return the matter to court.”

Wilson argued that the employer’s actions were in fact willful because it received two notices asking for immediate payment, which the employer failed to timely pay.

“We fail to see how notices to pay received before expiration of the relevant deadline create a factual dispute requiring remand,” the court concluded. “The court found the relevant deadline was July 7 – 30 days after AAA issued the invoice. The court found that [the employer] had electronically remitted the payment on July 7. As a matter of law, this delay in payment of one business day was not willful, grossly negligent or fraudulent as Hohenshelt used those terms to avoid preemption of section 1281.98.”

To read the opinion in Wilson v. Tap Worldwide, LLC, click .

Why it matters: The Hohenshelt decision is already providing dividends for employers in California, with courts backing off a strict interpretation of section 1281.98 and instead considering whether the failure to pay arbitral fees within the 30-day window was willful, grossly negligent or fraudulent. In the case at hand, the employer’s electronic payment on the day the bill was due and resulting processing delay of payment of one day was not willful, grossly negligent or fraudulent, the court held.