California Arbitration Act: What You Should Know

On Behalf of Law Offices of Denise Eaton May
February 20, 2025
Alternative Dispute Resolution

Disputes are an inevitable part of business and employment relationships, but litigation is not always the best way to resolve them. Arbitration has become a favored alternative dispute resolution (ADR) method due to its efficiency, confidentiality, and ability to avoid the drawn-out process of court litigation.

In California, the California Arbitration Act (CAA) governs arbitration proceedings within the state. Whether you are a business owner, an employer, an employee, or a consumer, understanding the implications of the CAA can help you make informed decisions about resolving disputes outside the courtroom.

What Is the California Arbitration Act?

The California Arbitration Act (CAA) governs arbitration proceedings in the state and provides the legal framework for resolving disputes outside the traditional court system. Arbitration is a form of alternative dispute resolution (ADR) where parties agree to have a neutral third party (the arbitrator) hear their case and render a binding or non-binding decision.

The CAA is codified primarily in the California Code of Civil Procedure (CCP) §§ 1280–1294.4, setting forth rules for enforcing arbitration agreements, selecting arbitrators, conducting arbitration proceedings, and enforcing arbitration awards.

Legal Foundation and Key Provisions

The CAA’s key provisions establish how arbitration operates in California:

Enforceability of Arbitration Agreements: Courts generally uphold arbitration agreements as long as they are clear, voluntary, and not unconscionable.
Judicial Involvement: While arbitration takes place outside of court, California courts have limited authority to confirm, modify, or vacate arbitration awards under certain conditions.
Selection of Arbitrators: If an arbitration agreement does not specify an arbitrator, the court may appoint one.
Procedural Fairness: The CAA ensures due process by allowing parties to present evidence and arguments, even though arbitration is less formal than litigation.
Finality of Arbitration Awards: Arbitration decisions are binding unless the parties agree otherwise. Courts can only vacate an award in cases of fraud, bias, or procedural misconduct.

Comparison to the Federal Arbitration Act (FAA)

The Federal Arbitration Act (FAA) is a federal law that governs arbitration agreements in cases involving interstate commerce. While the FAA applies nationwide, the CAA provides state-specific regulations for arbitration proceedings within California.

The two laws interact in important ways:

Feature	California Arbitration Act (CAA)	Federal Arbitration Act (FAA)
Scope	Governs arbitration agreements within California.	Applies to arbitration agreements in interstate commerce.
Preemption	State-specific arbitration laws apply unless overridden by the FAA.	Can preempt state laws that conflict with its provisions.
Employee Protections	Stricter than the FAA; California limits the enforceability of forced arbitration in employment.	Generally favors enforcement of arbitration agreements, including employment arbitration.
Public Policy Considerations	Allows greater scrutiny of arbitration clauses that may be unfair or unconscionable.	Prioritizes enforcement of arbitration agreements as written.

While the FAA favors broad enforceability of arbitration agreements, California courts have imposed more protections for employees and consumers to prevent unfair arbitration clauses.

Key Statutes Governing Arbitration Proceedings in California

Several California statutes regulate arbitration:

CCP §§ 1280–1294.4: The primary laws governing arbitration proceedings.
California Labor Code § 432.6: Limits mandatory arbitration agreements in employment contracts (though subject to legal challenges under the FAA).
California Civil Code § 1670.5: Allows courts to refuse to enforce unconscionable arbitration agreements.
California Business & Professions Code: Certain industries have arbitration-specific regulations, including real estate and healthcare.

Scope of the California Arbitration Act (CAA)

The CAA applies to a broad range of disputes, including:

Business Disputes: Breach of contract, partnership disagreements, shareholder disputes, and commercial litigation matters.
Commercial Arbitration: Conflicts between corporations, vendors, and service providers.
Employment Disputes: Wage claims, wrongful termination, and workplace discrimination cases, provided arbitration agreements comply with state law.
Consumer Disputes: Issues involving service contracts, warranties, and consumer transactions.
Real Estate and Construction Disputes: Conflicts involving property transactions, contractor agreements, and commercial leasing.

