New California Law Limits Stays of Proceedings Pending the Appeal of the Denial of a Petition to Compel Arbitration

On October 10, 2023, California Gov. Gavin Newsom signed CA Senate Bill 365 (SB 365), set to go into effect in 2024. This bill gives state court judges the discretion to move forward with litigation in trial court while an appeal of a denial of a petition to compel arbitration is pending. This law comes in the wake of the recent U.S. Supreme Court decision in Coinbase v. Bielski (outlined in our prior publication linked here). In Coinbase, the Supreme Court resolved a circuit split and held that district court proceedings should automatically be stayed pending the appeal of a denial of a motion to compel arbitration.

Like the Supreme Court’s rule in Coinbase, in California state court, under California Code of Civil Procedure Section 916, trial courts are required, in most cases, to postpone proceedings during the appeal of the denial of a petition to compel arbitration. But now, SB 365 amends California Code of Civil Procedure Section 1294(a), which allows appeals of an order denying or dismissing a petition to compel arbitration, adding the following language: “Notwithstanding Section 916, the perfecting of such an appeal shall not automatically stay any proceedings in the trial court during the pendency of the appeal.”

SB 365 is a significant departure from current California law and the Supreme Court’s recent ruling. It raises the same policy concerns that led the U.S. Supreme Court to decline discretionary stays in Coinbase v. Bielski: that such stays undermine the benefits of arbitration, create a potential for coercion in that parties may be forced to settle to avoid trial court proceedings they contracted through arbitration agreements to avoid, and create the possibility of wasting judicial resources on a dispute that will end up heading to arbitration. Critics of SB 365 also opposed it on the basis that it runs afoul of the Federal Arbitration Act and the Supreme Court’s “equal-treatment principle,” which requires arbitration agreements to be on equal footing with all other contracts.

Key Takeaways

• This is a significant change for those litigating in California state court. Following the Coinbase decision, plaintiffs may prefer to file cases in California state court (as opposed to federal court) to prevent defendants from automatically staying proceedings by appealing denials of a petition to compel arbitration. Similarly, SB 365 provides an additional reason for defendants to remove eligible cases to federal court to avoid the risk of facing substantial challenges and costs that come with concurrently litigating the underlying trial court action while appealing the denial of an arbitration motion.

We will continue to monitor litigation relating to SB 365 and whether it is ultimately held invalid as preempted by the Federal Arbitration Act.