In a pair of cases decided by the Second Appellate District of the California Court of Appeal, the Court reiterated the difference between procedural and substantive unconscionability when it comes to invalidating arbitration agreements based on unconscionability: procedural unconscionability focuses on the fairness of the process leading to the formation of the agreement, whereas substantive unconscionability focuses on whether the terms of the agreement are so one-sided that it unfairly benefits one of the parties to the agreement. The Court repeated the well-established rule in California that both procedural and substantive unconscionability must be present to invalidate an arbitration agreement and cautioned that a court must not “double count” procedural unconscionability or otherwise “water down” substantive unconscionability in its analysis.

The Two Cases

The facts of the two cases were similar. In Basith v. Lithia Motors, Inc. and Fuentes v. Empire Nissan, Inc., the Court of Appeal reviewed similar arbitration agreements in two otherwise unrelated cases. Both cases involved employees who signed arbitration agreements before starting work at car dealerships. In Basith, the plaintiff signed an online arbitration agreement, which he had to sign if he wanted the job (i.e. it was presented as take-it-or-leave-it.) In Fuentes, the plaintiff signed a single one-page form that had tiny and seemingly blurred print that rendered it largely unreadable.

Both agreements were deemed to have procedural unconscionability because they were presented to the employees on a take-it-or-leave-it basis in connection with their employment. The key question, then, was whether any substantive unconscionability existed in addition to procedural unconscionability. While substantive and procedural unconscionability do not need to be present to the same degree because the two are evaluated on a sliding scale where the greater presence of one can compensate for a lesser showing of the other, both substantive and procedural unconscionability must be present to invalidate the arbitration agreement. 

The Court held that despite a number of arguments raised by the employees, the substance of the arbitration agreements was fair, and therefore no substantive unconscionability existed to invalidate the agreements:

• Font Size and Readability – In Fuentes, the Court rejected the employee’s argument that the tiny font size and unreadability of the agreement made it difficult to understand and thus substantively unconscionable.  The Court explained that “font size and readability go to the “process of contract formation” and therefore are “logically pertinent to procedural unconscionability and not substantive unconscionability.

• Mutuality and Multiple Documents – In Fuentes, the Court rejected the employee’s argument that the agreement did not apply fully to the employer and the agreement was confusing to a layperson because of the presence of multiple contracts. The Court explained that the arbitration agreement controlled over any other document and the agreement applied to the employer.

• Instructions on How to Initiate Arbitration – In Fuentes, the Court rejected the employee’s argument that the agreement’s lack of instructions on how to initiate arbitration gave rise to substantive unconscionability. The Court explained that the agreement stated that the procedures for arbitration would be governed by California’s Arbitration Act, which is not unconscionable.

• Employer’s Signature – In Fuentes, the Court rejected the employee’s argument that the agreement’s lack of the employer’s signature amounted to substantive unconscionability. The Court explained that this might create an issue of whether a contract exists at all – an issue that the employee did not raise, but it does not concern how fair the agreement was and thus does not concern substantive unconscionability.

• Legalese – In Basith, the Court rejected the employee’s argument that a layperson would have been led to believe that they had waived the ability to file a complaint with the Equal Employment Opportunity Commission or California Department of Fair Employment and Housing (“DFEH”) (the DFEH is now known as the California Department of Civil Rights). The Court explained that prolix legalese may result in procedural unconscionability since it goes to the form of the arbitration agreement, but it does not concern substantive unconscionability since the agreement did not actually waive such rights.

 The Takeaway

Unconscionability is one of the few contractual defenses that may be used to invalidate an arbitration agreement. Basith and Fuentes are therefore important cases because they confirm the dividing line between procedural and substantive unconscionability and ensure that a party or court does not “double count” procedural unconscionability or otherwise “water down” substantive unconscionability in a misguided rush to invalidate an arbitration agreement.