On October 10, 2023, Governor Newsom signed Senate Bill 365, reversing a long-standing rule requiring a stay of litigation while a party appeals a denial of a motion to compel arbitration.  The old rule required courts to put a halt to all proceedings, including discovery, while waiting for the Court of Appeal to review and decide on the appeal, which could take months or even years.  Under the new rule, which goes into effect January 1, 2024, there will no longer be an automatic stay of litigation pending appeal.  Instead, the new law gives trial courts authority to use their discretion in determining whether to grant a stay during the pendency of the appeal of a denial of a motion to compel arbitration.

The law was co-sponsored by California Attorney General Rob Bonta and was described as a response to abuses of the old automatic stay provisions by defendants who sought to slow down litigation, even when there was no valid arbitration agreement between the parties.  Bonta became a co-sponsor following litigation with ride sharing companies which tried to force the Attorney General and the State Labor Commissioner into arbitration despite the fact that there was no arbitration agreement between those government offices and the ride sharing companies.  The Court of Appeal sided with Bonta’s office and allowed the lawsuit to proceed.  Supporters of SB 365 point to that case as an example of abusive efforts the new law would prevent.  But business advocates, including the U.S. Chamber of Commerce, have called SB 365 a “job killer.”

The new law is also certain to be subject to preemption challenges from business interests, arguing it is inconsistent with the Federal Arbitration Act (FAA) and a recent U.S. Supreme Court precedent, Coinbase, Inc. v. Bielski, decided in June 2023.  The 5-4 majority opinion in Coinbase held that “[a] district court must stay its proceedings while an interlocutory appeal on the question of arbitrability is ongoing.”   The FAA was adopted to encourage the use of arbitration, and the Coinbase Court held that automatically staying proceedings pending the appeal of a denial of a motion to enforce arbitration is consistent with Congress’s intent in adopting the FAA.  Despite the June 2023 ruling, the California legislature pressed ahead with SB 365 and sent it to Governor Newsom’s desk.

We should expect not only aggressive litigation over SB 365, but also continued efforts by consumer groups and labor activists on one side, and many business interests on the other side to change the dynamics in litigation in California State Courts, particularly relating to class action lawsuits and the enforceability of arbitration clauses, through litigation, legislation, and ballot initiatives.

Businesses with litigation challenges, including questions about the enforceability of arbitration agreements, need counsel with the experience and expertise to guide them through the changing landscape of commercial litigation.  Keller/Anderle’s seasoned trial lawyers are prepared to counsel you on the best approach for your case.