Michelle Phan worked intermittently between 2022 and 2024 for two car dealerships owned by Knight Sacramento SU Inc. and affiliated entities (Knight) — Elk Grove Volkswagen and Elk Grove Subaru. During her employment she signed several arbitration agreements at each dealership, including a standalone agreement at each that superseded the others. The two standalone agreements were identical. They required Phan to arbitrate “any and all claims” arising from her employment “or any other interaction/relationship” with Knight, past, present, or future, and extended that duty to a long list of third-party beneficiaries — Knight’s owners, officers, employees, agents, sister companies, subsidiaries, and more. The agreements barred class arbitration, carved out a handful of specific claims (workers’ compensation, unemployment benefits, NLRA claims, and, at Phan’s option, sexual harassment or assault claims), and included a severability clause.

In August 2024, Phan sued Knight individually and on behalf of a class, alleging eight wage-and-hour violations: unfair competition (Bus. & Prof. Code, §17200) and failures to pay minimum wages (Lab. Code, §1194, §1197, §1197.1), overtime (§510), meal and rest periods (§226.7, §512), itemized wage statements (§226), timely wages (§201, §202, §203), and expense reimbursement (§2802). She demanded a jury trial and separately filed a PAGA notice with the state labor agency. When Knight asked her to arbitrate, she refused, calling the agreements unconscionable.

Knight moved to compel arbitration of Phan’s individual claims and to strike the class claims. Phan opposed, arguing the agreements were procedurally unconscionable adhesion contracts and substantively unconscionable because their scope reached far beyond the employment relationship and bound only her — not Knight’s many affiliated third parties — to arbitrate. Knight countered that any procedural unconscionability was low because the arbitration terms were presented in a standalone document, and it submitted a declaration from its HR manager explaining that the broad language was meant to “capture” the many types of claims employees might bring.

The Sacramento County Superior Court found the agreements procedurally unconscionable, but only mildly so, since the arbitration terms were clearly written and stood alone rather than being buried in a longer document. On the merits, however, the court found a high degree of substantive unconscionability. Relying on Cook v. University of Southern California (2024) 102 Cal.App.5th 312, the court held that Knight’s explanation did not amount to the kind of factually established or contractually explained “business realities” needed to justify an arbitration clause reaching claims unrelated to employment, and that the agreements lacked mutuality because Phan, but not Knight’s third-party beneficiaries, was bound to arbitrate. Because these defects went to the core of the agreements, the court declined to sever them and denied Knight’s motion outright.

In the published case of Phan v. Knight Sacramento SU Inc., No. C103401 (Certified for publication July 2026) – the Court of Appeal affirmed the trial court’s order denying Knight’s motion to compel arbitration.

The panel first took up Knight’s invitation to depart from Cook, a decision of a sister district that is not binding but that California courts ordinarily follow absent good reason to disagree. The court found Knight had misread Cook: that decision did not hold that all broadly worded arbitration clauses are automatically unconscionable, and a separate Court of Appeal decision, Ayala-Ventura v. Superior Court (2026) 119 Cal.App.5th 241, had already confirmed as much. Rather, Cook condemned agreements that reach claims unconnected to employment without any justification, and that impose arbitration on the employee alone while leaving the employer’s affiliates free to sue in court. Seeing no material difference between Knight’s agreements and the one in Cook, and no good reason to part ways with that precedent, the court applied it here.

Turning to the merits, the panel agreed the agreements were substantively unconscionable for two independent reasons. First, their language covering any claim connected to “any other interaction/relationship” Phan had or would have with Knight went well beyond the employment relationship, distinguishing them from the narrower, employment-tied language in Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, which Knight had urged as the better analogy. Employers may draft a somewhat broader-than-literal “margin of safety” into an arbitration clause if a legitimate commercial need for the breadth is either spelled out in the contract or proven with evidence, citing Civil Code, §1670.5, and the framework of Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83. Knight’s stated desire to sweep in any conceivably related claim did not meet that bar, since the actual contract language covered claims with no tie to employment at all. Second, the agreements lacked mutuality: they bound Phan to arbitrate against a sweeping list of Knight-affiliated third parties without requiring those parties to do the same for any claims they might bring against her. The court rejected Knight’s argument that mutuality arose after the fact when some third parties later sought to compel arbitration, explaining that unconscionability is assessed as of the time the contract was signed, and that other listed third parties named in the suit had still not agreed to arbitrate anything.

Because these two defects – unjustified overbreadth and one-sided treatment of third-party claims – went to the central purpose of the agreements, the court held the trial court acted within its discretion under Civil Code §1670.5 and Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478, in declining to sever the offending terms and enforce what remained. Having resolved the case on unconscionability grounds, the panel did not reach Knight’s remaining arguments about PAGA waivers or jury-trial waivers in the agreements.