Governor Newsom Signed SB 365 On October 10, So Now There Are No Automatic Stays Pending Appeal When Trial Court Denies Motion To Compel Arbitration.
Ordinarily, "the perfecting of an appeal stays proceedings in the trial court upon the judgment or order appealed from or upon the matters embraced therein or affected thereby . . ." Therefore, California courts have stayed proceedings in trial courts when the order appealed from is an order denying a motion to compel arbitration. The stay protects the jurisdiction of the arbitrator if the court of appeal ultimately decides that the case should be arbitrated.
Prior to the United States Supreme Court Coinbase case, which we blogged about on 7/3/23, federal and California law were out of synch. Federal law provided that litigation continued in the district court pending an interlocutory appeal, but a party could try to convince the district court (and if necessary, the circuit court) to exercise discretion and stay proceedings pending appeal. Coinbase changed the law, making a stay automatic when a party sought review of the order denying its petition to compel arbitration. So for a fleeting moment, California law and federal law aligned. Now the stay pending appeal of an order denying arbitration was automatic in both state and federal court.
Along came the California Legislature, which enacted SB 365. The Legislative Counsel's Digest explains: "Existing law authorizes a party to appeal, among other things, an order dismissing or denying a petition to compel arbitration. Existing law generally stays proceedings in the trial court on the judgment or order appealed from when the appeal is perfected, subject to specified exceptions. This bill would provide that, notwithstanding the general rule described above, trial court proceedings would not be automatically stayed during the pendency of an appeal of an order dismissing or denying a petition to compel arbitration." (italics added). Once again, California law and federal law are out of joint. The stay pending appellate review of the order denying a petition to compel arbitration is automatic in federal court, but discretionary in state court, much as a stay in federal court pending appeal of an interlocutory order had once been discretionary.
Consider the political perspective. The conservative United States Supreme Court is very friendly to mandatory arbitration. In disputes brought by employees or consumers, it will usually be the defendant company that seeks to arbitrate. If defendant's motion to compel arbitration is denied, the employer will want to avoid unnecessarily litigating in district court and the court of appeals, and will want to preserve the jurisdiction of the arbitrator. It makes sense, therefore, that the SCOTUS majority would stray from the general rule that stays pending appeal are discretionary and instead make them automatic in the arbitration example. We note that Justice Katanji Brown Jackson filed a dissent in Coinbase, in which Justices Sotomayor and Kagan joined in full, supporting our Legal Realist view that there is a political slant to the issues. (Justice Thomas, sometimes an outlier in arbitration cases, partially joined the dissenters).
In our Blue state, the California courts, Democratic legislature, and labor unions are less supportive of mandatory arbitration than is SCOTUS, or at least, than is the conservative SCOTUS majority. It is therefore unsurprising that Governor Newsom signed SB 365.
Does the new California rule making the stay discretionary really help employees and consumers? That remains to be seen. Because the stay is now discretionary, it may not make much difference -- superior courts can still grant a stay pending an appeal. However, if the courts take advantage of the new rule to deny a stay, it could add a layer of complexity, expense, and delay to a case. This could turn out to be an example of "be careful what you ask for." The optics, however, certainly favor employees and consumers. At least on paper, they are no longer subject to an automatic stay when a corporation pursues arbitration in a court of appeal.
For an objective and elegant discussion of the "do-si-do re stays" see appellate specialist Ben Shatz's post in the Southern California Appellate News. Ben even included a cute sketch of "the dance".
Finally, I asked arbitrator and mediator Paul Dubow, his opinion as to whether SB 365 will raise preemption issues. As always, Paul provided a thoughtful in-depth response. With his permission, I repeat it in full:
"The enactment of SB 365 does not change the conflict between Section 16 of the FAA and CCP Section 1294. It just flips the situation.
Prior to the enactment of SB 365 and issuance of the Coinbase decision, there was a conflict between California and federal law with respect to appeals from the denial of a motion to compel arbitration. The trial was not stayed under Section 16 and was stayed under Section 1294. Now the situation is reversed, albeit only with respect to appeals where the underlying arbitration agreement is a condition of employment.
The FAA does not preempt state procedural rules. See Swissmex Rapid S.A. de CV v. SP Systems LLC, 212 Cal. App. 4th 539 (2012). In that case, Swissmex sought to confirm an arbitration award in state court. The underlying transactions were clearly in interstate commerce (although, as far as I can discern, the arbitration agreement did not clearly state whether the FAA applied) and so SP opposed the motion on the ground that Section 9 of the FAA, which did not permit the judicial confirmation of an award without the written agreement of the parties, applied. There was no such limitation under California law. The trial court granted the motion and the Court of Appeal affirmed, holding that federal procedural rules do not preempt state procedural rules.
However, take a look at Judge v. Niijar Realty, Inc., 232 Cal.App. 4th 619, which happens to involve the conflict between Section 16 and Section 1294. In that case, the appeal would not have been permissible under Section 16 and the appellee sought to dismiss it. The Court of Appeal denied the request but did state that if the parties incorporated federal procedural rules into their agreement, the outcome would have been different.
Employers may take a different tack than the Section 16 conflict to argue that SB 365 is preempted. They might argue that preemption exists because the new law singles out arbitration. However, in Gallo v. Wood Ranch, Inc. USA, 81 Cal. App. 5th 621 (2022), the Court of Appeal, in ruling that new CCP Sections 1281.97 and 1281.98 (which allow claimants to nullify arbitration agreements if the respondent does not timely pay arbitration fees) were not preempted, stated that the fact that a law is arbitration specific does not by itself warrant preemption. The law must "commit the additional sin of outright prohibiting arbitration or more subtly discouraging arbitration". And so I think this argument will fail. But who knows?"
Hat Tips to Paul Dubow and Ben Shatz.
