Alert

California Draws the Line: S.B. 82 Narrows the Reach of Consumer Arbitration Agreements

October 9, 2025

Nowadays, arbitration agreements are ubiquitous in the consumer finance context; some studies indicate that more than 90% of certain consumer contracts contain mandatory arbitration agreements. Over the years, many states and various government agencies have attempted to curtail or outright ban the use of arbitration agreements with little success. That has not stopped the California State legislature, however, which in recent years has attempted to limit arbitration in various ways.

California is back at it again with the passage of S.B. 82, which seeks to limit the scope of arbitrable claims in “consumer use agreements.” The law, which becomes effective January 1, 2026, is almost assuredly to be challenged in court on preemption and other grounds.

What Does the New Law Do?

S.B. 82 limits arbitrable claims in consumer use agreements (broadly defined as an agreement to “use, receive, or otherwise enjoy a good, service, money, or credit”) to claims arising out of and relating to the contract containing the agreement to arbitrate. Broadly speaking, this means that a claim or dispute separate and apart from the contract (like a later injury or a tort claim that is unrelated to the original contract) is no longer arbitrable even if such a claim would fall within the arbitration agreement’s definition of a “claim” or “dispute.”

California then went further and made clear that any arbitration agreement that violates this limitation is “void and unenforceable.” As well, any waiver of this new law contained in an arbitration agreement is deemed contrary to public policy and unenforceable. 

Supporters Say an End to “Infinite” Arbitration Clauses is Necessary

Proponents of the bill say it is necessary to end “infinite” arbitration clauses. As Senator Thomas Umberg, the Chair of the Senate Judiciary Committee, stated: “[n]o one should be denied their day in court because they clicked ‘I agree’ to a streaming trial or grocery app years ago. SB 82 makes sure arbitration applies only to the contracts people actually sign, not to every future dispute corporations can dream up.”

Senator Umberg also criticized so-called “infinite” arbitration clauses as producing “absurd and unfair” results, pointing to a widely publicized lawsuit against Disney where it initially attempted to compel to arbitration a wrongful death lawsuit where the decedent had agreed to an arbitration clause when he signed up for a Disney + account. 

An End-Around the FAA?

S.B. 82 will most likely be challenged in court on a number of grounds, including whether it is preempted by the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et. seq. The FAA was enacted by Congress nearly a century ago and was designed to overcome longstanding judicial hostility to arbitration. To that end, the FAA mandates that courts liberally construe arbitration agreements in favor of arbitration. As well, while the FAA does not include an express preemption clause, courts, including the Supreme Court, have routinely found state laws that unfairly target arbitration or treat arbitration agreements differently from other contracts as being preempted by the FAA.

In fact, California is no stranger to having its laws preempted by the FAA; it has happened numerous times over the years, ranging from laws attempting to preclude arbitration agreements in the employment context to laws attempting to avoid arbitration agreements that did not permit class-wide arbitration. And while proponents of S.B. 82 claim that it only regulates the scope of arbitration and not the formation of an agreement to arbitrate, that is arguably a distinction without a difference. Indeed, the Supreme Court has previously held that the FAA “preempts any state rule discriminating on its face against arbitration – for example, a ‘law prohibit[ing] outright the arbitration of a particular type of claim.’”

Challenges to the text of the bill itself will almost assuredly follow as well. For instance, the phrase “arising out of and relating to the contract” tends to be vague and will likely be challenged as such in court.

So What’s Next?

While S.B. 82’s future will most likely be decided in court, financial services companies that contract with and do business with California consumers would be well-served to re-review their arbitration agreements now to address the enactment of the bill. If the Bill survives judicial scrutiny, businesses will need to revise their broad arbitration agreements to account for it.

As well, businesses would be well-served to include a delegation clause in their arbitration agreement. Delegation clauses refer to who decides threshold questions of arbitrability: a court or an arbitrator? Absent such a clause, threshold questions as to arbitration, including the scope of an agreement, are for a court to decide. S.B. 82 arguably raises such threshold questions, and delegating those questions to an arbitrator may be appropriate.

Ultimately, California’s S.B. 82 represents a significant legislative shift in consumer arbitration law, targeting the overreach of so-called “infinite” arbitration clauses. If it survives potential legal challenges, it will likely reshape how businesses structure arbitration clauses and how consumers can contest them in California and elsewhere.