California Supreme Court Reaffirms Core Values Protecting Workers: Abusive Arbitration Practices Rejected in Fuentes v. Empire Nissan

California Supreme Court Reaffirms Core Values Protecting Workers: Abusive Arbitration Practices Rejected in Fuentes v. Empire Nissan

In recent decades, some employers have used fine-print, mandatory, pre-employment arbitration agreements to try to escape all manner of liability for unlawful workplace activities. But this month, California’s Supreme Court once again established that arbitration agreements favored by employers are no more and no less important than other contracts, and cannot be used abusively to strip workers’ basic rights.

In Fuentes v. Empire Nissan, Inc. (Feb. 2, 2026) 2026 WL 265574 (Case No. S280256), the Supreme Court continued to focus on “mutuality” in arbitration agreements – making sure that employers cannot rely upon agreements for out-of-court arbitration when it suits them but then run to court when those same employers want attention to their own priorities. In Fuentes, and many other cases, the employer had an arbitration clause in its pre-employment paperwork, and it also made the employee, after she was hired, sign confidentiality agreements. While the employer would seek to force arbitration of all the typical claims an employee would bring (like the discrimination claims she raised), the employer’s confidentiality agreements arguably created a one-sided carve-out that allowed the employer to pursue in court the intellectual property claims the company was most likely to bring. (Fuentes, supra, at **7-8.) The Supreme Court reversed the Court of Appeal and remanded the case to consider whether this created a lack of mutuality that would warrant denying the employer’s motion to compel arbitration altogether.

In Fuentes, the document with the arbitration clause was “printed in a very small font and its text [was] so blurry and broken up that it [was] nearly unreadable. Its arbitration provision [was] a lengthy, densely printed paragraph consisting of complex sentences filled with legal jargon and statutory references.” (Id. at *1.)  Also, “the document was part of an employment application packet that Empire Nissan gave Fuentes only five minutes to review. Fuentes spent most of this time filling out the employment application form. She was told that the documents in the packet had to do with her employment application, contacting her references, and a drug testing requirement, that she had to complete the documents to work for Empire Nissan, and that she should hurry because the drug testing facility was about to close. She was not offered an opportunity to ask questions. She did not receive a copy.” (Id.)

Later, after she started working, Fuentes signed two confidentiality agreements that (among other things) were designed to protect the company’s confidential information and trade secrets, and authorized the company to seek an injunction. (Id.)

After years of working at the company, Fuentes had to go on medical leave for cancer treatment, and Empire Nissan fired her. (Id. at *2.) She sued the company for wrongful termination and the company moved to compel arbitration. (Id.)  The trial court denied the company’s motion to compel arbitration, finding a “very high degree of procedural unconscionability” because the agreement was barely legible, difficult to understand, and Fuentes had no meaningful opportunity to review or negotiate it. (Id.) The trial court also found a low to moderate amount of substantive unconscionability, based upon the “fine-print terms” and “the confidentiality agreements’ apparent carveout from the arbitration agreement of unfair competition, trade secret, and confidentiality claims — claims that Empire Nissan, not Fuentes, would bring.” (Id.) The Court of Appeal reversed the trial court finding no substantive unconscionability in the fine print and that the confidentiality agreements’ terms could be arbitrated, as well. (Id.) A dissenting Court of Appeal justice would have held that Fuentes had shown substantive unconscionability based upon the fine-print terms, citing OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 128 (Kho). The Supreme Court granted review, and ultimately reversed and remanded.

Fuentes reiterated that “[b]oth procedural and substantive elements must be present to conclude a term is unconscionable, but these required elements need not be present to the same degree.” (Id., 2026 WL 265574, at *3, citing Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478, 403.) Courts “apply a sliding scale analysis under which the more substantively oppressive [a] term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Id. [internal quotation marks omitted]) “Although procedural unconscionability alone does not invalidate a contract, its existence requires courts to closely scrutinize the substantive terms to ensure they are not manifestly unfair or one-sided. The ultimate issue in every case is whether the terms of the contract are sufficiently unfair, in view of all relevant circumstances, that a court should withhold enforcement.” (Fuentes, supra, at *3, quoting Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 912 [internal quotation marks omitted].)

