In Fuentes v. Empire Nissan, Inc., the California Supreme Court held that an illegible arbitration agreement does not automatically invalidate the agreement. The Court explained that while “illegibility” may create procedural unconscionability (unfair contract formation), a court must also find substantive unconscionability (unfair contract terms) to invalidate an agreement. However, the Court noted that agreements involving a high degree of procedural unconscionability may be rendered unenforceable by “even a low degree of substantive unconscionability[.]”
Facts
When applying for employment at Empire Nissan, Evangelina Yanez Fuentes signed an “Applicant Statement and Agreement,” which included a broad arbitration clause covering “all disputes which may arise out of the employment context,” and provided that future modification of terms must be “in writing and signed by the President of the company.” The arbitration provision was printed in very small font with “blurry and broken up” text and consisted of dense and “complex sentences filled with legal jargon and statutory references.”
Fuentes stated that she was given “only five minutes” to review the employment application packet—which Empire Nissan advised had to do with her application, references, and drug testing requirement—and was told to hurry because “the drug testing facility was about to close.” Fuentes was neither offered an opportunity for questions nor provided a copy of the documents.
At Empire Nissan’s request, Fuentes later signed two confidentiality agreements that stated, among other things, it “supersedes any and all prior agreements” on certain subjects and, if breached, authorized Empire Nissan to seek injunctive relief and “any other remedies available[.]” There is no signature from Empire Nissan’s president on either copy of the two confidentiality agreements.
Two and a half years later, Fuentes went on medical leave for cancer treatment. After Fuentes requested an extension of her leave before returning to work, Empire Nissan terminated Fuentes. Fuentes filed a complaint alleging wrongful discharge and related claims, and Empire Nissan filed a motion to compel arbitration. Fuentes opposed the motion arguing that: (1) Empire Nissan failed to prove there was a valid agreement to arbitrate because the agreement was illegible, and Empire Nissan did not provide her with adequate time to review; and (2) even if valid, it was unenforceable because it was unconscionable.
Lower Court Decisions
The trial court denied Empire Nissan’s motion ruling that:
- Fuentes established “a very high degree of procedural unconscionability” because the arbitration provision was “barely legible,” the terms were “difficult to understand,” and Empire Nissan failed to provide an opportunity to review or negotiate the terms; and
- Fuentes established “a low to moderate degree of substantive unconscionability” based on the arbitration agreement’s “fine-print terms[,]” and in the confidentiality agreements’ carveout from the arbitration agreement of claims that only Empire Nissan could bring.
Since the trial court concluded the arbitration agreement was unconscionable, it did not reach Fuentes’ argument that the agreement did not give rise to a valid contract.
The Court of Appeal reversed, concluding that Fuentes’ “illegibility” arguments “go exclusively to procedural unconscionability—not to substantive unconscionability[.]” Relying on the federal and state presumption in favor of arbitration, the majority interpreted the confidentiality agreements to require arbitration of claims brought under them. Based on this interpretation, the Court of Appeal held there was no substantive unconscionability and, accordingly, did not address procedural unconscionability.
California Supreme Court Decision
While the California Supreme Court agreed that the trial court erred in relying on the arbitration agreement’s illegibility to support a finding of substantive unconscionability—noting that “legibility generally does not affect the substance of its terms”—it held that the Court of Appeal erred by relying on a pro-arbitration presumption to conclude the terms were not substantively unconscionable without addressing procedural unconscionability and directing the trial court to grant Empire Nissan’s motion instead of remanding for consideration Fuentes’ argument that there was no valid agreement to arbitrate.
In its analysis, the California Supreme Court noted that while “tiny, blurry font” does not render an otherwise fair and mutual term substantively unconscionable, it is indicative of procedural unconscionability because of the element of surprise. It further explained that “small font size can provide a basis for requiring a lesser showing of substantive unconscionability in the sliding scale analysis[,]” under which the more substantively oppressive a term, the less evidence of procedural unconscionability is required, and vice versa.
Given the high degree of procedural unconscionability present in this case, the California Supreme Court found that “even a low degree of substantive unconscionability may render the agreement unenforceable.” Accordingly, the Court of Appeal should have “closely scrutinized the agreement’s terms for unfairness or one-sidedness” and “construed any ambiguous provisions against Empire Nissan[.]”
The California Supreme Court reversed and remanded, directing the trial court to assess the agreements for substantive unconscionability consistent with its decision.
Employer Takeaways
While the California Supreme Court clarifies that “illegibility” alone will not invalidate an agreement, it confirms that courts must closely scrutinize such agreements under a “sliding scale” analysis and resolve ambiguities against the drafter. In light of this decision, employers should reassess their arbitration provisions and consider the following:
- Ensure that arbitration provisions are clearly formatted;
- Minimize legal jargon, and run-on sentences and paragraphs;
- Provide individuals with adequate time to review and ask questions;
- Carefully draft separate agreements to avoid unintended carveouts or ambiguities; and
- Consider referencing the arbitration agreement in separate contracts to clarify it does not override the arbitration agreement, unless the parties expressly state otherwise.
If you have any questions related to the California Supreme Court’s decision, or need assistance reviewing your organization’s arbitration agreements, please reach out to the NFC Attorney with whom you typically work or call us at 619.292.0515.