California’s detour from automatic arbitration appeal stays

Senate Bill 365: A shift in California's arbitration landscape amid federal preemption concerns

On Oct. 10, Gov. Newsom signed Senate Bill 365, altering the interplay between arbitration and judicial proceedings in California. The Bill stipulates that trial court proceedings will not be automatically stayed while an appeal of an order dismissing or denying a petition to compel arbitration is pending. This law is set to take effect on Jan. 1, 2024, sparking discussions among legal practitioners and policymakers regarding its potential impact on arbitration agreements and the broader arbitration framework.

1. The Bill

Currently, in California, an appeal of an order dismissing or denying a petition to compel arbitration triggers an automatic stay of the proceedings in the trial court on the judgment or order appealed from, subject to specified exceptions (see Section 1294 of the Code of Civil Procedure). The Bill modifies the existing law by stating that trial court proceedings shall not be automatically stayed during the appeal's pendency, leaving the possibility of a stay at the court's discretion.

According to the Bill's proponents, the Bill was aimed to protect workers and consumers from corporations' delay tactics. The existing law enables corporations to halt substantive proceedings for extended periods while an appeal is pending, thus abusing the arbitration process. Although the new law might curb such exploitation, it could have detrimental implications for the arbitration legal framework.

2. Possible implications on arbitration

Arbitration is characterized by a voluntary agreement between parties to resolve disputes outside the court's purview, providing a streamlined, cost-effective dispute resolution mechanism. The automatic stay provision is crucial in preserving contractual autonomy as it redirects disputes intended for arbitration away from the judicial system until the arbitrability question is resolved.

The Bill challenges this framework by allowing court proceedings to continue before resolving the arbitrability question. This could potentially lead to parallel proceedings, where the main dispute continues in court while the appeal on the defendant's petition to compel arbitration is pending, extending the dispute resolution process and increasing litigation costs. Furthermore, this may discourage parties from selecting California as the seat of arbitration due to the possible interference in the arbitration domain.

Notably, the new California rule contrasts with the recent U.S. Supreme Court decision in Coinbase, Inc. v. Bielski, 143 S. Ct. 1915 (2023), which mandates a U.S. district court to stay proceedings during an interlocutory appeal on the arbitrability question. In that case, the Court found, by a majority decision, that Congress envisaged automatic stay of trial court proceedings by providing a right to automatic appeal following the denial of a motion to compel arbitration under the FAA. The Court further emphasized that, "If the district court could move forward with pre-trial and trial proceedings while the appeal on arbitrability was ongoing, then many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be irretrievably lost - even if the court of appeals later concluded that the case actually had belonged in arbitration all along."

3. Possible preemption by Federal Arbitration Act

The Federal Arbitration Act (FAA) acts as a robust federal pillar in favor of arbitration, ensuring arbitration agreements are enforced according to their terms. It has historically served to preempt state laws that conflict with its objectives.

For instance, the 9th U.S. Circuit Court of Appeals found Assembly Bill 51 to be preempted by the FAA as it hindered the formation of arbitration agreements by imposing sanctions on employers who required them (Chamber of Commerce of the U.S. v. Bonta, No. 20-15291 (9th Cir. 2022)). The decision included a preliminary injunction prohibiting California from enforcing Assembly Bill 51, thus preserving the ability of California employers to mandate arbitration agreements without risking criminal liability. The Ninth Circuit, upon rehearing, aligned with this view, highlighting that Assembly Bill 51, despite not explicitly barring arbitration agreements, posed an unacceptable obstacle to the FAA's objectives by imposing severe burdens on arbitration agreements formation, which is contrary to the FAA's liberal federal policy favoring such agreements.

Given the FAA's preemption precedent and California's adversarial stance towards certain arbitration agreements, the Bill might face legal challenges on preemption grounds. By allowing court proceedings to continue while an appeal on an order denying a motion to compel arbitration is pending, the Bill possibly undermines the FAA's objective of providing an expedited dispute resolution alternative.

Conclusion

The Bill introduces a change that diverges from both federal law and prior California legislation regarding arbitration proceedings. While aiming to protect employees and consumers from delay tactics by corporations, this change may extend the dispute resolution process, potentially increasing litigation costs, and undermining the contractual autonomy and the arbitration's central purpose as a quicker, less costly alternative to court litigation. The Bill's provisions counter the recent U.S. Supreme Court ruling in Coinbase, Inc. v. Bielski, 143 S. Ct. 1915 (2023), which upheld the necessity of an automatic stay during an appeal concerning arbitrability. This precedent and FAA's history of preempting conflicting state laws raises substantial questions about the Bill's potential preemption. The Bill may also invite legal practitioners and companies to review and possibly amend their arbitration agreements to ensure they are expressly governed by the FAA.