For decades, California business owners have relied on a fundamental assumption: mandatory consumer arbitration is a fast, efficient, and cost-effective alternative to the grueling machinery of the civil court system. By embedding standard arbitration clauses into Terms of Service, companies shielded themselves from runaway jury verdicts, massive discovery burdens, and class-action litigation.
As of January 1, 2025, the California Legislature attempted to kill that assumption.
With the enactment of California Senate Bill 940 (SB 940), the state systematically dismantled the defensive advantages of consumer arbitration. At Nowland Law, our defense attorneys are witnessing firsthand the sheer operational friction this law has introduced for businesses of all sizes. The statute fundamentally rewrites California Code of Civil Procedure (CCP) and Civil Code provisions, flipping the script to favor plaintiffs and effectively turning private arbitration into a mirror image of expensive, drawn-out civil litigation.
If your company has not updated its arbitration agreements since January 1, 2025, your business is operating under legacy terms that are virtually guaranteed to backfire. However, rewriting your contracts today requires threading a very delicate needle, because the legal foundation of SB 940 is currently shaking.
The Elephant in the Room: We Are in Legal Limbo
Before executing any changes, California businesses must understand one critical reality: SB 940 is currently the subject of intense, ongoing litigation, and no one is entirely sure how it will survive judicial scrutiny.
Corporate defense bars are aggressively challenging the constitutionality of SB 940 in the appellate courts, arguing that it violates the Federal Arbitration Act (FAA). The U.S. Supreme Court has spent the last forty years consistently ruling that the FAA establishes a robust, national pro-arbitration policy that preempts state laws attempting to single out and restrict arbitration.
SB 940 is highly vulnerable to this preemption attack. For example, the final text of Civil Code Section 1799.208 explicitly prohibits out-of-state arbitration clauses, while leaving identical out-of-state litigation forum-selection clauses completely untouched. This asymmetry arguably violates the FAA’s equal-treatment principle. While the California Supreme Court recently tried to protect a different arbitration statute from FAA preemption in Hohenshelt v. Superior Court, SB 940’s outright, direct restrictions on venue and choice of law are much harder to defend.
Given the high stakes, it is widely expected that this jurisdictional war will ultimately end up before the U.S. Supreme Court. But until a binding appellate or Supreme Court ruling explicitly strikes down SB 940, businesses cannot afford to ignore it. You must operate defensively, assuming the law applies today, while strategically positioning your contracts to take advantage of federal preemption if the law is overturned tomorrow.
The New Threats: Understanding the SB 940 Statutory Overhaul
To defend your business in this interim period, you must understand the three primary weapons SB 940 currently hands to consumers and plaintiffs’ attorneys.
1. The Voiding of Out-of-State Venues and Choice of Law Historically, national or regional companies utilized unified Terms of Service dictating that any dispute must be arbitrated in the company’s home state and governed by that state’s substantive law. Under the newly added Civil Code Section 1799.208, a seller cannot require a consumer to arbitrate a claim arising in California outside of the state, nor can they deprive the consumer of California’s substantive legal protections. If a business attempts to enforce an out-of-state venue or choice-of-law provision in a consumer contract formed after January 1, 2025, that provision is completely voidable at the consumer’s option.
2. The Small Claims “Bypass” Right Under the new Civil Code Section 1799.209, a consumer who has signed an arbitration agreement is granted the absolute statutory option to bypass arbitration entirely and adjudicate the dispute in a California Small Claims Court, provided the damages sought fall within the court’s monetary limits.
3. The Discovery Explosion This is the most financially devastating element of the legislation. Previously, under CCP Section 1283.1, arbitration discovery rights were heavily restricted unless the case involved personal injury, wrongful death, or the parties explicitly agreed to expand them. SB 940 repealed Section 1283.1 entirely and amended Section 1283.05 to grant arbitrating parties the same broad discovery rights available in a California trial court.
Arbitrators are now empowered to regulate broad discovery, including issuing third-party subpoenas under CCP Section 1282.6. Furthermore, SB 940 expands these obligations to the “affiliates” of a party—meaning your officers, agents, and beneficial partners are now subject to the same severe discovery obligations as the business itself. The practical effect is simple: without contractual limits, arbitration costs will skyrocket to mirror standard trial costs during the discovery phase.
CA SB940 Playbook
At Nowland Law, we are advising all commercial clients to immediately execute a top-to-bottom audit of their consumer dispute resolution mechanisms to survive this period of legal uncertainty.
- Implement “Clickwrap” Agreements: The days of burying a hyperlinked arbitration clause at the bottom of a website are over. The Ninth Circuit applies incredibly strict scrutiny to online contract formation. To ensure your arbitration clause survives a challenge, you must require users to affirmatively check a box or click “I Agree” during sign-up or checkout.
- Draft Around the Discovery Default (Carefully): Because SB 940 creates a default of broad discovery, your arbitration agreement must explicitly limit the scope of discovery. However, you cannot simply ban all discovery. California courts have long held, pursuant to cases like Armendariz and Fitz, that arbitration agreements must provide “sufficient discovery” to permit parties to vindicate their claims. If you overreach and eliminate all depositions or written discovery, a judge will strike down the entire agreement as unconscionable, even if the Supreme Court later invalidates SB 940.
- Explicitly Adopt the Federal Arbitration Act (FAA): The most effective shield against California’s new procedural mandates is to explicitly state that the FAA governs the enforcement and procedural rules of your arbitration. The FAA does not provide for broad pre-hearing discovery or third-party depositions. By embedding the FAA into your contracts now, you perfectly position your legal defense team to argue federal preemption in front of an arbitrator today, and you are primed for success if the U.S. Supreme Court eventually strikes down California’s overreach.
