Currently, California trial court proceedings are automatically stayed when a party appeals an order denying a motion to compel arbitration. However, on October 10, 2023, Governor Newsom signed California Senate Bill No. 365 (SB365) into law.
Effective January 1, 2024, SB365 will amend California Code of Civil Procedure Section 1294 to state that “the perfecting of such 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.” (emphasis added). The amendment thus grants trial courts discretion to deny a stay of their proceedings while the arbitrability of the dispute is on appeal, requiring defendants to continue the costly and burdensome defense of claims in court even though the appellate court might subsequently rule that such claims should have been resolved in the arbitral forum.
A strong argument could be made that SB365 contravenes the Federal Arbitration Act (FAA). In its June 2023 decision in Coinbase, Inc. v. Bielski, the U.S. Supreme Court, construing Section 16(a) of the FAA, held that trial court proceedings are automatically stayed when a party appeals an order denying a motion to compel arbitration. The Court concluded that “it makes no sense for trial to go forward while the court of appeals cogitates on whether there should be one.” Indeed, “[a]bsent an automatic stay of district court proceedings, Congress’s decision in §16(a) to afford a right to an interlocutory appeal would be largely nullified.”
While there is a question whether the procedural aspects of the FAA such as Section 16(a) preempt analogous state court rules, it could be argued that SB365 is preempted by the FAA because it imposes a severe burden on arbitration and essentially nullifies the parties’ agreement to arbitrate. As explained in Coinbase:
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. Absent a stay, parties also could be forced to settle to avoid the district court proceedings (including discovery and trial) that they contracted to avoid through arbitration. That potential for coercion is especially pronounced in class actions, where the possibility of colossal liability can lead to what Judge Friendly called “blackmail settlements.”
A refusal to stay under SB365 could similarly cause the core benefits of arbitration to be “irretrievably lost” and force defendants to enter into “blackmail settlements” in order to avoid the risk of class action liability that they had contracted to avoid. As the U.S. Supreme Court held in AT&T Mobility LLC v. Concepcion, nothing in the FAA “suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” Requiring the parties to litigate claims in court while the right to arbitrate those claims is on appeal arguably contravenes the FAA because, in the words of Concepcion, it “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
Even if SB365 is not successfully challenged on FAA preemption grounds, hopefully California trial courts will exercise their discretion to preserve the resources of litigants, as well as their own, by staying litigation while the threshold issue of arbitrability is on appeal. As the court reasoned in Coinbase, from the “institutional perspective” of the judiciary, allowing a case to proceed simultaneously in the district court and the court of appeals “creates the possibility that the district court will waste scarce judicial resources—which could be devoted to other pressing criminal or civil matters—on a dispute that will ultimately head to arbitration in any event.” Such a scenario represents the “‘worst possible outcome’ for parties and the courts: litigating a dispute in the district court only for the court of appeals to ‘reverse and order the dispute arbitrated.’” If the trial court refuses to stay litigation while arbitrability is being appealed, the defendant can ask the California court of appeal to issue a stay by filing a writ of supersedeas on the ground that the trial court abused its discretion in denying a stay.
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