Court of Appeal clarifies substantive unconscionability analysis for arbitration agreements: Velarde v. Monroe Operations, LLC

In Velarde v. Monroe Operations, LLC,          Cal.App.5th           (Jun. 10, 2025), the Court of Appeal (Fourth Appellate District, Division Three) held that strong evidence of procedural unconscionability coupled with misrepresentations regarding the substance of an arbitration agreement rendered the entire agreement unenforceable.

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Plaintiff sued alleging disability discrimination, whistleblower retaliation, and other violations following her termination. The trial court denied Defendant’s motion to compel arbitration, finding the arbitration agreement procedurally unconscionable due to pressure on Plaintiff to sign it, and substantively unconscionable because the agreement did not allow judicial review of the arbitration award. Defendant appealed.

The Court of Appeal affirmed the denial of the motion to compel arbitration. It found the agreement procedurally unconscionable due to its adhesive nature, Plaintiff’s limited review opportunity, and an HR manager’s misrepresentations about the agreement. Citing OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, the Court of Appeal held that strong procedural unconscionability, particularly when combined with the defendant’s express misleading of the plaintiff, also rendered the agreement substantively unconscionable. Given these findings, the court determined it did not need to address whether the agreement unlawfully prohibited judicial review, as the agreement was already unenforceable.

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