Unreported / Non-Citable
Background
Olga Lidia Martinez worked for Suburban Motors, Inc. for approximately four months in 2023 and signed an "At Will and Arbitration Agreement" as part of the hiring process. After resigning, she filed a putative class action alleging various wage-and-hour law violations and later filed a Labor Code Private Attorneys General Act (PAGA) action seeking civil penalties and related relief based on the same violations. The trial court consolidated the two actions. Suburban then moved to compel arbitration of Martinez's individual claims, dismiss the class claims, and stay the trial court proceedings.
The agreement required the parties to arbitrate existing and future claims arising from the employment context or any other interaction or relationship, including claims against an extensive list of third-party beneficiaries such as owners, directors, officers, managers, employees, agents, attorneys, sister companies, subsidiaries, and affiliated entities. It also barred class and representative claims and contained a severance clause. The trial court denied the motion, finding the agreement unenforceable in its entirety due to unconscionability. It found a moderate degree of procedural unconscionability because the agreement was an adhesion contract and Suburban could unilaterally modify its provisions, and it identified three substantively unconscionable terms: overbroad scope, indefinite duration, and lack of mutuality. The trial court concluded the unconscionable provisions could not be severed because they permeated the agreement and curing them would require rewriting rather than merely striking terms.
The Court’s Holding
The Court of Appeal reviewed enforceability de novo and followed Phan v. Knight Sacramento SU Inc., which had interpreted materially identical provisions while this appeal was pending. Although the panel expressly noted it was not bound by Phan because there is no horizontal stare decisis within the Court of Appeal, it found that Suburban failed to present a compelling reason to depart from that decision. The court also declined to resolve whether procedural unconscionability was moderate or minimal because either level warranted close scrutiny and the substantive defects independently supported nonenforcement.
The court rejected Suburban's FAA-preemption argument, explaining that Cook applied the generally applicable contract defense of unconscionability to the specific agreement rather than creating an arbitration-specific rule. It refused to narrow the agreement to employment disputes through interpretation or ejusdem generis: the text expressly covered other interactions and relationships, future claims, and tort claims, and the Cocom and Ayala-Ventura authorities did not control this broader language. The court also found unjustified one-sidedness because Martinez had to arbitrate claims against third-party beneficiaries without a reciprocal obligation covering their claims against her.
The agreement's application to future relationships supported the indefinite-duration concern, but the court held that overbreadth and lack of mutuality independently established substantive unconscionability even if the agreement were terminable at will after a reasonable time. It then upheld the trial court's refusal to sever under the abuse-of-discretion standard, agreeing that the agreement's central purpose was tainted by the unconscionable terms and that a severance clause did not eliminate the trial court's discretion. The order denying the motion to compel arbitration was affirmed, and Martinez was awarded her costs on appeal.
Key Takeaways
- An employment arbitration clause may be substantively unconscionable when its express language extends without adequate justification to claims arising from nonemployment interactions and relationships.
- The FAA does not preempt application of generally applicable unconscionability principles to the particular terms of an arbitration agreement.
- A court will not rescue an overbroad clause by deleting express language, applying ejusdem generis, or imposing an employment-only limitation that the parties did not write.
- Requiring an employee to arbitrate claims against numerous third-party beneficiaries without reciprocal protection can establish an unjustified lack of mutuality.
- A severance clause does not require severance when the unconscionable provisions taint the agreement's central purpose, and the refusal to sever is reviewed for abuse of discretion.
Why It Matters
The decision applies Phan's analysis of the same arbitration language and reinforces Cook's distinction between generally applicable unconscionability review and an arbitration-specific prohibition. It also explains why Cocom's employment-focused enumeration and Ayala-Ventura's ambiguity analysis did not control this broader text, and it confirms that a sister-panel decision, while not binding, will be followed absent a compelling reason to depart.
For employers, the opinion emphasizes that expansive wording, future-relationship coverage, and nonreciprocal third-party benefits require justification and cannot simply be interpreted away. For employees, it confirms that adhesion alone need not receive a particular procedural-unconscionability label when the substantive defects independently support refusal to enforce the agreement.