California Senate Bill 940 (SB 940), enacted in late 2024, introduces several key changes to arbitrations involving “consumer contracts,” which is defined as a contract prepared by a seller and signed by a consumer for the sale or lease of goods or services or for the extension of credit purchased or used primarily for personal, family, or household purposes. Below, we explore the major provisions of SB 940 and their implications.
Key Provisions
For all consumer contracts entered into after January 1, 2025, the following provisions apply.
- Venue and Choice of Law Restrictions
One of the most notable aspects of SB 940 is its prohibition against requiring consumers to arbitrate claims outside of California or under the laws of another state. This provision ensures that disputes arising in California are adjudicated within the state, under California law. Contracts violating this requirement are voidable at the consumer’s discretion, allowing them to enforce their rights and potentially recover attorney’s fees.
- Small Claims Court Option
SB 940 allows consumers to resolve disputes in small claims court (if the dispute qualifies), even if the contract mandates arbitration.
- Enhanced Discovery Rights
The bill amends existing laws to explicitly allow depositions and discovery in arbitration proceedings, subject to the arbitrator’s approval. This change aligns arbitration discovery rights with those available in civil court, including allowing arbitrators to issue subpoenas for discovery in any California arbitration. The prior version of the law permitted arbitration discovery if the parties incorporated the relevant provision into their agreement. The amended version extends the discovery rights to all arbitration claims in California.
- Disclosure Requirements for Arbitrators
To ensure impartiality, SB 940 mandates comprehensive disclosures from arbitrators regarding any potential conflicts of interest. This includes revealing any solicitations made by arbitration companies to parties involved in the arbitration.
- Certification Program for Alternative Dispute Resolution
The State Bar of California is tasked with creating a certification program for alternative dispute resolution providers. This program aims to uphold ethical standards and accountability, offering different certification tiers based on the provider’s commitment to consumer protection.
Implications
Businesses operating in California or engaging with California consumers must carefully review and potentially revise their arbitration clauses to comply with SB 940.
