Broad, One-Sided Arbitration Agreement Held Unconscionable

Court

Cal. Ct. App., 3d Dist.

Decided

June 5, 2026

Case No.

C103401

In Phan v. Knight Sacramento SU Inc., the Third District Court of Appeal affirmed an order denying a motion to compel arbitration, holding that the employer’s arbitration agreements were both procedurally and substantively unconscionable and could not be saved by severance. The court found the agreements overly broad in scope and lacking mutuality, and it declined the employer’s request to depart from Cook v. University of Southern California. The opinion was certified for publication on July 2, 2026.

Background

Michelle Phan worked intermittently for two car dealerships operated by Knight Sacramento SU Inc. between 2022 and 2024. During her employment she signed standalone arbitration agreements, which were identical across the two dealerships.

In 2024, Phan sued Knight in both her individual capacity and on behalf of a class, alleging various wage and hour violations, and she demanded a jury trial. Knight moved to compel arbitration and, alternatively, to sever any invalid terms and enforce the rest.

Relying on Cook v. University of Southern California, the Sacramento County Superior Court denied the motion, finding the agreements procedurally and substantively unconscionable and declining to sever the offending terms. Knight appealed.

What the Court Held on Unconscionability

The parties did not dispute the procedural unconscionability finding, so the court focused on the substantive element, reviewing the arbitrability question de novo. It concluded the agreements were overly broad because they required Phan to arbitrate any past, present, or future claim against Knight and its third parties⁠—⁠including claims from “any other interaction/relationship”⁠—⁠whether or not tied to her employment.

The court rejected Knight’s attempt to analogize the agreements to Little v. Auto Stigler, Inc., noting that this language reached well beyond the employment context. It also found Knight had not justified that breadth: while an employer may build in a “margin of safety” for a legitimate commercial need, that need must be explained in the contract or factually established, and Knight’s stated reasons did not justify capturing every possible claim.

Separately, the court held the agreements lacked mutuality. They required Phan to arbitrate all her claims against a broad list of third-party beneficiaries without requiring those parties to arbitrate their claims against her.

Knight argued the agreements became mutual once certain third parties moved to compel arbitration, but the court held unconscionability is measured when the contract is made. It also observed that some listed third parties never sought arbitration, leaving the agreements one-sided as to them.

What the Court Held on Severance

Knight also challenged the trial court’s refusal to sever the unconscionable terms. Under Civil Code section 1670.5, subdivision (a), a court may refuse to enforce a contract or enforce its remainder without the unconscionable clause, with the strong preference being severance unless the agreement is “permeated” by unconscionability.

Applying Ramirez v. Charter Communications, Inc., the court explained the inquiry is qualitative: if the central purpose of the contract is tainted with illegality, it cannot be cured. Because the central purpose here was to compel arbitration of all of Phan’s claims through overbroad, one-sided terms, the trial court did not abuse its discretion in refusing to enforce the agreements. Having found the agreements unenforceable, the court did not reach Knight’s remaining arguments, and it affirmed.