On October 10, 2023, California Governor Newsom signed into law S.B. 365, a bill that amends California Code of Civil Procedure Section 1294. The new law provides that when a party appeals an order denying a motion to compel arbitration (an order which is immediately appealable), the trial court is not obligated to stay the action during the pendency of the appeal. The law marks a major shift in California civil procedure law.

Under the previous version of California Code of Civil Procedure Section 916, trial courts were generally required to stay proceedings during the pendency of an appeal of a denial of a motion to compel arbitration. S.B. 365 will now force employers to litigate the underlying claims while pursuing such an appeal unless the trial or appellate court can be persuaded to exercise its discretion to order a stay.

Coinbase Decision

The Federal Arbitration Act (FAA) often preempts state laws that restrict the right to arbitrate. It is unclear whether the FAA will be held to preempt S.B. 365. However, in a recent decision from this term, Coinbase, Inc. v. Bielski, the United States Supreme Court resolved a circuit split over whether the FAA requires district courts to stay proceedings during the interlocutory appeal of a denial of a motion to compel arbitration. The Supreme Court held that such a stay was mandatory even though there is no express command in the text of the FAA for such a stay. See Supreme Court Eases the Ability for Employers to Appeal Denials of Motions to Compel Arbitration in Federal Court.

The Supreme Court in Coinbase held that, notwithstanding the absence of a direct provision in the FAA addressing the stay of an action during the pendency of an appeal of an order refusing to compel arbitration, such a rule was implicit in the structure of the FAA. The Court recognized the background principle that an appeal generally divests a district court of its jurisdiction over any aspect of a case involved in the appeal. Furthermore, a key policy goal of the FAA is to promote the basic benefits of arbitration, such as efficiency, lessened expenses, and less intrusive discovery. If a party lacked the ability to stay a trial court action while seeking to appeal a denial of arbitration, but the court of appeal ultimately agreed the matter was arbitrable, that would undercut the value of arbitration in that the parties would be required to expend substantial resources litigating in court where that should not have been required.

Accordingly, under the highest authority interpreting the FAA, the FAA provides for automatic stays of an appeal. The question is whether that policy standing alone is deemed important enough to preempt state laws to the contrary. That is, California is not challenging the right to immediately appeal a denial of arbitration, and it is also not eliminating the possibility of obtaining a stay at the discretion of the trial or appellate court. It is, however, undermining the potency of the right to immediate appeal. Proponents of arbitration will certainly argue that states are preempted from taking any steps to dilute the ability to appeal without incurring the full cost of litigating in the trial court. It remains to be seen how courts will decide this argument.

Takeaways

S.B. 365 will take effect January 1, 2024, so employers should be aware moving forward that, assuming the law takes effect, they will need to persuade the trial court to stay an action during the pendency of appeal rather than having the right to obtain such a stay in all cases. Given the concerns surrounding the efficiency of arbitration and waste of judicial resources, many trial courts may still feel inclined to stay proceedings. In addition, researching the assigned state court judge’s attitude toward arbitration will be an even more important step in deciding whether to seek a peremptory challenge of the judge. S.B. 365 also heightens the importance of removing cases to federal court where possible, as district courts are likely more willing to enforce FAA principles than state courts.