After noting that a “twist of fate brings to us substantially the same Nissan employment arbitration contract in two otherwise unrelated cases,” the Second District Court of Appeal published a pair of decisions involving the legal standard for determining “unconscionable” arbitration clauses.

The opinion in Basith v. Lithia Motors, Inc. – B316098 (Apr.2023) began by noting that “These two cases raise the same vital question in contract law: what exactly is California’s test for unconscionability? More precisely, when there is a very high degree of procedural unconscionability, is there any meaningful content to the second element of substantive unconscionability? In an online world where contracts usually appear only in a take-it-or-leave-it format and where there thus is much procedural unconscionability, this question about substantive unconscionability looms large.”

In Basith, and the companion Fuentes v. Empire Nissan, Inc. – B314490 (Apr.2023) Both cases involved employees of unrelated Nissan dealerships in southern California, who agreed to similar Nissan form arbitration clauses when hired. Both sued the dealerships for labor code related violations, and the dealerships filed motions to compel arbitration of the disputes. In both cases the trial court denied the motion, ruled the arbitration contract was unconscionable. The trial court was reversed in both published opinions.

Mohammad Basith applied to work as general manager for a car dealership doing business as Nissan of Carson. The dealership’s owner, Lithia Motors, Inc., ran a network of dealerships. Basith signed an arbitration agreement electronically. After Nissan terminated Basith, he sued Nissan and Nissan moved to compel arbitration. The trial court denied the motion, ruling the arbitration agreement was unconscionable.

When Evangelina Yanez Fuentes applied to work for at another Nissan dealership, she signed paper documents that included an “Applicant Statement and Agreement.” Below that heading, the print in this one-page form was “strikingly minute and, in the record photocopy, blurry to boot.” The longest paragraph squeezed something like 900 words into about three vertical inches.

When the Nissan dealership fired Fuentes, she sued, and it moved to compel arbitration. The trial court ruled the arbitration contract was unconscionable. Font size was a dominating issue in one case – Fuentes – and entirely absent as an issue in Basith’s case. In Fuentes the longest paragraph squeezed something like 900 words into about three vertical inches. Basith did not state he had trouble reading these documents.

In OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 125 (Kho) the Supreme Court of California ruled that the unconscionability defense has two mandatory elements: a party must establish both procedural and substantive unconscionability.

The opinion noted that nearly every form employment contract can be perceived as having some procedural unfairness. Employees may lack power to bargain at all. Sometimes employers insist, “sign it or no job.” However, when “the law attributes some procedural unfairness to every form employment contract, the real fight boils down to whether the substance of the final terms are fair. “We must enforce this contract if its substance is even-handed.”

Fuentes argues the tiny and unreadable print of Nissan’s form makes the substance of the contract unfair. Tiny font size and unreadability go to the process of contract formation, however, and not the substance of the outcome. Font size and readability thus are logically pertinent to procedural unconscionability and not to substantive unconscionability.

Font size is not the substance of a contract. Terms can be fair or unfair in substance, no matter the font size. When an employer puts a contract in an unreadably minute font, this practice definitely is problematic, but not for substantive reasons. Under California law, an agreement must be both procedurally and substantively unconscionable to be unenforceable. Allowing a single feature to count for both categories would nullify this requirement.

Another argument about substantive unfairness is that Fuentes was the only one to sign the arbitration agreement, and this shows a lack of mutuality. “This argument is misplaced. Nissan’s missing signature is irrelevant to whether the substance of the contact is fair. A missing signature cannot make a fair deal unfair.”

Basith maintains the contract’s wording is so convoluted that uncounseled lay people would not understand whether the agreement meant they were waiving rights.

“A complaint about prolix legalese is the same type of objection as a complaint about font size. If the substance of a contract is fair, how the contract is expressed cannot change that. Font size, format style, or verbal obscurantism does not affect the fairness of the final allocation of rights and duties. This contention does not address, and cannot establish, substantive unfairness. To rule otherwise would drain the element of substantive unconscionability of meaningfully independent content and effectively would turn the unconscionability doctrine into a one-element test of vast and unsettling sweep.”

The majority opinion concluded that since the unconscionability defense requires a party to establish both procedural and substantive unconscionability. (Kho, supra, 8 Cal.5th at p. 125.) and there was no substantive unconscionability established in either case, the trial court was reversed in both cases, and the cases remanded with an order to arbitrated both cases.

A dissenting opinion was filed by P.J. Stratton in both cases.