On October 10, 2023, Governor Newsom signed Senate Bill 365 (“SB 365”) into law. Effective January 1, 2024, SB 365 provides that an appeal from an order dismissing or denying a petition to compel arbitration shall not automatically stay proceedings in the trial court during the pendency of the appeal. The law amends California Code of Civil Procedure Section 1294, which enumerates statutory rights to appeal from certain orders, including the dismissal or denial of a petition to compel arbitration. Prior to the law’s enactment, appealing from an order that denied a petition to compel arbitration automatically stayed the underlying court proceedings pending appeal.

Proponents of the bill argued that businesses and employers have greater resources than individual employees and consumers and, therefore, greater capacity to withstand a delayed resolution of a dispute. Existing law, they argued, incentivized businesses and employers to protract litigation in the hopes of batting down claims without a trial on the merits. Opponents of the new law criticized the notion that all appeals related to arbitration are meritless and argued that the law is preempted by the Federal Arbitration Act (FAA) because it contradicts the entire purpose of arbitration by allowing court proceedings to continue while an appeal is pending.

The impact of SB 365 will be significant as it likely will lead to increased litigation, resulting in more time and resources expended when the dispute could be expeditiously resolved through arbitration. There may be challenges to this law as it appears to contradict the recent U.S. Supreme Court ruling in Coinbase, Inc. v. Bielski, which held that a federal district court must stay proceedings pending resolution of an interlocutory appeal of a denial of a motion to compel arbitration. Other recent California bills limiting arbitration have been successfully challenged and struck down as violating the purpose of the FAA. For example, this year in Chamber of Commerce v. Bonita, the Ninth Circuit struck down California Assembly Bill 51 (“AB 51”) which prohibited mandatory arbitration agreements in employment contracts, ruling that the bill was preempted by the FAA because it affected the enforceability of arbitration agreements and discriminated against the formation of arbitration agreements.

Only time will tell if the new law can survive scrutiny under the FAA. In the meantime, however, businesses and employers should take note that an appeal from an order denying a petition to compel arbitration in California state courts will not automatically obviate the need to continue litigating in court pending the outcome on appeal.