Employers’ arbitration rights in California have been eroding. In recent years, there have been a number of legal challenges to the use of mandatory arbitration agreements in employment disputes, and some of these challenges have been successful. For example, in 2019, California Governor Gavin Newsom signed Assembly Bill 51 (AB 51) into law, which prohibited employers from requiring employees to sign arbitration agreements as a condition of employment.

However, this law was preempted by the Federal Arbitration Act (FAA) in the case of Chamber of Commerce v. Bonta. The Ninth Circuit Court of Appeals ruled in February 2023 that AB 51, which prohibited employers from requiring employees to sign arbitration agreements as a condition of employment, was preempted by the FAA. The court held that AB 51’s deterrent effect on arbitration agreements conflicted with the FAA’s policy of favoring arbitration.

And yet another highly controversial new law has just been been passed in California that again seeks to limit employers rights to appeal disputes about a trial court decision to mandate arbitration of employer-employee disputes. Governor Newsom has singed SB 365 into law.

Under existing law, Code of Civil Procedure Section 1294 identifies various orders or judgements which may be appealed by an aggrieved party, including an order dismissing or denying a petition to compel arbitration.

Code of Civil Procedure Section 916 further provides that, subject to exceptions, the perfecting of such an appeal stays proceedings in trial court. That is to say, when a party is denied in their effort to compel arbitration, upon their appeal, the court proceedings to adjudicate the underlying conflict are postponed until the appeal is decided.

SB 365 adds the sentence ” 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” to CCP Section 1294. Thus, as of January 1, 2024, in the event a trial court declines to compel an employer’s motion to arbitrate a dispute with employees, and the employer appeals that denial, a stay of the proceeding in the trial court will no longer be an automatic protection of the employer’s rights.

The author of this law claimed that “SB 365 gives courts the discretion to prevent corporations from using a common delay tactic against workers and consumers – in both private and public enforcement actions – when a court has determined that a particular case cannot not be sent to arbitration. Current law allows corporate defendants to pause a consumer, government, or worker’s case by simply filing an appeal of a trial court’s denial of a motion to compel arbitration. Through this process, powerful corporations delay cases filed against them for typically one to three years.”

Earlier in this year, the California Chamber of Commerce added SB 365 to its 2023 Job Killer List and urged the legislature and the Governor to not allow it to become law. The Chamber’s efforts were not successful.

Nonetheless, this new law will likely be challenged for the same reasons as were successful in the Chamber of Commerce v Bonta litigation against AB 51 in February 2023.

At the federal level, California is under the jurisdiction of the 9th Circuit Court of Appeals which followed its 1990 precedent, under which an appeal from the denial of a motion to compel arbitration does not automatically stay district court proceedings. See Britton v. Co-op Banking Group, 916By contrast, however, most other Courts of Appeals to address the question have held that a district court must stay its proceedings while the interlocutory appeal on the question of arbitrability is ongoing. E.g., Bradford-Scott Data Corp. v. Physician Computer Network, Inc., 128 F. 3d 504, 506 (CA7 1997). F. 2d 1405, 1412 (1990).

To resolve that disagreement among the Courts of Appeals,last June the Supreme Court of the United States held that a district court must stay its proceedings while an interlocutory appeal on the question of arbitrability is ongoing in the case of Coinbase Inc., v Bielski – 22-105_5536 (June 2023). It concluded that “An appeal, including an interlocutory appeal, ‘divests the district court of its control over those aspects of the case involved in the appeal.”  This conclusion was supported by the Supreme Court’s interpretation of the Congressional intent in creating the Federal Arbitration Act which preempts state law. This conclusion was supported by a 1982 Supreme Court case, Griggs v. Provident Consumer Discount Co., in which the justices explained that an appeal “divests” a federal trial court of control “over those aspects of the case involved in the appeal.”

SB 365 is therefore at odds with Section 16(a) of the Federal Arbitration Act which sets up a “one-way” right to an immediate (“interlocutory”) appeal: The party seeking arbitration can appeal immediately if the trial court refuses to order arbitration, but the party opposing arbitration has no similar right if the trial court does order arbitration. And under the Coinbase decision, a stay of the trial court is automatic. It would seem that it is more likely than not that a challenge to SB 365 would be successful.