Enforceability of Arbitration Agreements

The CAA generally enforces arbitration agreements, but California courts have scrutinized certain types of arbitration clauses, particularly in employment and consumer agreements. These agreements are typically enforceable in the following circumstances:

When they are voluntarily entered into and clearly outline arbitration procedures.
When they provide a fair and neutral process for dispute resolution.
When they do not limit a party’s substantive rights (such as waiving access to statutory claims).

However, the clause may not be enforceable if:

They are procedurally unconscionable (forced upon a party with little choice).
They are substantively unfair (giving one party a significant advantage).
They violate public policy, such as limiting employee rights under California law.

How Arbitration Impacts Business Disputes in California

Arbitration has become a crucial tool for resolving business disputes in California. Companies often prefer arbitration over litigation because it is generally faster, less expensive, and more private than taking a case to court. However, arbitration is not without controversy, particularly in employment and consumer disputes, where concerns about fairness and enforceability have led to significant legal battles.

The Role of Arbitration in Business Disputes

Many California businesses include arbitration clauses in contracts because arbitration offers key advantages over traditional litigation:

Speed: Arbitration typically resolves disputes faster than the court system, where lawsuits can take months or years to be heard.
Cost-Effectiveness: Avoiding court reduces legal fees and administrative expenses.
Confidentiality: Unlike lawsuits, arbitration proceedings are private, protecting sensitive business information.
Flexibility: Parties can agree on customized rules, including selecting industry-specific arbitrators.
Finality: Arbitration decisions are often binding, reducing the risk of drawn-out appeals.

Employment Arbitration and Its Controversies

Many California employers require employees to sign arbitration agreements as a condition of employment, meaning workplace disputes—such as wrongful termination, discrimination, or wage-and-hour claims—must be settled through arbitration instead of litigation.

However, employee advocates argue that these agreements disproportionately benefit employers by:

Limiting employees’ ability to sue in court.
Forcing private dispute resolution, which may favor businesses.
Restricting collective action, preventing class-action lawsuits.

California lawmakers have attempted to curb mandatory employment arbitration, but these efforts have faced pushback in court.

AB 51 (2019): This California law aimed to ban forced arbitration agreements in employment contracts. However, in 2023, the Ninth Circuit Court of Appeals ruled that AB 51 was preempted by the Federal Arbitration Act (FAA), meaning employers can still require arbitration.
PAGA and Arbitration (2022-2023): The Private Attorneys General Act (PAGA) allows employees to sue on behalf of the state for labor violations. In Viking River Cruises v. Moriana (2022), the U.S. Supreme Court ruled that individual PAGA claims can be forced into arbitration, but California courts have since limited the scope of this decision.

While many employment arbitration agreements remain enforceable, California courts have placed restrictions to ensure fairness:

Arbitration agreements must provide due process, including access to evidence and neutral arbitrators.
Employees cannot be required to pay excessive arbitration costs.
Some employment claims, such as harassment and discrimination claims, may still be heard in court if arbitration agreements are found to be unconscionable.

Employees who question the validity of an arbitration agreement should consult an attorney to determine whether it is enforceable under California law.

When Arbitration Is Used in Business-to-Consumer Disputes

Many companies include arbitration clauses in contracts with consumers, requiring them to resolve disputes through arbitration instead of filing lawsuits. Common industries using consumer arbitration include:

Banking and Financial Services: Credit card agreements, loans, and investment contracts often require arbitration.
Telecommunications: Cell phone, cable, and internet service providers frequently include arbitration clauses in customer contracts.
Retail and Online Services: Many e-commerce platforms and subscription services mandate arbitration for disputes.

These clauses prevent consumers from suing companies in court or joining class-action lawsuits, which has led to significant consumer protection concerns.

Similarly, franchise agreements frequently include arbitration clauses, requiring franchisees and franchisors to resolve disputes through arbitration rather than litigation. This is common in industries such as:

Restaurant and Hospitality Franchises: Disputes over franchise fees, royalties, and operational requirements.
Retail and Service Franchises: Conflicts regarding territorial rights, marketing requirements, and brand compliance.

Arbitration allows franchisors to maintain control over their network while avoiding costly litigation. However, franchisees may face challenges, as arbitration often favors the larger franchisor due to financial and legal resources.

