Online businesses are increasingly facing a wave of arbitration demands under the California Invasion of Privacy Act (“CIPA”) and similar laws. Enterprising law firms have been at the forefront of this trend, filing claims on behalf of individuals who are often not genuine customers, but rather “litigation testers” or professional plaintiffs. Some law firms recruit claimants from advertisements on social media or elsewhere, often recruiting individuals to bring claims against multiple companies simultaneously. These claimants typically allege technical privacy violations, such as the use of website cookies, chatbots, or session replay tools, and then initiate arbitration demands, often en masse. The underlying strategy is not to resolve the merits of each claim, but to exploit the high cost of initiating and defending one or more arbitrations, thereby pressuring businesses into settlements regardless of the actual validity of the claims. Because the major arbitration providers charge businesses a fee for each case filed, businesses can often face tens or hundreds of thousands of dollars in fees simply to have their cases heard, even if the claims against them ultimately fail.
This development has placed a significant burden on well-intentioned businesses. Many of the arbitration demands are based on dubious or manufactured claims, yet the cost of responding to each individual arbitration—including substantial administrative and arbitrator fees—can quickly become overwhelming. As a result, the threat of arbitration is increasingly being used as a tool for extracting settlements, rather than for resolving legitimate disputes.
In this article, we will examine the legal framework that has enabled this trend, focusing on California’s 30-day arbitration fee payment rule and its potential consequences for businesses. We will then explore the arguments raised by major retail industry groups challenging the rule, review the appellate decisions in the Hohenshelt and Hernandez cases, and preview the upcoming California Supreme Court review that could reshape the landscape for consumer arbitrations in California.
California’s 30-Day Arbitration Fee Rule: Strict Deadlines and Harsh Consequences
California law, specifically Code of Civil Procedure sections 1281.97 and 1281.98, requires that businesses pay arbitration fees within 30 days of the invoice being issued by the arbitration provider, such as JAMS or AAA. In consumer and employment arbitrations, the business is typically responsible for a large part of these fees. In the mass arbitration context, the required payment can be substantial sums—tens or even hundreds of thousands of dollars—that not all businesses have readily available. If the business fails to pay within the 30-day window, the business may be in material breach of the arbitration agreement. The consequences can be severe: the claimant may withdraw from arbitration and proceed in court, and the business may be required to pay the claimant’s attorneys’ fees and costs. The statute does not permit extensions unless all parties agree, and there is no exception for inadvertent delay, substantial compliance, or lack of prejudice to the claimant.
Sections 1281.97 and 1281.98 single out arbitration agreements for uniquely harsh treatment, as no other type of contract is voided on such a hair-trigger basis for a minor delay in payment. Outside of the arbitration context, courts consider the facts and circumstances, including whether the delay was excusable or whether the other party was prejudiced. The law’s lack of flexibility in the arbitration context is also problematic, as it does not allow for any discretion or relief for excusable neglect, inadvertent error, or even situations where the payment is only a few days late due to circumstances beyond the business’s control, such as a payment lost or delayed in the mail or an invoice sent to a spam folder. Courts have held that even disagreement as to whether the amount of the fee is correct does not alter the strict interpretation of the 30-day deadline.
Appellate Decisions To-Date
The legal landscape surrounding California’s 30-day arbitration fee rule is sharply illustrated by the appellate decisions in Hohenshelt v. Superior Court and Hernandez v. Sohnen Enterprises, Inc. These cases not only highlight the practical consequences of the rule for businesses but also frame the core legal debate over federal preemption and the enforceability of arbitration agreements in California.
Hohenshelt v. Superior Court
In Hohenshelt, the dispute arose when an employer, Golden State Foods Corp., failed to pay arbitration fees within 30 days of receiving invoices from JAMS, the arbitration provider. The employee, Dana Hohenshelt, invoked Code of Civil Procedure section 1281.98, which deems such a failure a “material breach” of the arbitration agreement. Hohenshelt elected to withdraw from arbitration and return to court, seeking to lift the stay on litigation.
The Court of Appeal sided with the employee, holding that the statutory language was clear and left no room for discretion: if the drafting party (typically the employer or business) does not pay the required fees within 30 days, it is in material breach, and the claimant may proceed in court. The court rejected the argument that an extension granted by the arbitration provider could cure the breach, emphasizing that the statute only allows extensions if all parties agree. The court also found that the Federal Arbitration Act (“FAA”) did not preempt California’s rule, reasoning that the statute furthered the FAA’s objectives by preventing businesses from stalling arbitrations through nonpayment and ensuring a speedy resolution of disputes.
A notable aspect of the Hohenshelt decision is its strict, almost mechanical application of the 30-day rule, regardless of the reasons for late payment or the absence of prejudice to the claimant. The court’s approach was to treat the statutory deadline as absolute, with no exceptions for inadvertent delay, good faith participation, or even payment made shortly after the deadline. This rigid interpretation has significant consequences for businesses, as even minor administrative errors can result in the loss of the right to arbitrate and exposure to additional sanctions.
Hernandez v. Sohnen Enterprises
In contrast, Hernandez presented a different scenario. The employer, Sohnen Enterprises, paid the arbitration fees after the 30-day deadline, and the employee sought to withdraw from arbitration under section 1281.97. The trial court granted the motion, but the employer appealed.
The Court of Appeal reversed, holding that the FAA preempted California’s 30-day rule in this context. The court’s analysis focused on the “equal-treatment principle” established by the U.S. Supreme Court, which prohibits states from imposing special burdens on arbitration agreements that do not apply to other contracts. The court found that section 1281.97’s mandatory finding of material breach and waiver for late payment was an arbitration-specific rule that conflicted with the FAA. Under general contract law, whether a breach is “material” is a fact-specific inquiry, and courts typically consider the circumstances, including whether the delay was excusable or whether the other party was prejudiced. By contrast, California’s statute imposed a strict, automatic penalty for late payment, singling out arbitration agreements for disfavored treatment. The court held that the state law did not override the federal policy favoring arbitration.
What’s Next: California Supreme Court Review
These two cases encapsulate the current legal uncertainty facing businesses in California. Hohenshelt suggests that the 30-day rule is absolute and not preempted by federal law, while Hernandez holds that the FAA preempts the rule. The split in authority has led to confusion and inconsistent outcomes and ultimately creates pressure for businesses to settle non-meritorious claims or risk having to pay the claimant’s attorneys’ fees and costs as a sanction.
The California Supreme Court has granted review in Hohenshelt, with oral argument scheduled for May 21, 2025. The Court’s upcoming review of Hohenshelt could provide much-needed clarity for businesses and claimants alike. The decision may determine whether California can continue to enforce its strict 30-day rule in all consumer and employment arbitrations, or whether the FAA’s equal-treatment mandate will require a more flexible approach.
The outcome could have significant implications for businesses facing arbitration demands, especially in the consumer privacy context, where claimants may attempt to leverage the current statutory regime to pressure businesses into settlements.
We will continue to monitor this case closely and provide updates as the Supreme Court’s decision approaches. Virtually any business with a website faces potential CIPA or similar privacy claims, so those businesses with consumer arbitration agreements should review their arbitration provisions and consult with counsel regarding best practices for managing arbitration fee payments and mitigating the risk of arbitration exposure.