Quick Hits
- The Supreme Court of California ruled that the formatting of an arbitration agreement does not influence its substantive unconscionability, but courts must still evaluate the agreement’s legibility and context for potential unfairness.
- The court emphasized the sliding scale analysis of unconscionability, stating that excessive procedural unconscionability can render even minimally substantively unconscionable agreements unenforceable.
- The court said the appellate court had erred in applying a presumption in favor of arbitration without adequately scrutinizing the ambiguity and fairness of the confidentiality agreement involved.
On February 2, 2026, the California high court reversed a decision by the California Court of Appeal, which had, “relying on ‘the principle that the law strongly favors arbitration,’” directed a trial court to grant the employer’s motion to compel arbitration.
The appellate court found arguments that the arbitration agreement was illegible and that the employer rushed the employee to sign were procedural and did not render the arbitration agreement substantively unconscionable or unenforceable. But, while the California Supreme Court agreed that procedural unconscionability does not affect substantive unconscionability, the high court said the appellate court failed to properly consider substantive unconscionability and erred in its unconscionability analysis.
Background
The case arose from an employment dispute with an employee who alleged she was unlawfully discharged after seeking to extend sick leave for cancer treatments. At the time of hire, the employer presented the employee with an employment agreement containing an arbitration provision requiring the employee to arbitrate “all disputes which may arise out of the employment context.”
According to the decision, the arbitration provision, which was included in her employment application packet, was printed in “very small font,” was “blurry,” had approximately 900 words squeezed into roughly “‘three vertical inches’ of text,” and contained legal jargon and references to statutes. The employee was given “only five minutes” to review the application packet, and was not told that it contained an arbitration agreement, nor did she receive a copy of the agreement.
A trial court denied a motion to compel arbitration filed by the employer, finding that the agreement was unconscionable based on a “very high degree of procedural unconscionability” and a “low to moderate degree of substantive unconscionability.” The appeals court then reversed, holding that “tiny and unreadable print” is a problem of procedural unconscionability only.
Sliding Scale of Unconscionability
The California Supreme Court held that a contract’s format, including font size and legibility, is generally irrelevant to substantive unconscionability, which focuses on the fairness of the contract’s actual terms. But the court reinforced that the question of unconscionability is a sliding scale: the more substantively oppressive the contractual term, the less evidence of procedural unconscionability is required to conclude that the term is unenforceable, and vice versa.
In this case, the court noted in the case that the employer “did not provide” the employee “a meaningful opportunity to review the agreement or ask questions about it, much less to negotiate its terms.” The employer told the employee to hurry to sign the application packet within five minutes and did not tell her that it included an arbitration agreement, nor did it provide her with a copy of the agreement. “These circumstances constitute significant oppression,” the court said. The court found “the significant oppression and unusually high degree of surprise involved in the agreement’s formation undermine the policies that normally favor enforcement.” (Emphasis added.)
“Because the circumstances under which [the employee] signed the agreement involved such a high degree of procedural unconscionability, even a low degree of substantive unconscionability may render the agreement unenforceable,” the court held.
Error With Reliance on Presumption in Favor of Arbitration
Ultimately, the California Supreme Court did not rule on the substantive unconscionability but held that the appeals court had “erred” in its analysis. The court stated that reading the confidentiality agreement that appears to allow the employer to bring claims in court, along with the arbitration agreement, “reveals an ambiguity concerning whether the parties intended claims under the confidentiality agreement to be subject to mandatory arbitration.”
The state high court held the appellate court had “erred in applying a presumption in favor of arbitration to conclude that the confidentiality agreements did not create a one-sided carveout for claims only [the employer] would bring.”
Given the degree of procedural unconscionability, the lower courts “should instead have treated the arbitration agreement like any other contract and closely scrutinized the agreement’s terms for unfairness or one-sidedness, given the high degree of procedural unconscionability, and construed any ambiguous provisions” against the employer as the drafting party.
The California Supreme Court further found that the applicability of the confidentiality agreement largely turned on a factual issue as to whether the employer had properly signed it and remanded the issue to the trial court for consideration. Additionally, the court told the trial court to address the employee’s arguments that the agreement is invalid.
Key Takeaways
The Fuentes decision reinforces that California courts will apply a sliding scale in an unconscionability analysis: the greater the procedural unconscionability of a contract or contractual term, the less evidence of substantive unconscionability is required, and vice versa.
Tiny and almost illegible formatting of a contract term does not necessarily render it substantively unconscionable and unenforceable, but such issues are relevant to procedural unconscionability “because it contributes to the element of surprise.”
Employers may want to review their employment agreements to ensure they have clear, easy-to-read formatting, and that the agreements’ terms are not overly harsh, oppressive, or one-sided. Employers may also want to provide employees a “meaningful opportunity to review” employment agreements.
Ogletree Deakins’ California offices and Arbitration and Alternative Dispute Resolution Practice Group will continue to monitor developments and will provide updates on the Arbitration and Alternative Dispute Resolution, California, and Leaves of Absence blogs as additional information becomes available.
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