Limits on Arbitration in Consumer Protection Cases

California law places some restrictions on forced arbitration in consumer disputes:

Unconscionable Agreements: If an arbitration clause is overly one-sided or unfair, courts may invalidate it.
Certain Consumer Protection Laws: Some California laws protect consumers from forced arbitration, particularly in cases involving fraud or deceptive practices.
Public Injunctions: In McGill v. Citibank (2017), the California Supreme Court ruled that arbitration clauses cannot prevent consumers from seeking public injunctive relief to stop unlawful practices.

Consumers who feel they have been unfairly forced into arbitration should consult legal counsel to determine if their arbitration agreement is legally enforceable.

The Arbitration Process in California

Arbitration generally begins with a contractual agreement between the parties, such as a business, employment, or franchise contract. Once an arbitration clause is included in a contract, it is generally enforceable under both the California Arbitration Act (CAA) and the Federal Arbitration Act (FAA). Courts tend to favor arbitration agreements, but in some cases, a party may challenge the enforceability of the contract, especially if it is considered unconscionable or unfair.

1. Selecting an Arbitrator

Unlike court cases, where judges are assigned, arbitration allows parties to select their arbitrator. Choosing the right arbitrator is critical to ensuring a fair and knowledgeable resolution, particularly in business and employment disputes.

An arbitrator acts as a private judge in arbitration proceedings, evaluating evidence and issuing a binding or non-binding decision. A neutral arbitrator should:

Have no financial or personal interest in the case outcome.
Be impartial and free of bias toward either party.
Follow California’s ethical standards for arbitrators.

Furthermore, business arbitrators should have expertise in corporate law, commercial contracts, and financial matters. Similarly, employment arbitrators should have experience in California labor laws, wrongful termination cases, and workplace discrimination claims.

The California Arbitration Act requires arbitrators to disclose any potential conflicts of interest to ensure fairness in the arbitration process. A qualified arbitrator ensures that disputes are resolved by someone with industry-specific knowledge and a fair, neutral approach.

2. The Arbitration Hearing

Arbitration hearings differ significantly from court trials in structure, rules, and process:

Feature	Arbitration	Court Trial
Formality	Less formal, with relaxed rules.	Strict procedural and evidentiary rules.
Length	Generally shorter (weeks to months).	Can take years to resolve.
Judge vs. Arbitrator	Private arbitrator selected by parties.	Public judge assigned by the court.
Privacy	Confidential proceedings.	Public record unless sealed.
Right to Appeal	Limited appeal options.	Right to appeal through appellate courts.

During the hearing, arbitration rules of evidence are less strict than in court. Witnesses and documents are presented in a more flexible setting, and the arbitrator may allow more informal testimony and weigh evidence differently than a judge. Since arbitration is meant to be faster and more efficient, it generally avoids the lengthy discovery process required in litigation.

One of the biggest benefits of arbitration is confidentiality. Unlike court cases, where hearings and documents are public, arbitration remains private, which is particularly important for:

Business disputes involving trade secrets or financial matters.
Employment disputes involving sensitive HR or discrimination claims.
Parties who want to resolve conflicts without public exposure.

Confidentiality allows businesses and individuals to resolve disputes without damaging their reputations or disclosing proprietary information.

3. Finalizing the Arbitration Award

After the hearing, the arbitrator will issue a decision (arbitration award) based on:

The evidence presented by both parties.
Testimony from witnesses and expert opinions.
Legal principles and contract terms applicable to the dispute.

Arbitration awards are final and binding unless the parties agree to non-binding arbitration, in which case they can still pursue litigation if dissatisfied with the outcome.

Once an arbitration award is issued, it can be enforced through the California courts if necessary. The prevailing party can petition the court to confirm the award, making it a legally binding judgment. If necessary, they may also request court enforcement if the losing party refuses to comply.

4. Appeals and Limited Grounds for Challenging Arbitration Outcomes

One of the biggest drawbacks of arbitration is the limited ability to appeal an unfavorable decision. Courts will only overturn an arbitration award under specific circumstances, such as:

Fraud or corruption by the arbitrator.
Misconduct that resulted in an unfair hearing.
A clear conflict of interest or bias by the arbitrator.
The arbitrator exceeds their authority under the agreement.

Outside of these rare exceptions, courts generally uphold arbitration decisions, making arbitration a final and binding process in most cases.

