Governor Signs Job Killer Bill That Undermines Arbitration

(October 12, 2023) On Tuesday, Governor Gavin Newsom signed SB 365 (Wiener; D-San Francisco), a job killer bill that severely restricts the use of arbitration agreements and will needlessly waste court and party resources.

The California Chamber of Commerce opposed SB 365 because the bill undermines arbitration by allowing a trial to continue even as an appeal regarding the question of arbitration is under review, increasing court costs, party time and resources spent on cases that ultimately are sent to arbitration.

Courts have repeatedly overturned laws that, like SB 365, undermined arbitration.

Federal Arbitration Act Preemption

The United States Supreme Court has consistently and unequivocally declared a national policy favoring arbitration of claims.

Based on the purpose of the FAA, the Supreme Court has established an “equal-treatment principle,” which requires arbitration agreements to be on equal footing with all other contracts. A state law will be struck down if it discriminates against arbitration on its face, has a disproportionate impact on arbitration agreements, stands as an obstacle to the objectives of the FAA, or disfavors arbitration agreements.

Courts have consistently invalidated California laws relating to arbitration as preempted by the FAA for these reasons and many other proposals have been vetoed by past governors.

By requiring litigation to continue during the appeal of a denial of a motion to compel arbitration, SB 365 undercuts the benefits of arbitration in providing a speedier, less costly forum in which to resolve disputes.

The CalChamber has pointed out in past opposition letters that it is clear that the intent behind SB 365 and its impact of forcing litigation where an appeal is pending is to have a deterrent effect on a company’s willingness to enter into arbitration agreements.

Departure from Federal Procedure

The United States Supreme Court ruled on June 23 in Coinbase, Inc. v. Bielski that a district court must stay its pre-trial and trial proceedings while an appeal is pending. The issue in Coinbase was for the Court to settle a circuit split regarding whether an appeal of a denial of a motion to compel arbitration ousts a district court’s jurisdiction to proceed with litigation pending appeal, the CalChamber explains.

Most circuits have said “yes,” requiring district court proceedings to be stayed while the appeal is pending. Other circuits, including the Ninth Circuit, have held that the district court has discretion over whether to stay the proceedings pending appeal.

The majority opinion stated, “If the district court could move forward with pre-trial and trial proceedings while the appeal on arbitrability was ongoing, then 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. Absent a stay, parties also could be forced to settle to avoid the district court proceedings (including discovery and trial) that they contracted to avoid through arbitration.”

With this decision, SB 365 represents a significant departure from federal procedure on this issue, the CalChamber said. SB 365 prohibits any automatic stay whatsoever, while federally the district court would be mandated to stay proceedings.