SB 365: California Prohibits Automatic Stay Pending Appeal of Order Denying Motion to Compel Arbitration

On Oct. 10, 2023, Gov. Gavin Newsom signed Senate Bill (SB) 365, substantially changing existing law when a party appeals an order denying a motion to compel arbitration. SB 365 reverses the long-standing rule that trial court proceedings are automatically stayed pending an appeal of an order denying a motion to compel arbitration. The new law takes effect on Jan. 1, 2024.

Key Points

• SB 365 amends existing law and provides that a party appealing an order denying a motion to compel arbitration is not entitled to an automatic stay.
• In light of the Supreme Court’s decision in Coinbase, Inc. v. Bielski, challenges to SB 365 on preemption grounds are expected.
• SB 365 reminds employers to implement arbitration policies governed by the Federal Arbitration Act (FAA).

Existing Law, SB 365 and California’s Adversity to Arbitration

Currently, Code of Civil Procedure Section 916 provides that “the perfecting of an appeal stays proceedings in the trial court… upon the matters embraced therein or affected thereby.” In practice, Section 916 requires a trial court to stay proceedings of any claims that could be subject to arbitration when a party appeals the denial of a motion to compel arbitration.

SB 365 amends Code of Civil Procedure section 1294 to provide that “Notwithstanding Section 916, the perfecting of such an appeal shall not automatically stay any proceedings in the trial court” when appealing an order denying a motion to compel arbitration.

SB 365 follows a trend of recent California laws adverse to arbitration. In October 2019, Gov. Newsom signed Assembly Bill (AB) 51, which prohibited employers from requiring employees to enter into certain arbitration agreements, including agreements to arbitrate claims under California’s Fair Employment and Housing Act and California’s Labor Code. The law also imposed certain criminal and civil penalties upon would-be violators.

AB 51 was immediately challenged by business groups led by the U.S. Chamber of Commerce, who argued the law was preempted by the FAA. Eventually, in February 2023, the Ninth Circuit declared AB 51 was preempted by the FAA in its entirety because the law stood as an obstacle to entering into arbitration agreements.

Does the FAA Preempt SB 365?

Similar to AB 51, it is likely SB 365 will be challenged on preemption grounds. The law stands as an obstacle to arbitration, which promotes streamlined and expedient dispute resolution as an alternative to court. By requiring parties to litigate in court while appealing the enforceability of an arbitration agreement, the central purpose of arbitration would be lost.

SB 365 also stands in stark contrast to the U.S. Supreme Court’s recent decision in Coinbase, Inc. v. Bielski, which resolved a circuit split on the issue of automatic stays pending appeal under the FAA. The Court held that a district court must stay proceedings while an interlocutory appeal on the question of arbitration is ongoing. In reaching this decision, the Court found Congress intended trial court proceedings to be automatically stayed when it provided for the right to an automatic appeal upon the denial of a motion to compel arbitration under the FAA.

While it is not certain the Supreme Court will determine the fate of SB 365, the Court’s position on this issue is clear: “The common practice of staying district court proceedings during the pendency of an interlocutory appeal taken under §16(a) reflects common sense.”

Takeaways

If there ever were a time to ensure that your arbitration policies are explicitly governed by the FAA, now is the time to do so. Given the FAA’s preemption of California’s other attempts to undermine arbitration, the FAA should preempt SB 365. However, arbitration policies that are governed by the California Arbitration Act will be subject to SB 365, prohibiting any stays upon the appeal of denial of a motion to compel arbitration, and force employers to litigate the merits of the underlying claims while the case is appealed.

Armstrong Teasdale’s Employment and Labor team will continue to monitor developments related to SB 365 and will share updates as new information is brought forth. Please contact your regular AT lawyer or one of the authors for further guidance or to review your arbitration policies.