California Court Strikes Down Arbitration Agreement

In Velarde v. Monroe Operations, LLC (G063626, filed June 6, 2025), the California Court of Appeal affirmed a trial court’s refusal to enforce an arbitration agreement presented to a new hire as a condition of employment. The opinion offers a clear-eyed application of the unconscionability doctrine and provides critical guidance for employers who rely on arbitration agreements to manage workplace disputes.

Background

Newport Healthcare, a nationwide behavioral health provider, required Karla Velarde to sign an arbitration agreement on her first day of work. She was handed 31 documents by an HR manager who stood by as she completed them, emphasizing the need to get through them as fast as possible. When Velarde expressed discomfort with the arbitration agreement and said she did not understand it, the HR manager told her it would allow the company to resolve disputes without having to pay lawyers and that signing it was necessary to begin work. Velarde signed.

After her termination, Velarde filed claims for discrimination, retaliation, and whistleblower violations. Newport moved to compel arbitration. The trial court denied the motion, finding the agreement both procedurally and substantively unconscionable. The Court of Appeal affirmed.

Unconscionability: Definitions and Application

Under California law, a written agreement to submit a controversy to arbitration is valid, enforceable, and irrevocable, “save upon such grounds as exist for the revocation of any contract” (quoting Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478, 492). Unconscionability is such a ground. The doctrine has both a procedural and a substantive element, and while both must be present, they need not be present to the same degree (id., at p. 493).

Procedural Unconscionability: Oppression and Surprise

The court had no trouble finding procedural unconscionability. “Procedural unconscionability addresses the circumstances of contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power” (Velarde, at p. 5, quoting Ramirez, supra, 16 Cal.5th at p. 492). This standard is “generally established by showing the agreement is a contract of adhesion” (ibid.).

Here, Newport’s conduct checked every box: a preprinted, take-it-or-leave-it agreement, buried in a thick stack of onboarding forms, delivered with no explanation and under time pressure. Most critically, the HR manager’s response to Velarde’s questions about the agreement—stating it meant she would not need a lawyer—was plainly false. As the court emphasized, “This was manifestly untrue, as the agreement required the parties to resolve all covered disputes in an adversarial arbitration before an arbitrator in which all parties would bear their own attorney fees” (Velarde, at p. 7).

Whether the misstatement was intentional or not did not matter: “We do not mean to suggest the HR manager intentionally misled Velarde. The misinformation may have been given out of negligence, ignorance, or inadvertence. But we focus on the effect, not the intent” (id., at p. 7).

Substantive Unconscionability: Unfairness in Terms

“Substantive unconscionability looks beyond the circumstances of contract formation and considers the fairness of an agreement’s actual terms, focusing on whether the contract will create unfair or one-sided results” (Velarde, at p. 5, quoting Ramirez, supra, 16 Cal.5th at p. 493). The test asks whether the terms “impair the integrity of the bargaining process or otherwise contravene the public interest or public policy” (OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 130).

The court emphasized that substantive unfairness cannot be judged in the abstract. It “must be sensitive to context” (Velarde, at p. 10, quoting OTO, supra, at p. 136). And the context here mattered. The HR manager expressly conveyed that Velarde would not need to hire a lawyer and would not be required to pay one. But the agreement incorporated the full complexity of formal litigation, requiring compliance with the Federal Rules of Civil Procedure and Federal Rules of Evidence. It did nothing to approximate the inexpensive, speedy process she had been promised. In short, “the agreement did not match up with Velarde’s reasonable expectations given what was expressly conveyed to her” (Velarde, at p. 11).

The court also noted that the imbalance in legal sophistication amplified the one-sided nature of the agreement: “It is unlikely a lay person, inexperienced in the nuances of employment law, would be able to navigate the procedural complexities… It is much more likely Newport Healthcare… had an attorney available who could navigate those complexities for it” (id., at p. 11).

Key Holding

“Had Newport Healthcare either correctly explained the terms of the agreement, or had not explained them at all, and had given Velarde a reasonable opportunity to review the agreement and to consult counsel, this would be a different case” (Velarde, at p. 12). But it did not. And so the court affirmed the denial of the motion to compel arbitration.

Conclusion

For California employers, Velarde is a clear warning. Even facially valid arbitration agreements may be unenforceable if the process by which they are presented undermines an employee’s ability to understand and make a voluntary choice. Adhesion alone may not be fatal. But coercion, false assurances, and legal complexity masked as informality will not survive judicial scrutiny. The enforceability of arbitration agreements does not turn only on what they say but on how they are delivered.

*This publication is designed to provide general information on pertinent legal topics. The statements made are provided for educational purposes only. They do not constitute legal or financial advice, nor do they necessarily reflect the views of Lido Law Group, APC, or any of its attorneys other than the author(s). This publication is not intended to create an attorney-client relationship between you and Lido Law Group, APC. Substantive changes in the law subsequent to the date of this publication might affect the analysis or commentary. Similarly, the analysis may differ depending on the jurisdiction or circumstances. If you have specific questions as to the application of the law to your activities, you should seek the advice of your legal counsel.