California Court Of Appeals Examines Unconscionability In Arbitration Agreements

JurisdictionCalifornia,United States
Law FirmSquire Patton Boggs LLP
Subject MatterEmployment and HR, Litigation, Mediation & Arbitration, Contract of Employment, Arbitration & Dispute Resolution
AuthorCristen R. Hintze and Michael Kelly
Published date23 May 2023

In yet another chapter of the saga involving California and its treatment of employment arbitration agreements, a Court of Appeals recently issued two decisions examining the state's legal standard for determining unconscionable arbitration clauses.

Fuentes v. Empire Nissan, Inc., ' Cal. Rptr. 3d. ', No. B314490, April 21, 2023, 2023 WL 3029968 (Apr. 21, 2023) and Basith v. Lithia Motors, Inc., ' Cal. Rptr. 3d ', No. B316098, 2023 WL 3032099 (Apr. 21, 2023), involved employees of unrelated Nissan dealerships in southern California, who signed similar form arbitration clauses when hired (Fuentes signed a paper agreement; Basith signed a digital version). Both employees were terminated from their employment, and sued the dealerships for alleged violations of the California Labor Code. Both dealerships filed motions to compel arbitration of the disputes, and the respective trial courts denied the motions to compel, ruling the arbitration agreements were substantively unconscionable. Both dealerships filed appeals in the Second Appellate District, and the Court of Appeals reversed both decisions because the agreements were not substantively unconscionable.

Citing OTO, LLC v. Kho, 8 Cal. 5th 111 (2019), Fuentes and Basith reiterated that to invalidate an arbitration agreement, an employee must show both procedural and substantive unconscionability.

Substantive unconscionability relates solely to the terms of the contract, and asks whether those terms are unreasonably favorable to the "stronger" party. Procedural unconscionability, by contrast, relates to the circumstances by which the "weaker" party consented to those terms - in other words, to the "process" by which the apparent consent was obtained. Questions about whether the weaker party truly understood what they signed, or about whether they had any "meaningful choice" in the matter are questions about procedural rather than substantive unconscionability. In fact, Fuentes points out that nearly every form employment contract can be perceived as having some procedural unfairness, because employees generally lack any power to bargain. Sometimes employers insist, "sign it or no job." Fuentes then astutely explains when the law automatically attributes some procedural unfairness to every form employment contract, then "the real fight boils down to whether the substance of the final terms are fair" and courts "must enforce [such] contracts if the substance is even-handed."

The Fuentes opinion examined the...

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