New California Law Eliminates Automatic Stay Pending Appeal of Arbitration Denials—Setting Up a Conflict with Federal Law

On October 10, 2023, a new law was enacted in California that will curb automatic stays of trial court proceedings upon the appeal of a denial of a motion to compel arbitration. Senate Bill 365, which will take effect on January 1, 2024, amends the California Arbitration Act (“CAA”), which until now, has provided for automatic stays during the denial of such motions in California state court. Such stays have proved important for limiting the expense of trial-court litigation and discovery while the appeal is pending. Under SB 365, a stay may be granted at the discretion of the trial court.

SB 365 turns California law sharply away from the Federal Arbitration Act (“FAA”) and the US Supreme Court’s 2023 holding in Coinbase, Inc. v. Bielski, under which an appeal of denial of a motion to compel arbitration automatically stays proceedings in the district court. We expect that the conflict between SB 365 and the FAA will be hotly litigated in the new year—particularly where arbitration agreements do not clearly and unambiguously incorporate the FAA’s substantive and procedural provisions.

SB 365 amends California Code of Civil Procedure section 1294, a section of the CAA that governs the appealability of various orders related to arbitration. Under the amended provision, an appeal of a denial of a motion to compel arbitration “shall not automatically stay any proceedings in the trial court during the pendency of the appeal.” SB 365 directly abrogates the current law in California, which provides that “an appeal from the denial of a motion to compel arbitration automatically stays all further trial court proceedings on the merits.” Varian Med. Sys., Inc. v. Delfino, 35 Cal. 4th 180, 190 (2005) (citing California Code of Civil Procedure section 916(a)).

SB 365 not only abrogates existing California law, it also sets up a potential conflict with the Supreme Court’s recent decision in Coinbase, Inc. v. Bielski, 599 US 736 (2023). In Coinbase, the Supreme Court ruled that under the FAA, an appeal of a denial of a motion to compel arbitration automatically stays proceedings at the district court.

Companies litigating in California state court can make an initial assessment of the impact of this new legislation by determining whether the arbitration agreements contained in their terms of service, employment agreements, and other contracts are governed under the CAA or the FAA. Notably, in California state court, the CAA automatically applies unless the contracting parties agreed that enforcement of their arbitration agreement would be governed by the FAA instead. And even where the arbitration agreement adopts the FAA, California courts also pay careful attention to whether the arbitration agreement adopts both the FAA’s substantive and procedural provisions.

When the CAA governs an arbitration agreement being litigated in California state court, litigants will almost certainly be forced to follow SB 365. This means they will not be entitled to an automatic stay pending appeal of the denial of a motion to compel arbitration—and will be forced to proceed through trial-court litigation and discovery, even if the denial of the motion was wrong.

By contrast, if the parties’ contract is enforced under the FAA, there is a strong argument that the FAA would apply in lieu of CAA’s procedural law, even in California courts. In Coinbase, Inc., the Supreme Court held that, absent an automatic stay, Congress’s decision to afford a right in the FAA to an interlocutory appeal “would be largely nullified.” Id. at 743. If the parties were forced to proceed with trial court proceedings, the Court reasoned, “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”—and therefore would “largely defeat[] the point of the appeal.” Id. Under Coinbase, companies can argue that SB 365 “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” and that it is therefore preempted by the FAA. See Wisc. Pub. Intervenor v. Mortier, 501 US 597, 605 (1991).

Companies should expect plaintiffs to argue that SB 365 applies across the board in California arbitration. Companies should consult with their attorneys to discuss the best response to such challenges in California state court and how to draft arbitration agreements that, where appropriate, take advantage of the FAA’s substantive and procedural provisions.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Sabrina H. Strong, an O'Melveny partner licensed to practice law in California, Damali A. Taylor, an O'Melveny partner licensed to practice law in California and New York, Jen Cardelús, an O'Melveny counsel licensed to practice law in California, James K. Rothstein, an O'Melveny counsel licensed to practice law in California, and Kelly Kambourelis, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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