On October 10, 2023, Governor Gavin Newsom signed Senate Bill (SB) 365, which brings about significant changes to the existing law concerning the appeal of orders denying motions to compel arbitration. According to the new SB 365, an employer who loses a civil motion to compel arbitration is no longer permitted to stay the proceedings pending an appeal. This article examines the key provisions of SB 365, its implications for employers, and the potential challenges it may face on preemption grounds. It is essential for employers to be aware of these changes and take proactive measures to ensure compliance and effective dispute resolution.

Amendments to Existing Law

SB 365 modifies the Code of Civil Procedure Section 916, which previously mandated an automatic stay on trial court proceedings when a party appealed the denial of a motion to compel arbitration. Under the new law, the perfecting of an appeal no longer automatically stays any proceedings in the trial court, as stated in the amended Code of Civil Procedure Section 1294. This change marks a departure from the long-standing rule and introduces a potential shift in how appeals of orders denying motions to compel arbitration are handled.

California's Stance on Arbitration

SB 365 aligns with a recent trend in California, as the state has shown some degree of adversity towards arbitration. In 2019, Governor Newsom signed Assembly Bill (AB) 51, which prohibited employers from requiring employees to enter into certain arbitration agreements. Although AB 51 was ultimately declared preempted by the Federal Arbitration Act (FAA), SB 365 introduces further challenges to the enforcement of arbitration agreements. These developments highlight the ongoing tension between California and the promotion of streamlined and expedient dispute resolution through arbitration.

Potential Preemption Challenges

Like AB 51, SB 365 is likely to face legal challenges on preemption grounds. The law presents an obstacle to arbitration by requiring parties to litigate in court while simultaneously appealing the enforceability of an arbitration agreement. This contradicts the Supreme Court's decision in Coinbase, Inc. v. Bielski, 143 S. Ct. 1915 (2023), which affirmed the automatic stay of district court proceedings during ongoing interlocutory appeals on arbitration matters. The Supreme Court's position emphasizes the importance of staying district court proceedings and aligns with the FAA's intent to facilitate efficient arbitration processes including minimizing invasive discovery.

Although a legislative staff analysis on the bill concluded that there was “potential for direct conflict” with past and pending Supreme Court decisions on the topic, the California Legislature moved forward and passed the legislation despite this warning. Now employers are faced with expending resources litigating a matter when the court of appeal may ultimately agree the matter was arbitrable thereby diminishing the value of arbitration.

Implications and Recommendations: Moving Forward

To navigate the changing landscape, employers should ensure that their arbitration policies explicitly reference the FAA. Given the FAA's preemption of California's previous attempts to undermine arbitration, it is reasonable to expect the FAA to preempt SB 365 as well. However, arbitration policies governed by the California Arbitration Act will remain subject to SB 365, necessitating employers to litigate the underlying claims during the appeal process. It is crucial to review and update arbitration policies to ensure compliance with the FAA. The new law goes into effect on January 1, 2024.

The attorneys at WSHB will continue to monitor developments related to SB 365 and provide updates as new information becomes available. Please do not hesitate to reach out to the author of this article or a member of our team if we can be of assistance.

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