Reported / Citable
Background
Michelle Phan worked at Elk Grove Subaru and Elk Grove Volkswagen — two California car dealerships under the Knight Sacramento SU Inc. umbrella — intermittently from 2022 to 2024. At various points during her employment, she was required to sign standalone arbitration agreements as a condition of continued work. The agreements were adhesion contracts prepared by Knight and presented to Phan on a take-it-or-leave-it basis, including one signed after she had already been employed for over a year and a half at one of the dealerships.
The arbitration agreements were broad. They required Phan to arbitrate “any and all claims” she might have — not only her own claims against Knight, but also claims against Knight’s affiliated entities, owners, managers, attorneys, sister companies, subsidiaries, and parties to Knight’s employee benefit plans. The class action waiver in the agreements blocked any class or representative proceeding. The agreements also included a severability clause that Knight relied upon as a fallback if particular provisions were found unenforceable.
In August 2024, Phan filed a wage and hour lawsuit individually and on behalf of a class of Knight employees, alleging failures to pay minimum wages, overtime, meal and rest period premiums, and accurate pay stubs, as well as a separate PAGA notice. When Knight moved to compel individual arbitration and strike the class claims, the trial court denied the motion, finding both procedural and substantive unconscionability under Cook v. University of Southern California (2024) 102 Cal.App.5th 312. Knight appealed.
The Court’s Holding
The Third District affirms. The arbitration agreements are unconscionable on both procedural and substantive grounds, and the unconscionable terms so thoroughly permeate the agreements that severance would not save them.
On procedural unconscionability, the court finds a high level of unfairness in how the agreements were presented. They were contracts of adhesion — pre-printed, non-negotiable, offered on a take-it-or-leave-it basis. More significantly, Phan was required to sign one of the agreements after 18 months of employment, when she faced substantial economic pressure if she refused. This is not the “low” procedural unconscionability typical of an at-hire adhesion contract; the economic coercion of an existing employee creates heightened unconscionability.
On substantive unconscionability, the court follows Cook v. USC and finds the agreements’ third-party beneficiary provisions fatally one-sided: Phan must arbitrate claims against Knight’s affiliates, but those affiliates bear no reciprocal obligation to arbitrate their claims against Phan. This structural imbalance — combined with the sweeping class waiver — renders the agreements substantively unconscionable. Knight’s attempt to distinguish Cook is rejected; the Third District declines to part ways with Cook.
On severability, the court upholds the trial court’s refusal to sever the offending provisions. Where unconscionability so thoroughly infects the agreement, severing particular clauses would not remove the taint. The court will not rewrite Knight’s bargain for it.
Key Takeaways
- Arbitration agreements imposed on existing employees as a condition of continued employment face heightened procedural unconscionability — the economic coercion involved is materially greater than at-hire agreements.
- Third-party beneficiary clauses that force employees to arbitrate all claims against a broad network of employer affiliates, without reciprocal arbitration obligations, are substantively unconscionable under Cook v. USC (2024).
- Cook v. University of Southern California (2024) is being followed consistently across California appellate districts; employers should treat it as controlling authority.
- Severability clauses cannot salvage arbitration agreements when unconscionable terms permeate the core bargain — courts are not obligated to rewrite the employer’s agreement.
- Employers with multi-entity structures — parent companies, affiliates, sister stores — should audit their arbitration agreements for one-sided third-party beneficiary clauses that likely cannot survive Cook scrutiny.
Why It Matters
Wage and hour class actions remain one of the highest-stakes areas of California employment litigation, and forced arbitration of individual claims has been employers’ primary shield against class exposure. This ruling shows that shield is becoming unreliable when arbitration agreements overreach. The Cook decision from 2024 is establishing itself as a durable standard: agreements that attempt to conscript employees into arbitrating claims against a broad constellation of affiliated entities — while those entities bear no corresponding obligation — will not be enforced.
For California employers, especially those operating through multi-entity franchise or dealership structures, this decision is a clear signal to redesign arbitration programs. The key vulnerabilities are (1) mid-employment re-signing requirements under economic duress, (2) asymmetric third-party beneficiary provisions, and (3) class waivers paired with those provisions. Employers who rely on boilerplate arbitration agreements drafted before Cook should have those agreements reviewed now, before litigation exposes them to class-wide liability.