California Supreme Court Signals Heightened Scrutiny for Arbitration Agreements

Background

The California Supreme Court recently issued a decision that provides important guidance for employers using arbitration agreements. The Court clarified that, while formatting issues alone will not invalidate an arbitration agreement, the way an agreement is presented to employees can play a significant role in whether it is ultimately enforced. In Fuentes v. Empire Nissan, Inc., the Court focused on how readability, clarity, and the onboarding process affect the unconscionability analysis used to determine if an arbitration agreement is enforceable.

Fuentas involved an employment application that included a mandatory arbitration provision printed in dense, very small, and difficult-to-read text. The applicant was given only a few minutes to complete the paperwork, was not told it contained an arbitration agreement, and did not receive a copy. The trial court denied the employer’s motion to compel arbitration based on procedural concerns, but the Court of Appeal reversed. In turn, the California Supreme Court reversed the Court of Appeals and remanded, clarifying that although formatting alone does not establish substantive unfairness, courts must closely scrutinize the terms of difficult-to-read agreements for potential unfairness or lack of mutuality.

What the Court Said About Readability

The Court confirmed an important point for employers: small font, dense text, or poor formatting does not automatically make an arbitration agreement unenforceable. Issues such as font size, layout, or readability generally relate to how the agreement was presented, not whether the terms themselves are unfair.

At the same time, the Court emphasized that the presentation process remains critical. If an arbitration agreement is difficult to read, confusing, or provided in a rushed onboarding process without a meaningful opportunity for review, courts will scrutinize the terms more closely. California courts apply a sliding-scale approach to unconscionability. When the circumstances surrounding the signing of an agreement involve a high degree of pressure or surprise, even a relatively modest level of unfairness in the terms may be enough for a court to decline enforcement.

Increased Scrutiny in the Employment Setting

The Court found that the circumstances in this case reflected a particularly high level of procedural concern. The arbitration provision was nearly illegible, presented as a condition of employment, and provided in a rushed onboarding setting without a meaningful opportunity for review or questions. According to the Court, these conditions undermined the expectation that arbitration agreements reflect a knowing and voluntary decision.

The decision underscores that courts are especially attentive to how agreements are presented in the employment context, where employees often have limited bargaining power. When formatting or onboarding practices make it harder for employees to understand what they are signing, courts are more likely to closely examine the agreement’s terms and enforceability.

No Special Preference for Arbitration

The Court also rejected the idea that ambiguous agreements should be interpreted in favor of arbitration simply because arbitration is generally favored. Instead, arbitration agreements must be evaluated like any other contract. Where the employer drafted the agreement and the circumstances of presentation raise concerns, ambiguities will be interpreted against the employer.

The Court also noted potential issues created by separate confidentiality agreements that may have allowed the employer to pursue certain claims in court while requiring employees to arbitrate their claims. Because the record was not fully developed, the Court remanded the case for further proceedings, directing the trial court to consider whether the agreements, taken together, created ambiguity or a potential lack of mutuality, and whether the employee meaningfully assented to the arbitration provision.

What This Means for Employers

Although the decision confirms that “fine print” alone will not invalidate an arbitration agreement, it increases the risk for employers that rely on dense formatting, long blocks of text, or rushed onboarding practices. The Court’s message is practical: arbitration agreements should be presented in a way that employees can realistically read and understand.

Fuentes reflects a broader trend in California showing that challenges based solely on formatting may fail, but poor presentation can still undermine enforceability by triggering heightened scrutiny of fairness, mutuality, and employee consent. Agreements that appear visually overwhelming or are presented under time pressure are more likely to face challenges.

Employers should review their California arbitration materials to ensure they are clearly formatted, consistent with related agreements, and provided with a meaningful opportunity for employees to review and ask questions. For assistance or questions, please contact one of Honigman’s Employment and Labor Attorneys here.