Effective January 1, 2025, California Senate Bill 940 (SB 940) imposes significant new limitations on arbitration clauses in consumer contracts. Businesses engaging with California residents or transacting in California should be aware of the law’s impact on contract enforceability and compliance. This advisory explains the key elements of SB 940 and its implications for companies.
Overview of SB 940
SB 940 ushers in a wave of changes to how legal disputes are arbitrated in California. For matters involving consumer contracts, SB 940 prohibits businesses from requiring consumers to arbitrate claims outside of California if those claims arise in the state. Additionally, arbitration of such claims must apply California substantive law. The legislation aims to protect consumers by ensuring that disputes are resolved within California and under its legal framework.
Under existing law, a “consumer contract” is defined as an agreement for the sale or lease of goods or services used “primarily for personal, family, or household purposes.” Cal. Civ. Code § 1799.201(b). It also includes contracts for extending credit to consumers. Id.
Key Provisions
- Location Restrictions: Businesses cannot mandate arbitration outside California for claims arising within the state, ensuring that California consumers are not burdened by out-of-state proceedings.
- Applicable Law: Any arbitration of claims falling under this statute must use California substantive law, even if the contract specifies another state’s laws.
- Applicability Beyond California Residents: The law applies not only to California residents but also to claims arising from activities in California, regardless of the consumer’s residence. Businesses must account for scenarios where non-resident customers enter California and experience harm while in the state.
Implications for Businesses
The reach of SB 940 creates new compliance challenges for businesses that contract with consumers, particularly in industries where customers are mobile or interact with services across state lines. Companies must evaluate their current contracts to ensure compliance and mitigate potential risks.
- Amendment of Consumer Contracts: Businesses that knowingly transact with California residents or anticipate that their customers may travel to California should review and update arbitration provisions in their contracts. Contracts that require arbitration outside California or under non-California law may now be unenforceable.
- Industries Affected: Companies in industries such as e-commerce, telecommunications, travel, and other services catering to mobile or geographically dispersed consumers are particularly vulnerable to non-compliance.
- Increased Litigation Risk: Failure to comply with SB 940 may result in disputes being adjudicated in California courts under California law, increasing the potential for costly and unpredictable outcomes.
- Need for Tailored Compliance Strategies: Businesses must carefully consider the scope of their customer base and potential exposure to claims arising in California. A strategic review of contract language and risk management practices is essential.
Conclusion
SB 940 underscores the importance of ensuring that arbitration provisions in consumer contracts align with California’s legal requirements. Businesses that knowingly transact with California residents or serve customers who may travel to California should immediately evaluate their contract terms and compliance strategies.
For assistance determining whether your company is affected by SB 940 and to ensure your contracts meet the new legal requirements, please contact the attorney responsible for your account. Alternatively, reach out to Susan Duarte at sfd@commlawgroup.com or Julia Clayton at jac@lawofficejac.com for more information.
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