New Law on Appeals Signed by Governor may Affect Arbitration

New Law on Appeals Signed by Governor may Affect Arbitration

Governor Newsom recently signed into law a bill that provides that California trial court proceedings aren’t automatically suspended during the appeal of an order dismissing or denying a petition to compel arbitration.

The new law will permit judges to have the discretion to decide whether a case is allowed to proceed while an appeal is heard. The passage of Senate Bill 365 amends California’s existing law that generally requires trial court proceedings to be automatically suspended (“stayed”) pending the appeal of an order dismissing or denying a petition to compel.

With the new act, Section 1294 of the Code of Civil Procedure is amended to read:

An aggrieved party may appeal from:

  1. An order dismissing or denying a petition to compel arbitration. 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.
  2. An order dismissing a petition to confirm, correct or vacate an award.
  3. An order vacating an award unless a rehearing in arbitration is ordered.
  4. A judgment entered pursuant to this title.
  5. A special order after final judgment.

Impact on Arbitration

Permitting parties to move forward with court proceedings while an appeal is pending may have a significant impact on arbitration. The benefit of arbitration is that it can provide a more efficient and possibly less costly alternative to court. It’s a private process where disputing parties agree that one or several individuals can decide issues after receiving evidence and hearing arguments.

Generally, arbitration is preferred in both state and federal court. To that end, the Federal Arbitration Act (FAA) encourages arbitration due to the fact that it expedites the efficient resolution of legal disputes. Moreover, the United States Supreme Court has supported a federal policy favoring arbitration by expanding the FAA’s scope and applicability.

However, it’s important to note that the new California law may be preempted by the FAA if challenged in court.

Some observers say that this law may discriminate against arbitration and be an impediment to its application. This is a practice that has been rejected by the U.S. Supreme Court.

The new law is effective January 1, 2024.

Bottom Line

California employers should be certain that their arbitration policies are specifically governed by the FAA. In light of the FAA’s preemption of California’s other efforts to subvert arbitration, the FAA likely will preempt SB 365. Nonetheless, arbitration policies governed by the California Arbitration Act will be subject to SB 365, prohibiting any stays upon the appeal of denial of a motion to compel arbitration. This will require employers to contest the merits of the underlying claims in court as the case is appealed.

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