KF&C California Law Blog

February 14, 2024 | Business Litigation

Arbitration in California: New Law Prohibits Automatic Stay of Trial Court Proceedings Pending Appeal of Order Denying Motion to Compel Arbitration

Litigants facing a trial court’s denial of an attempt to compel arbitration may find themselves surprised by a significant change in California law that recently became effective on January 1, 2024: An appeal from an order denying or dismissing a petition to compel arbitration no longer automatically stays trial court proceedings. This reversal by the California Legislature from the historic norm—where an appeal would automatically stay trial court proceedings—amended Civil Code of Procedure Section 1294(a) and now gives trial court judges discretion to stay or continue proceedings. The amendment took effect this year after moving through the Legislature as California Senate Bill No. 365 (SB 365) and was approved by Governor Newsom on October 10, 2023.

The original Code section stated: “An aggrieved party may appeal from … [a]n order dismissing or denying a petition to compel arbitration.” Cal Civ. Proc. § 1294(a) (effective until December 31, 2023). This meant that such appeals were subject to the automatic stay (of trial court proceedings) found in Civil Code of Procedure Section 916. In other words, under the previous rule, an appeal of a motion denying or dismissing a motion to compel arbitration would stop all litigation on the merits of a case while the appeal was pending.

A review of SB 365’s Legislative History shows that the Legislature was concerned about litigants’ potential incentive to pursue “meritless appeals that are filed only to delay litigation.” See California Bill Analysis, S.B. 365 Sen., 7/12/2023. Indeed, the legislature concluded that this was a common tactic in the California trial courts and thus, was likely the impetus for this amendment. See id. This delay tactic was simple: The defendant filed a meritless motion to compel arbitration and, after the trial court denied this motion, the defendant would appeal from its denial, automatically staying the case. This tactic, when employed, would substantially impair a case where speedy resolution of the claims is important to the plaintiff, as the appeal process could (and almost always would) take a year or more to complete.

To address what had become a common litigation tactic, the California Legislature added the following clause to the statute: “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.” Cal Civ. Proc. § 1294(a) (emphasis added). Thus, while the denial of a motion to compel arbitration remains an immediately appealable order, it will no longer trigger an automatic stay in the Superior Court. Id.

In the federal context, the United States Supreme Court, consistent with a recent line of cases strongly favoring arbitration, took up a similar issue in Coinbase, Inc. v. Bielski, 599 U.S. 736 (2023). In Coinbase, the Supreme Court held by a 5-4 majority that, under the Federal Arbitration Act (“FAA”), a district court must stay its proceedings while an interlocutory appeal concerning arbitrability is pending. The Court relied on the general principle, although not explicitly incorporated in the FAA, that an appeal “divests the district court of its control over those aspects of the case involved in the appeal.” Id. at 740. The Court reasoned that “many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be irretrievably lost” without a stay during appeal, even if an appeal court were to ultimately agree that arbitration is required. Id. at 743.

Thus, the new California procedure differs from federal procedural law under the FAA. It remains to be seen which procedure will control in a proceeding in California state court where the alleged arbitration agreement is subject to the FAA. The FAA can, at times, preempt state laws that restrict the right to arbitrate. See Sonic-Calabassas A, Inc. v. Moreno (2013) 57 Cal. 4th 1109, 1144 (“a state-law rule is preempted [by the FAA] when its impact is such that it interferes with fundamental attributes of arbitration”). A party that loses a motion to compel arbitration under the FAA and is denied a stay of proceedings by the trial court may thus argue that California may not undermine the FAA by requiring a party to litigate in the trial court while the appeal is pending. Time will tell how that potential argument is received by the California courts.

The amendment to Civil Code of Procedure Section 1294(a) is still new to California courts and litigators who practice there, and so it will take time until the full effects and impact of its enactment are known. One immediate observation is that a plaintiff who wishes to avoid arbitration may be more likely to file a case in California state court, given the choice between state and federal court, to avoid the risk of a lengthy stay of the case while appeals are resolved. On the other hand, if a basis for federal jurisdiction exists, a defendant may consider removing a case to federal court prior to seeking to compel arbitration to mitigate the risk of being required to litigate in the trial court while an appeal is pending.

Another observation is that the changes to the statute appear to be a complete reversal of the status quo. The California Legislature’s effort to cull the number of “meritless appeals,” may have opened the door to the countervailing concern that “meritorious appeals” will be substantially weakened. Under the revised statute, a party who has valid grounds to appeal an erroneous decision denying a motion to compel arbitration is left to the discretion of the trial court as to whether the case will be stayed pending the appeal. Where a trial court declines to stay the proceedings, a party may end up spending years litigating in the trial court only to receive an appellate ruling that the parties must proceed in arbitration. Such an appellate ruling would be functionally useless, as it would defeat most of the bargained-for benefits of arbitration, including efficiency and the reduced costs associated with streamlined discovery and the evidentiary hearing. These benefits were covered in more detail in another KF&C California Law Blog Post. See Arbitration in California: Contracting for Appeal of Arbitral Awards” (KF&C California Law Blog, September 28, 2023).

If the California Legislature sees too many “meritorious appeals” being effectively nullified by their attempt to reduce the number of “meritless appeals,” it is possible (albeit not likely) that the Legislature will revisit the statute. For example, one approach could be to amend Civil Code of Procedure Section 1294(a) to require an automatic stay of the trial court proceedings if the appellant can make some initial showing of likelihood of success on the merits of its appeal.

Practice Tips

The amendment to Civil Code of Procedure Section 1294(a) is new and untested, but in practice, it will likely undermine the goals of an arbitration agreement that seeks to establish a faster, cheaper and less formalistic mechanism for dispute resolution. For practitioners, it is important to be aware of this new law when guiding clients in drafting pre-dispute provisions. Given the U.S. Supreme Court’s ruling in Coinbase and the likelihood that the FAA will preempt any California state law that restricts the right to arbitrate, parties may smartly opt to draft arbitration provisions as explicitly governed by the FAA. This will ensure that a party that loses a motion to compel arbitration under the FAA could fight a stay of proceedings by a California trial court by arguing that California may not undermine the FAA.

As always, KF&C will keep a close eye as this issue develops further. If you have questions or comments on the content of this post, please email Michael Kibler ([email protected]), Michael Carnevale ([email protected]), Kevin Kroll ([email protected]) or Zien Halwani ([email protected]).

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Michael D. Kibler

Managing Partner

(310) 409-0400

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Michael Carnevale

Counsel

(917) 909-6479

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Kevin C. Kroll

Senior Associate

(310) 409-4679

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Zien Halwani

Associate

(917) 909-6479

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