Background
Michelle Phan was intermittently employed by Elk Grove Subaru and Elk Grove Volkswagen, both operated by Knight Sacramento SU Inc. (Knight), between 2022 and 2024. During her employment, Phan signed multiple arbitration agreements, including standalone agreements at each dealership. The standalone agreements were identical and required Phan to submit “any claims” to binding arbitration, including claims arising out of the employment context “or any other interaction/relationship” with Knight and its broadly defined third-party beneficiaries. The agreements also contained a class action waiver and a severance clause.
In August 2024, Phan filed a wage and hour lawsuit against Knight on behalf of herself and a class of current and former employees, alleging various Labor Code violations including failure to pay minimum wages, failure to pay overtime, failure to provide meal and rest periods, and failure to reimburse expenses. When Knight moved to compel arbitration, Phan opposed the motion, arguing the agreements were both procedurally and substantively unconscionable. The trial court denied the motion, finding the agreements unconscionable and declining to sever the offending terms.
Knight appealed, arguing the trial court misapplied Cook v. University of Southern California (2024) 102 Cal.App.5th 312, that Cook was distinguishable, and alternatively that Cook was wrongly decided and should not be followed. Knight also challenged the trial court’s refusal to sever the unconscionable provisions.
The Court’s Holding
The Third District Court of Appeal affirmed the trial court’s order in its entirety. The court first addressed Knight’s threshold argument that Cook was wrongly decided. Finding no good reason to depart from the Second District’s analysis, the court rejected Knight’s characterization that Cook created a per se rule against broad arbitration agreements. Instead, the court noted that Cook found the specific agreement at issue was one-sided without justification, a conclusion the Third District found to be faithfully grounded in the unconscionability doctrine articulated by the California Supreme Court in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83.
On the merits, the court found no material difference between the agreements in Cook and the agreements at issue here. Both required the employee to arbitrate all claims, whether related to employment or not, against the employer and broad categories of third-party beneficiaries. The court rejected Knight’s attempt to analogize the agreements to the one in Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, because the agreements here extended beyond employment-related claims to cover “any other interaction/relationship” between Phan and Knight. The court also found that Knight failed to justify the overbreadth of the agreements, holding that a general desire to “capture” all potential claims did not constitute the kind of factual showing of “business realities” required under Cook and Civil Code section 1670.5.
The court further held the agreements lacked mutuality because they required Phan to arbitrate all claims against third-party beneficiaries while those beneficiaries were not required to arbitrate their claims against Phan. Knight’s argument that mutuality was established post-contract when third parties moved to compel arbitration was rejected because unconscionability is evaluated at the time a contract is made. Finally, the court upheld the trial court’s decision not to sever the unconscionable terms, finding the central purpose of the agreements was tainted with illegality.
Key Takeaways
- Arbitration agreements requiring employees to arbitrate all claims, including those unrelated to employment, remain vulnerable to unconscionability challenges under Cook. Employers cannot salvage overbroad agreements merely by offering post hoc business justifications for the breadth of covered claims.
- The Third District’s decision to follow Cook strengthens the precedent across multiple appellate districts in California, signaling that employers across the state should expect consistent application of this unconscionability framework.
- One-sided arbitration provisions that benefit only the employer’s third-party beneficiaries without any reciprocal obligation for those beneficiaries to arbitrate their claims against the employee will be found substantively unconscionable, and post-contractual conduct by the third parties cannot cure this defect.
Why It Matters
This decision is significant for California employment law because it represents the first time the Third District has expressly adopted the Cook framework for analyzing overbroad arbitration agreements. Employers operating auto dealerships and other businesses that rely on standardized arbitration agreements should carefully review the scope of their arbitration provisions to ensure they are tailored to employment-related claims. Agreements that sweep in all possible claims against an employer and its affiliates, without limitation or justification, are increasingly likely to be struck down as unconscionable and unenforceable.
For employees and their counsel, the decision reinforces that wage and hour class actions can survive motions to compel arbitration where the underlying agreements are overbroad and lack mutuality. The court’s refusal to sever the unconscionable terms also underscores that pervasive unconscionability in arbitration agreements may render the entire agreement unenforceable, not just the offending clauses.