California Senate Bill 365 Another Barrier to Arbitration in the Golden State

Among the flurry of new laws in California, employers take notice: Last week the state put up yet another barrier to arbitration. Gov. Gavin Newsom signed S.B. 365, which provides that an appeal of a court's denial of a motion to compel arbitration shall not automatically stay trial court proceedings while the appeal is pending. 

Time will tell, but this provision could throw a significant wrench in orderly litigation – forcing parties to expend money on discovery and possibly other motion practice, even though the matter may ultimately be moved to arbitration. Given the time it takes for courts of appeal to decide such issues, often over a year from the initial denial, litigation may well be to the point of motions for class certification, summary judgment, or beyond.

Under S.B. 365, businesses who lose a motion to compel arbitration, where the court then denies a motion to stay, would also effectively be losing their ability to appeal. Without the oversight of an appeal, this could lead to more denials of motions to compel arbitration, especially those that may be close calls.

Businesses in the Golden State will undoubtedly challenge this law, as preempted by the Federal Arbitration Act. It is hard to see how this law does not discourage arbitration. All the more reason for California businesses to ensure their arbitration agreements are unequivocally enforceable at the outset, in order to avoid any appeal process.