SB 365's departure from the Bielski rule for FAA cases may lead to further litigation

It is well known to California appellate practitioners that the perfecting of an appeal stays proceedings in the trial court as to the judgment or order appealed from or “upon matters embraced therein or affected thereby.” Cal. Civ. Proc. Code § 916(a). The stay under Section 916(a) is automatic, and the trial court lacks jurisdiction over any matters affected by the order. (Varian Med. Sys., Inc. v. Delfino (2005) 35 Cal.4th 180, 195.)

But the Legislature enacted a new law, effective last Jan. 1, amending the California Arbitration Act (CAA) and exempting the automatic stay rule for orders denying a motion to compel arbitration. Senate Bill 365, codified as California Code of Civil Procedure Section 1294(a), provides that, “[n]otwithstanding [Code of Civil Procedure] Section 916, the perfecting of [an appeal of an order denying a motion to compel arbitration] shall not automatically stay any proceedings in the trial court during the pendency of the appeal.”

SB 365 is likely to have a practical impact on litigation moving forward, as parties eager to proceed before an appeal concludes may seek to litigate during the pendency of the appeal. SB 365 also raises an important question as to whether the Federal Arbitration Act (FAA) could preempt it.

Background on SB 365

Under the CAA, an order denying a motion or petition to compel arbitration is immediately appealable. Cal. Code Civ. Proc. § 1294(a). But an order granting a motion or petition to compel arbitration is not immediately appealable, and a litigant unhappy with the decision to compel arbitration must wait and appeal a judgment confirming the arbitration award, or file a petition for writ of mandamus. Lesser Towers, Inc. v. Roscoe-Ajax Const. Co., 271 Cal. App. 2d 675, 692 (Ct. App. 1969).

Prior to 2024, California Code of Civil Procedure Section 916, which automatically stays proceedings in the trial court on matters embraced by the order, applied to orders denying a motion or petition to compel arbitration. Prudential-Bache Sec., Inc. v. Superior Ct., 201 Cal. App. 3d 924, 925 (Ct. App. 1988). So, there was no doubt that litigation could not proceed while the appeal was pending.

SB 365, effective Jan. 1, 2024, amended the CAA so that an appeal of an order denying a motion or petition to compel arbitration no longer “automatically” results in a stay of proceedings in the trial court. Instead, the trial court will have the discretion to enter a stay. So now there is a chance that the expense of litigation will be borne by the party seeking to arbitrate, while waiting for the appeal to vindicate its demand for arbitration.

According to the legislative history of SB 365, the automatic stay of an order denying a motion or petition to compel arbitration “poses significant difficulties for consumers and employees, due to the inherent power dynamic between them and opposing businesses and employers,” and “[i]t is more likely that a business or employer will have greater resources than individual employees or consumers, and therefore greater capacity to handle a delayed resolution of the dispute.” See California Bill Analysis, S.B. 365 Assem., 6/13/2023. According to the law’s authors, “SB 365 gives courts the discretion to prevent corporations from using a common delay tactic against workers and consumers.” But what capacity is needed, to wait for an appeal to resolve? It’s not as if workers and consumers can avoid defending the order on appeal, and more capacity, not less, would be needed to litigate at the same time.

FAA Rule on Stays Pending Appeal

FAA Section 16 provides a party with the right to an immediate interlocutory appeal from a court’s denial of a motion to compel arbitration. But the FAA itself does not address whether the litigation should proceed in the lower court or be stayed while the appeal resolves.

Prior to June 2023, the circuits had split on whether an appeal of an order denying a motion or petition to compel arbitration results in an automatic stay of the district court litigation. Compare Britton v. Co-op Banking Grp., 916 F.2d 1405, 1411. (9th Cir. 1990) (holding district court has discretion to refuse to enter a stay), with Bradford-Scott Data Corp. v. Physician Computer Network, Inc., 128 F.3d 504, 506 (7th Cir. 1997) (appeal of orders denying motion to compel arbitration automatically divests district court’s jurisdiction).

In June 2023, the United States Supreme Court resolved the circuit split and held that the district court must stay proceedings while an interlocutory appeal of an order denying a motion or petition to compel arbitration is pending. Coinbase, Inc. v. Bielski, 599 U.S. 736, 747 (2023). The Court noted that the general rule is that a district court is divested of jurisdiction as to “those aspects of the case involved in the appeal.” Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58 (1982). The Court then concluded that there was no reason to depart from the Griggs rule in arbitration appeals, and if the rule were set aside it could “allow[] a case to proceed simultaneously in the district court and court of appeals” which “creates the possibility that the district court will waste scarce judicial resources.” Bielski, 599 U.S. at 744. The Court described that as a “worst possible outcome for parties and the court: litigating a dispute in the district court only for the court of appeals to reverse and order the dispute arbitrated.” Id. (quotations omitted).

Arbitration Angle

Whatever one’s view of the grounds for SB 365, there can be no doubt that it applies to CAA cases litigated in California courts. But by allowing trial courts to exercise discretion and order proceedings to continue during the pendency of an appeal, SB 365 certainly departs from the Bielski rule for FAA cases. It also raises a number of issues that may lead to further litigation.

First, it remains to be seen how trial courts will exercise their newfound discretion under SB 365. Many courts may prefer to continue under the prior legal regime and stay most cases, absent extraordinary circumstances. But other courts may want cases to proceed at a faster pace without regard to the status of an appeal. The risk that the Bielski rule protects against in FAA cases, is surely just as real in CAA cases—wasted litigation.

And for competing policy arguments, as the Supreme Court noted in Bielski, it is highly inefficient and problematic for the parties to proceed through litigation, and expend substantial party and judicial resources, only to have an order denying a motion or petition to compel arbitration overturned by the appellate court. Nonetheless, SB 365’s authors argued that a stay is a delay tactic for larger companies that have more power than individual consumers and employees. And supporters of SB 365 will assert that the law does not require the trial court proceedings to continue – it affords the trial court the discretion to grant a stay, or not, based on the particular circumstances of the case. Therefore, to the extent there would be any inefficiencies, the trial court may still order a stay to prevent such an outcome.

In addition, litigation over FAA preemption could increase now as SB 365 represents a sharp break from the FAA’s rule clarified in Bielski. It is well established that in cases where the FAA applies, a state law cannot “stand as an obstacle” to the FAA’s pro-arbitration policy. AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 346. And while disputes over whether the FAA applies have long preexisted SB 365, such as arguing that interstate commerce is implicated, now there may be more of an incentive to litigate that issue in order to avoid SB 365.

Overall, in CAA cases, SB 365 could pave the way for a party to proceed in the trial court despite a pending appeal on the right to arbitration. Whether such a decision is wise is another thing altogether. And just how willing courts are to allow litigation to move forward remains to be seen. After all, courts also manage scarce resources, and may not want to risk having time-consuming litigation rendered a meaningless dress rehearsal by the issuance of an appellate opinion requiring arbitration.

Arbitration Angle is a bi-monthly column presented by Hanson Bridgett’s Appellate Group.