California Senate Bill 940, signed into law at the end of 2024, imposes new requirements for arbitration agreements in consumer contracts, along with obligations affecting arbitration providers and related disclosures.
Under California law, a consumer contract includes a writing prepared by the seller that provides for the sale or lease of goods or services or the extension of credit, purchased or used primarily for personal, family, or household purposes. For all consumer contracts “entered into, modified, or extended on or after” the beginning of 2025, SB 940 imposes the following key changes for consumer arbitration agreements:
- Limitations on non-California venue and choice of law. SB 940 prohibits a seller from requiring the consumer to agree to a provision that would compel the consumer to either “arbitrate outside of California a claim arising in California” or “arbitrate a controversy arising in California under the substantive law of a state other than California.” The new law further provides that a contract that violates this requirement is voidable by the consumer, and if a contractual provision is rendered void at the consumer’s request, “the matter shall be adjudicated in California and California law shall govern the dispute.” “Adjudication” in this section includes both litigation and arbitration. Further, SB 940 authorizes the recovery of reasonable attorney’s fees incurred by consumers enforcing their rights under this requirement.
- Mandatory small claims carveout. Under SB 940, if arbitration of disputes is required, the consumer must be given the option to adjudicate the dispute in small claims court if the dispute qualifies.
- Permitted depositions and discovery. SB 940 also amends California law to expressly authorize depositions to be taken (with leave first granted by the arbitrator) and discovery obtained in arbitration proceedings, repealing prior law that deemed deposition and discovery provisions to be incorporated into certain arbitration agreements only if the parties so agreed. Specifically, the new law affords parties “the right to take depositions and to obtain discovery regarding the subject matter of the arbitration, and, to that end, to use and exercise all of the same rights, remedies, and procedures, and be subject to all of the same duties, liabilities, and obligations in the arbitration” as if the matter were pending in a nonlimited civil case in superior court.
For businesses transacting in California or with California residents, SB 940 raises important considerations that should be weighed in evaluating and updating arbitration clauses in consumer contracts.
