On the heels of the California Supreme Court’s ruling in Hohenshelt v. Superior Court, the California Court of Appeal’s recent decision in Wilson v. TAP Worldwide, LLC has provided welcome clarity and significant breathing room for employers by limiting the punitive consequences of Code of Civil Procedure section 1281.98. Specifically, the appellate court confirmed that a mere administrative oversight in fee payment will not automatically result in both the forfeiture of the employer’s right to arbitrate and the substantial fee-shifting penalties of the statute.
The Wilson case originated from a common scenario: the employer’s counsel electronically initiated payment of required arbitration fees on the final day of the 30-day deadline, but due to a banking process delay over the weekend, the payment was received by the arbitration provider three days late. Relying on pre-existing precedent that strictly enforces the statute's deadline, the trial court found the late receipt was an automatic material breach of the arbitration agreement and vacated the order compelling arbitration, which triggered the employee’s right to seek all attorney’s fees and costs from the now “abandoned arbitration proceeding”. The employee sought over $300,000 in fees and costs. The trial court granted the fee award, but reduced the amount to roughly $11,000 – noting that most of the legal work performed could be reused in preparing for trial and thus was not unique to the arbitration. The plaintiff appealed the reduction of the award.
On appeal, the court’s analysis was dominated by the California Supreme Court’s recent ruling in Hohenshelt. The Supreme Court, in an effort to save Section 1281.98 from being preempted by the Federal Arbitration Act (FAA), re-interpreted the statute to state that forfeiture of the right to arbitrate occurs only when the employer’s failure to pay is willful, grossly negligent, or fraudulent. The legislature’s intent, the Hohenshelt court determined, was to prevent strategic nonpayment, not to punish good-faith errors.
Applying the Hohenshelt standard, the Wilson court held, as a matter of law, that the one-business-day delay – where payment was initiated on time – was not willful, grossly negligent, or fraudulent. Because the payment delay was excused under the higher standard, the employer was not deemed to have committed the type of material breach that results in the full “abandonment” of the arbitration. Consequently, the employee was not entitled to the mandatory, sweeping fee award under Section 1281.98(c)(1), and the original fee award was reversed.
It is crucial to note a significant procedural distinction in the Wilson case: even though the Court of Appeal reversed the large fee award, this ruling did not overturn the original decision allowing the employee to withdraw the case from arbitration and proceed in court. The trial court's initial order vacating the arbitration and returning the matter to court became final because the employer, TAP Worldwide, LLC, subsequently dismissed its own appeal challenging that specific order. Therefore, the case continued in court while the appeal on the separate issue of attorney’s fees was litigated. The employer successfully defended against the punitive financial penalty, but could not retrieve the right to arbitrate because that procedural decision was no longer before the appellate court.
The holding in Wilson defines a critical defense for employers. An employer’s right to arbitrate and the potential exposure to substantial fee penalties are now tied to the employer’s intent, not just the clock. While the Wilson decision provides a vital shield, employers must remain diligent. A late payment may still result in a monetary sanction under Section 1281.99 regardless of the reason for the delay, if the case is ultimately withdrawn from the arbitration in favor of proceeding in Superior Court. To effectively leverage this defense, employers must establish and maintain robust fee payment protocols and be prepared to immediately document any delay, proving that it was an unintentional, good-faith mistake, and not a strategic maneuver.
