California Senate Bill 940, which went into effect on January 1, 2025, seeks to bring significant changes to consumer contracts and arbitration practices in California. The law is codified at California Civil Code Section 1799.208 and places several restrictions on arbitration that sellers can include in agreements with consumers.
These restrictions impact contracts that are entered into, modified, or extended on or after January 1, 2025. The new law provides:
(1) Require the consumer to arbitrate outside of California a claim arising in California.
(2) Require the consumer to arbitrate a controversy arising in California under the substantive law of a state other than California.
(b) Any provision of a contract that violates subdivision (a) is voidable by the consumer, and if a provision is rendered void at the request of the consumer, the matter shall be adjudicated in California and California law shall govern the dispute.
(c) In addition to injunctive relief and any other remedies available, a court may award a consumer who is enforcing their rights under this section reasonable attorney’s fees incurred in enforcing those rights.
(d) For purposes of this section, adjudication includes litigation and arbitration.
(e) This section applies to a contract entered into, modified, or extended on or after January 1, 2025.
In Section 1791(l), the Civil Code defines a “seller” to mean “any individual, partnership, corporation, association, or other legal relationship that engages in the business of selling or leasing consumer goods to retail buyers.” This means that any person or business that sells or leases goods to consumers cannot require those consumers to resolve disputes arising out of activity in California in another state, and they cannot require those disputes to be arbitrated under another state’s substantive law.
If a seller is doing business with consumers in California and includes an arbitration provision in its contracts, under the new law it is required to arbitrate in California and under California law. If a seller includes a provision that violates these new requirements, a consumer can move to void the provision, and if deemed void, the matter will be adjudicated in California and under California law. Gone are the days of being able to contract around “bad” California law or to gain a strategic advantage by having the arbitrations be in the seller’s home forum.
It’s possible that enforcement of Senate Bill 940 may be preempted by the Federal Arbitration Act (FAA). The FAA is a federal statute that generally ensures the enforceability of arbitration agreements in state and federal courts. In some cases, state laws or rules that disfavor arbitration have been preempted by the FAA. During the legislative process, the California Senate Rules Committee noted its view that Section 1799.208 would likely not be preempted because the California court of appeal found that Labor Code Section 925, a law with a similar prohibition, did not on its face conflict with the FAA.
Labor Code Section 925 prohibits employers from requiring an employee who resides and works in California to agree to a provision that either requires the employee to adjudicate a claim arising in California outside California or deprives the employee of the substantive protection of California law in a controversy arising in California. This case is currently on appeal in the California Supreme Court. We expect the supreme court’s ruling on Labor Code Section 925 to ultimately affect the interplay between Section 1799.208 and the FAA.
It is likely that Senate Bill 940 will face similar preemption challenges in California courts in the coming months, and we will be monitoring whether California courts respond to these challenges in the same way that the California court of appeal found that Section 925 on its face did not violate the FAA. In the meantime, businesses should proactively review and update their consumer arbitration agreements to ensure compliance.
What Sellers Should Be Doing Now
- Businesses that sell or lease goods to California consumers may no longer be able to require consumers to arbitrate outside California or under another state’s law for claims arising within California.
- Any contracts entered into, modified, or extended on or after January 1, 2025 should be reviewed to ensure compliance with Section 1799.208.
- Businesses should monitor legal developments as the courts interpret this law and its interaction with the FAA.
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If you have any questions, or would like additional information, please contact one of the attorneys on our Class Action & Multidistrict Litigation team.