California employers that seek to enforce arbitration agreements with their employees may feel like they are playing the game of “Whack-A-Mole.” For those unfamiliar, the game of “Whack-A-Mole” is played on a machine with a table-like play area top, an elevated display screen and a large, soft mallet. Five to eight holes in the play area top are filled with small, plastic, cartoonish moles, or other characters, which pop up randomly throughout the game. Points are scored by, as the name suggests, rapidly whacking each mole with the mallet as soon as it appears from its hole. As soon as one mole retreats into its hole, another mole emerges, and this continues until time is up. California employers may feel like they are playing this game in the sense that they are constantly responding to new legislative or court created rules against enforcement of arbitration agreements. Although certain rules against enforcement have been invalidated based on preemption by the Federal Arbitration Act (“FAA”), California courts have continued to recognize new defenses against enforcement.
The recent decision by the California Court of Appeal in Phan v. Knight Sacramento SU Inc., ___ Cal.Rptr.3d __ (2026) is illustrative of employers’ recent “Whack-A-Mole” experience. The case also serves as a reminder that employers should regularly review their arbitration agreements, and, if necessary, revise their arbitration agreements to avoid potential grounds for courts to invalidate the agreements. Phan involved an employer’s appeal of a trial court order denying the employer’s motion to compel arbitration. The trial court found the arbitration agreement unenforceable on grounds of unconscionability because the agreement was procedurally unconscionable due to it being presented to the employee on a take-it-or-leave-it basis as a condition of employment. The trial court also found two provisions of the agreement substantively unconscionable. The first provision specified that claims subject to arbitration include those “which arise out of the employment context or any other interaction/relationship” between the parties. Relying on the Court of Appeal decision in Cook v. University of Southern California (2024) 102 Cal.App.5th 312, the Court found this provision too broad because it would require arbitration of claims arising outside of the employment relationship. The Court also found the appellant’s attempt to distinguish Cook or to set forth a reasonable justification for the provision unavailing. Second, the Court found a provision allowing third-party beneficiaries (including the company’s owners, employees and related companies) to enforce the arbitration agreement substantively unconscionable because it lacked mutuality in requiring the employee to arbitrate her claims against third-parties but did not obligate those third parties to arbitrate claims they might bring against the employee.
The Court also upheld the trial court’s decision to invalidate the arbitration agreement in its entirety rather than to apply the severability clause to strike the provisions it deemed unconscionable, noting that courts have discretion when making this decision. The Court explained that, when deciding whether to sever unconscionable provisions, courts should inquire whether the “the central purpose of the contract is tainted with illegality.” If it is, the court should refuse to enforce the contract. Here, the Court agreed with the trial court’s conclusion that “the central purpose of the Agreement was to require [the employee] to arbitrate all claims against [her employer] and third parties, whether related to employment or not.”
In the author’s view, the decision in Phan (and the Cook decision on which it relies) are subject to valid criticism for several reasons. First, there is no sound basis to find the provision requiring arbitration of all disputes between the parties (including those unrelated to the employment relationship) unconscionable simply because it is broad. Indeed, this conclusion proceeds from a perceived hostility to arbitration and offends the principle – embodied in the FAA – that arbitration agreements must be placed on the same footing as all other contracts and enforced as written. Second, although it may be true that certain provisions allowing third party beneficiaries to enforce an agreement operate asymmetrically, that result is inherent in third-party beneficiary clauses. The only way that third parties could be required to arbitrate their potential claims against a party to the arbitration agreement is if they sign separate agreements obligating them to arbitrate such claims. The Phan court fails to address this practical reality. Third, the Phan court’s characterization of the central purpose of the arbitration agreement appears unreasonable and intentionally tailored to find against severability.
Regardless of whether one agrees or disagrees with the decision, Phan reminds employers that because California courts closely scrutinize arbitration agreements (and some might say often are hostile to their enforcement), employers must continue to review their agreements and ensure they do not include provisions courts have found unlawful. Generally, employers should utilize arbitration agreements that only require arbitration of claims that relate to the employment relationship. If employers include potentially broader provisions, they should set forth within the agreement a business justification for the provision to increase their chances of successfully enforcing the arbitration agreement.
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