Real-World Risk Analysis: Client Archetypes
To truly grasp the operational threat of SB 940, we must apply these abstract statutes to tangible business models. Here is how Nowland Law analyzes the risk profile for four distinct types of businesses operating in California today.
The Out-of-State Solopreneur
The Scenario: A sole proprietor operates an e-commerce brand out of Nevada, selling physical and digital goods to a national audience, including California. They use a generic Terms of Service template requiring any disputes to be arbitrated in Clark County, Nevada, under Nevada law.
The Impact & Analysis: This solopreneur is a prime target for the procedural traps of SB 940. First, under Civil Code Section 1799.208, the Nevada venue and choice-of-law clauses are entirely voidable by the California consumer. Second, the consumer can invoke their right to bypass arbitration and file a $500 product defect claim in a local California Small Claims Court. Small claims courts in California do not allow attorneys to represent parties at the hearing.
Nowland Law Conclusion: While we wait to see if the Supreme Court strikes down these venue rules, the solopreneur must deal with the immediate reality. Defending a small claims lawsuit out-of-state is logistically devastating; the owner would have to personally travel to California to defend themselves over a nominal sum. We often advise solopreneurs to reconsider whether mandatory arbitration is even useful at this scale. Adopting a hyper-aggressive, no-questions-asked refund policy is vastly cheaper than attempting to maintain an arbitration infrastructure that California law currently allows consumers to bypass at will.
The Micro-Company (The Five-Person Tech Startup)
The Scenario: A five-person tech startup develops a fitness tracking application that collects user data. A California consumer, represented by an aggressive plaintiffs’ firm, claims the app’s tracking software violates consumer privacy laws and demands arbitration.
The Impact & Analysis: Before 2025, the startup could have relied on arbitration to quickly dismiss the claim with minimal discovery. Today, SB 940 turns this into a nightmare. Under the revised CCP Section 1283.05, the plaintiff is statutorily entitled to the same discovery rights they would have in a California trial court. The plaintiff will immediately subpoena the startup’s third-party software vendors, marketing partners, and internal communications to prove the privacy violation.
Nowland Law Conclusion: A micro-company does not have the capital to pay defense lawyers to manage months of heavy, trial-like discovery in a private arbitration. First, they must implement airtight clickwrap agreements. Second, their contracts must include highly specific, negotiated caps on discovery—for instance, limiting each side to a single deposition and a strict number of document requests. They must explicitly override the SB 940 defaults or face bankruptcy by discovery.
The Regional Small Business
The Scenario: A California-based HVAC installation company uses an arbitration clause in their standard customer contract that was drafted in 2021. The contract simply states: “All disputes shall be resolved by binding arbitration in California.”
The Impact & Analysis: Because this small business is using a legacy contract that is silent on the specific rules of discovery, they are now squarely trapped by the new defaults. SB 940 reversed the old presumption; without explicit contractual limits, broad civil discovery is fully authorized. If a homeowner alleges negligent installation resulting in $40,000 of water damage, the homeowner’s lawyer will subject the HVAC company to endless interrogatories, document demands, and depositions of their foremen and executives.
Nowland Law Conclusion: Lawyers and business owners can no longer assume that merely choosing “California arbitration” will result in a streamlined process. This business must execute a total contract rewrite. We would draft an updated arbitration clause that explicitly opts out of the expanded discovery rules of CCP Section 1283.05, while ensuring the limits still allow the consumer enough discovery to survive the Fitz unconscionability standard.
The Mid-Market Enterprise
The Scenario: A mature, mid-sized online retailer processing thousands of transactions daily relies on mandatory arbitration primarily to protect itself from class-action lawsuits. They are facing a “mass arbitration” threat, where a plaintiffs’ firm threatens to file 2,000 individual arbitrations simultaneously over allegedly misleading discount pricing.
The Impact & Analysis: Under SB 940, mass arbitration becomes an existential threat. The plaintiffs’ firm can now threaten to propound full civil discovery in all 2,000 individual cases simultaneously. The arbitrator has the power of a judge to impose sanctions, force the production of affiliate documents, and manage heavy motion practice in every single file.
Nowland Law Conclusion: For mid-market entities, the sheer economic burden of complying with broad discovery across thousands of claims is unsustainable. The core defense strategy here is aggressive preemption litigation. We would strictly revise this retailer’s Terms of Service to explicitly adopt the Federal Arbitration Act as the sole procedural governing law. Because the FAA does not permit broad pre-hearing discovery or non-party depositions, adopting it provides a vital shield. We will actively litigate the position that the FAA preempts California’s state-level discovery and venue mandates, taking the fight to the appellate courts to force these disputes out of the SB 940 framework entirely.
Secure Your Defenses Today
SB 940 represents a fundamental hostility toward business interests in California. The legislature has intentionally blurred the lines between private arbitration and civil litigation. While we strongly believe the U.S. Supreme Court will ultimately have the final word on whether California has overstepped federal preemption boundaries, your business cannot afford to wait for that ruling.
Hope is not a legal strategy, and relying on outdated contracts guarantees that you will pay a heavy price in legal fees, discovery costs, and jurisdictional friction today.
At Nowland Law, we specialize in shielding commercial entities from California’s aggressive regulatory environment. We will audit your current Terms of Service, draft sophisticated arbitration agreements that preempt state overreach, and ensure your business is strategically positioned regardless of how the appellate courts ultimately rule on SB 940. Contact Nowland Law today to schedule a comprehensive review of your consumer contracts.