What Happens When One Party Refuses to Arbitrate?

If one party refuses to arbitrate despite a valid agreement, the other party may take legal action by:

Filing a motion to compel arbitration in California state court.
Providing evidence that both parties agreed to arbitration and that the dispute falls within the agreement’s scope.
Requesting a stay of litigation until arbitration is completed.

California courts generally enforce arbitration agreements unless they are found to be invalid or unfair. If the court orders arbitration, the refusing party must participate in the arbitration process, or they risk having a default award entered against them.

Advantages and Disadvantages of Arbitration

Arbitration has become a popular alternative to litigation for resolving disputes, particularly in business, commercial, employment, and consumer cases. Many companies and individuals prefer arbitration due to its efficiency, confidentiality, and flexibility. However, arbitration is not without drawbacks, including limited appeal rights, potential bias, and cost concerns.

Benefit 1: Speed and Cost-Effectiveness Compared to Litigation

One of the primary advantages of arbitration is that it is typically faster and less expensive than traditional litigation.

Court cases can take years to resolve, particularly in business and employment disputes, while arbitration is often concluded within a few months.
Discovery and procedural rules in arbitration are less formal and more streamlined, reducing legal fees.
Fewer court appearances mean less time and money spent on administrative costs.

For businesses, arbitration helps minimize disruptions and allows companies to resolve disputes without prolonged litigation that can drain resources.

Benefit 2: Privacy and Confidentiality in Sensitive Business Disputes

Unlike court cases, which are typically public record, arbitration proceedings and outcomes are confidential. This is especially beneficial for businesses dealing with:

Trade secrets and proprietary information that could be exposed in a public courtroom.
Employment disputes involving internal policies and personnel matters.
High-profile commercial disputes that could damage a company’s reputation.

By keeping disputes out of the public eye, arbitration protects sensitive business information and prevents negative publicity.

Benefit 3: Flexibility in Scheduling and Procedural Rules

Arbitration allows parties to have more control over the process, including:

Choosing the arbitrator: Unlike court litigation, where judges are randomly assigned, parties in arbitration can select an arbitrator with industry expertise.
Setting their own schedule: Arbitration hearings are scheduled at the convenience of the parties rather than waiting for court availability.
Customizing procedures: Parties can agree on rules of evidence and discovery that work best for their situation, reducing delays and unnecessary legal hurdles.

This flexibility makes arbitration an attractive option for businesses and professionals who want a structured but adaptable dispute-resolution process.

Drawback 1: Limited Ability to Appeal Arbitration Awards

One of the biggest drawbacks of arbitration is that arbitration awards are often final and binding, with very limited grounds for appeal. In litigation, an unfavorable decision can be appealed to a higher court, but in arbitration, errors of law or fact are not enough to overturn a decision.

Under the CAA and FAA, arbitration awards can only be overturned in cases of:

Fraud or corruption by the arbitrator.
Misconduct that deprived a party of a fair hearing.
A clear conflict of interest by the arbitrator.

For businesses and employees, this means accepting the arbitrator’s decision, even if they strongly disagree with the outcome.

Drawback 2: Concerns About Fairness in Mandatory Employment Arbitration Agreements

Mandatory arbitration in employment agreements has been a source of significant controversy in California. Many employees are required to sign arbitration agreements as a condition of employment, often without fully understanding their rights. This has become particularly controversial because:

Employers often choose the arbitrator, raising concerns about bias in favor of businesses.
Employees may not fully understand arbitration agreements, leading to an unfair advantage for the employer.
Class-action waivers in arbitration agreements prevent employees from suing collectively, making it harder to hold employers accountable for systemic workplace violations.

California has attempted to limit forced employment arbitration, but federal courts have repeatedly ruled that mandatory arbitration agreements are enforceable under the FAA. This remains a highly debated issue in California employment law.

Drawback 3: Cost Considerations and Arbitrator Fees

While arbitration can be cheaper than litigation, it is not always inexpensive—especially in complex disputes.

Arbitrators charge substantial fees, often hundreds or thousands of dollars per hour.
Unlike court cases (where judges are publicly funded), arbitration costs must be covered by the parties.
In employment and consumer disputes, employers and corporations often bear most of the costs. However, individuals may still face expenses for attorneys and expert witnesses.