In Fuentes, as in almost every employment case involving any but the highest-level executives, there was procedural unconscionability because the prospective employer was directing an applicant to sign an arbitration agreement as part of the employment application process, making “the economic pressure on the applicant to sign the agreement particularly high.” (Fuentes, supra, at *4.) There was “significant oppression” based upon the rush to sign and surprise because of the small font size and near illegibility. (Id.) The Supreme Court noted that there was a sentence with 214 words in it and a paragraph that referred to six different statutes by name, which would present a “substantial barrier to understanding” the arbitration agreement’s terms. (Id.) “Because the circumstances under which Fuentes signed the agreement involved such a high degree of procedural unconscionability, even a low degree of substantive unconscionability may render the agreement unenforceable.” (Id. at *5.)

The Supreme Court reversed based upon the Court of Appeal’s erroneous evaluation of substantive unconscionability. “[T]he unconscionability doctrine is concerned not with a simple old-fashioned bad bargain, but with terms that are unreasonably favorable to the more powerful party.” (Id., quoting Kho, 8 Cal.5th at 129-130 [internal quotation marks omitted].) The evaluation of the “fine-print terms” should have been as to whether they were “both hidden and unfavorable to the nondrafting party.” (Fuentes, supra, at *5.)

Perhaps more important is the Fuentes analysis of the question of mutuality, incorporating Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 117, noting that “[g]iven the disadvantages that may exist for plaintiffs arbitrating disputes, it is unfairly one-sided for an employer with superior bargaining power to impose arbitration on the employee as plaintiff but not to accept such limitations when it seeks to prosecute a claim against the employee, without at least some reasonable justification for such one-sidedness based on business realities.” (Fuentes, supra at *6 [quoting Armendariz].) Because there was no business justification argument, “[w]hether the confidentiality agreements support[ed] a finding of substantive unconscionability therefore turn[ed] on whether they created a one-sided exemption from arbitration for claims that Empire Nissan would prosecute against Fuentes.” (Id.)

Interestingly, in Fuentes, the confidentiality agreements were signed at a different time from the arbitration agreement – significantly later – and, on their face, did not say that unfair competition or trade secret/confidential information claims could be brought in court, as the Chief Justice noted in her dissent (Id. at **6-7; id. at *14 [dissent].) However, the Supreme Court reversed and remanded because the absence of any statement in the confidentiality agreements about arbitration meant the confidentiality claims could be brought in court, since arbitration is strictly a matter of consent and absent an agreement to arbitrate, contract claims may be brought in court. (Id. at *7.)

Fuentes cited approvingly Alberto v. Cambrian Homecare (2023) 91 Cal.App.5th 482, 490-491, which relied upon Civil Code section 1642 to support construing arbitration and confidentiality agreements together in the employment context. In Fuentes, the agreements were signed at different times, but especially where (as is commonly true) an employer requires these agreements to be signed at the same time, and pre-employment, employees will have a powerful argument that these agreements need to be read together, even if they are supposedly two different documents. If an employer requires arbitration of basic employment claims (like discrimination, whistleblower, or wage claims), but would allow an employer to seek an injunction in court for claims involving confidentiality or intellectual property, after Fuentes, Ramirez, and other recent precedents stretching back to Armendariz, employees have a strong argument that the arbitration agreement lacks mutuality, and should not be enforced.

In Fuentes, the Supreme Court sent the matter back to the trial court to resolve the confusion about whether the later-signed confidentiality agreement (which permitted court action) superseded the arbitration agreement, which, on its face, said that it could not be superseded unless a modification was signed by the company president. (Fuentes, supra at *7.) The Court of Appeal erroneously cited the principle that the “law strongly favors arbitration” to read the arbitration agreement to have “supervening force” over the confidentiality agreements – but the Supreme Court reiterated that arbitration agreements are not supercharged contracts – they are “treated like other contracts.” (Id. at *7, quoting Quach v. California Commerce Club, Inc. (2024) 16 Cal.5th 562, 579.) “When, as in the present case, a high degree of procedural unconscionability is involved in an arbitration agreement’s formation, treating that agreement like other contracts involves closely scrutinizing its terms for unfairness or one-sidedness and resolving ambiguities in meaning against the drafting party.” (Fuentes, supra at *7.)

Finally, Fuentes held that the trial court should have had a chance to consider the worker’s argument that the arbitration agreement was not a valid contract to begin with (i.e., where the parties had a meeting of the minds) because of its formatting and how it was presented, which precluded the worker from ever really agreeing to its terms. (Id. at **9-10.)

If you have an arbitration agreement and confidentiality agreement that create one-sided carve-outs for your employer’s claims while your employer is attempting to force you into arbitration, or if you believe your arbitration agreement may not have been a valid contract to begin with, contact Bryan Schwartz Law for help.