This year, in Basith v. Lithia Motors, Inc. (“Basith”) and Fuentes v. Empire Nissan, Inc. (“Fuentes”), the Second Appellate District of the California Court of Appeal (the “Court”) set forth the difference between procedural and substantive unconscionability as the basis for invalidating arbitration agreements. Procedural unconscionability focuses on the fairness of the process leading to the formation of the agreements, while substantive unconscionability focuses on whether the terms of the agreements are so one-sided that it unfairly benefits one of the parties to the agreement. The cases affirm the long-standing rule in California that both procedural and substantive unconscionability must be present to invalidate an arbitration agreement.
Basith and Fuentes
In each case, plaintiff employees signed arbitration agreements before commencing employment at car dealerships. In Basith, the plaintiff signed an online arbitration agreement, which was presented to him on a “take it or leave it” basis. In Fuentes, the plaintiff signed a single one-page form that had a tiny and seemingly blurred print that rendered it largely unreadable.
Procedural and Substantive Unconscionability
Both arbitration agreements were invalidated on the basis of procedural unconscionability because they were presented to the employees on a “take it or leave it” basis in connection with their employment. However, the main issue was whether there was any substantive unconscionability.
Despite the number of arguments raised by the employees, the Court ultimately held that the substance of the arbitration agreements was fair, and therefore no substantive unconscionability existed to invalidate the agreements:
- Employer’s signature. The Court rejected the employee’s argument that the lack of the employer’s signature on the agreement amounted to substantive unconscionability because it did not concern how fair or unfair the agreement was.
- Font size and readability. In Fuentes, the plaintiff argued that the tiny font size and unreadability of the agreement made it difficult to understand and therefore substantively unconscionable. The Court rejected this argument, explaining that “font size and unreadability go to the process of contract formation” and therefore are “logically pertinent to procedural unconscionability and not substantive unconscionability.”
- Instructions on initiating arbitration. The lack of instructions on how to initiate arbitration did not give rise to substantive unconscionability. The Court explained that the agreement provided that the procedures for arbitration would be governed by California’s Arbitration Act.
- Multiple documents. The Court explained that the presence of multiple contracts did not nullify the application of the arbitration agreement to the employer. Ultimately, the arbitration agreement takes precedence over any other document and therefore applies to the employer.
Key Takeaways
Both cases are an important reminder to distinguish between procedural and substantive issues of unconscionability. An experienced attorney can help you draft and implement employee arbitration agreements that are not vulnerable to enforceability attacks and tactics as to avoid “double count[ing]” procedural unconscionability or “watering down” substantive unconscionability.
For more information on employee arbitration agreements in California, please contact us at info@mnklawyers.com.
This material is provided for informational purposes only. It is not intended to constitute legal advice, nor does it create a client-lawyer relationship between MNK Law and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material.