For businesses, arbitration can become costly if the dispute is lengthy or requires multiple hearings. For employees and consumers, high arbitration costs may discourage them from pursuing valid claims.

When to Consider Arbitration for Your Business or Employment Dispute

Before deciding to pursue arbitration, consider these key factors:

Nature of the Dispute: Arbitration is well-suited for contract disputes, partnership disagreements, employment claims, and consumer-business conflicts, but it may not be ideal for cases requiring extensive public legal precedent.
Confidentiality Needs: If keeping the dispute private is important (e.g., trade secrets, financial disputes, or sensitive employment matters), arbitration offers a level of secrecy not available in court litigation.
Desire for Speed and Efficiency: Arbitration resolves disputes faster than litigation, often in months rather than years.
Binding vs. Non-Binding Arbitration: Determine whether you want a binding decision (which cannot be appealed) or a non-binding process that allows for further legal action if necessary.
Cost Considerations: While arbitration can be cheaper than litigation, it still involves arbitrator fees, legal representation costs, and administrative expenses.
Flexibility and Control: Arbitration allows parties to customize procedures, including selecting an arbitrator with industry expertise and setting hearing dates based on availability.

Arbitration is most beneficial when the parties want a private and expedited resolution, the dispute involves technical or industry-specific issues, and appealing the decision is not a priority.

However, arbitration may not be ideal when one party has significantly more power or resources (e.g., employer vs. employee, large corporation vs. small business), if one party seeks legal precedent or broad injunctive relief, or if the arbitration agreement is overly restrictive or one-sided.

Alternatives to Arbitration

While arbitration is a powerful dispute resolution tool, it is not the only ADR option available. In some cases, mediation or litigation may be a better fit.

Factor	Mediation	Arbitration
Process	A neutral mediator facilitates negotiations but does not impose a decision.	A neutral arbitrator hears evidence and issues a binding or non-binding decision.
Cost	Generally cheaper than arbitration.	More expensive than mediation but cheaper than litigation.
Outcome	The parties control the outcome and must voluntarily agree on a settlement.	The arbitrator makes the final decision, which can be binding.
Confidentiality	Fully confidential.	Typically confidential, but it depends on the arbitration agreement.
Appeal Rights	N/A: Since the parties voluntarily agree to a settlement, there is no appeal.	Limited appeal rights unless there is fraud or misconduct.

Based on these factors, it may be beneficial to choose mediation if the parties want to maintain a business relationship after the dispute, if both sides are willing to negotiate and find a mutually beneficial resolution, or if the dispute is relational rather than strictly legal (e.g., workplace conflicts).

Meanwhile, arbitration may be a better choice if a final and binding decision is needed or if both parties want to avoid public litigation but need a structured process.

When Litigation May Be a Better Option

While arbitration is often preferred, litigation may be necessary when:

A party seeks injunctive relief (e.g., a court order stopping an action).
One side refuses to participate in arbitration or challenges the agreement’s validity.
The dispute involves constitutional rights or issues of public policy.

Certain legal claims—such as some employment discrimination cases and public enforcement actions—may not be subject to arbitration and must go through the court system.

Combining Arbitration with Other ADR Methods for Optimal Results

In some cases, a hybrid approach may be the best solution:

Med-Arb (Mediation-Arbitration): The parties first attempt mediation, and if they fail to settle, the case proceeds to arbitration.
Arb-Med (Arbitration-Mediation): An arbitrator issues a decision but keeps it confidential while the parties attempt mediation. If mediation fails, the decision is then enforced.
Negotiation Before Arbitration: Businesses often include a mandatory negotiation period before moving to arbitration, allowing parties to settle informally.

These blended ADR approaches can help minimize costs, preserve relationships, and encourage fair resolutions.

Talk to Professional ADR Specialists About Arbitration

The California Arbitration Act provides a structured framework for resolving business and employment disputes outside the courtroom. Arbitration offers speed, confidentiality, and flexibility, making it a valuable tool for many parties. However, understanding the nuances of arbitration law is essential to ensuring a fair process.

If you are considering arbitration for a business or employment dispute, the Law Offices of Denise Eaton May, P.C. can guide you through the process and provide the legal support you need.