CalChamber Asks Governor to Veto Bill That Undermines Arbitration

The California Chamber of Commerce is urging the Governor to veto SB 365, a job killer bill that severely restricts the use of arbitration agreements.

SB 365 (Wiener; D-San Francisco) discriminates against the use of arbitration agreements by allowing trial courts to continue trial proceedings during any appeal regarding the denial of a motion to compel, undermining arbitration, and increasing court, party time and resources spent on cases that ultimately are sent to arbitration.

In opposing SB 365, the CalChamber has cautioned that allowing a court the discretion to continue with the underlying trial while an appeal regarding a motion to compel arbitration is pending eliminates the entire purpose of arbitration and runs afoul of the Federal Arbitration Act (FAA).

The CalChamber also points out that SB 365 would incentivize forum shopping even more than what occurs now, with trial attorneys filing claims in venues where they believe there will be judges more inclined to deny the current law’s requirement to stay a case during an appeal regarding the enforceability of an arbitration agreement.

“SB 365 will lead to additional litigation and more money in the pockets of trial attorneys, which will increase the cost of doing business in California and exacerbate the ongoing affordability crisis we are facing,” the CalChamber has warned.

Increases Litigation to the Detriment of Consumers, Employees, Businesses

SB 365 will result in more civil litigation. The stakeholder that generally profits from civil litigation is the plaintiff’s attorney, not the consumer or worker.

For example, consumers and employees typically receive higher awards and have their claims resolved more quickly in arbitration than litigation. The same holds true when one looks at data from California’s own agencies regarding outcomes in litigation versus agency enforcement.

In the case of the Private Attorneys General Act (PAGA), the current average payment that a worker receives from a PAGA case filed in court is $1,300, compared to $5,700 for cases adjudicated by the state’s enforcement agency. Attorneys on average recover a minimum of 33% of the workers’ total recovery (and often rising to 40%), or $372,000 on average in litigation.

In addition to receiving lower average recoveries in PAGA cases, workers also wait almost twice as long for their owed wages. Resolving disputes outside of litigation is better for all parties and ensures the consumer and worker are made whole more quickly rather than increasing fees and payments for trial attorneys.

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 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.

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, the CalChamber says.

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 says. SB 365 prohibits any automatic stay whatsoever, while federally the district court would be mandated to stay proceedings.