Published July 2, 2026

Arbitration Update

Phan v. Knight Sacramento SU Inc. · Third District Court of Appeal · June 5, 2026; certified for publication July 2, 2026

When an Arbitration Agreement Covers Everything, It Enforces Nothing: Phan v. Knight Sacramento

The Third District held a car dealership’s arbitration agreement unconscionable because it swept in claims far beyond the job and bound the employee — but not the employer’s affiliates — to arbitrate. The court refused to sever, so the entire agreement fell.

Case Summary

Need to Know

A California appeals court refused to enforce a car dealership’s arbitration agreement — the fine print that would have kept an employee’s wage lawsuit out of court and away from a jury.
The agreement demanded too much: it covered every possible dispute, forever, not just problems at work. Courts call that “overbroad,” and it can sink the entire agreement.
It was also a one-way street. She had to arbitrate against the company’s owners, lawyers, and sister companies — but none of them had to arbitrate against her. Fairness has to run in both directions.
The court refused to just trim away the bad parts. When the unfairness is the whole point of the contract, the whole contract fails — and the employee keeps her right to a jury.
If you signed something like this at work — and most California employees have — it does not automatically mean you can’t sue. These agreements fail more often than employers would like you to think.

ShortLegal Takeaway

The fine print grabbed for everything — and lost it all

You have probably signed one of these. Somewhere in your first-day paperwork, between the direct-deposit form and the handbook receipt, was a page saying that if you and the company ever have a dispute, it goes to a private arbitrator instead of a judge and jury. Employers love these agreements. What Phan shows is that they sometimes love them a little too much. This dealership’s version didn’t stop at job disputes — it claimed every disagreement Ms. Phan might ever have, on any subject, forever, against practically anyone who had ever shaken hands with the company. The court’s answer was refreshingly simple: write a contract with no limits, and don’t expect a court to enforce it.

Our favorite part is how the employer lost. Asked to justify why the agreement reached so far beyond the job, the company’s own HR manager explained under oath that the agreements were really “only meant to” cover employment claims. Meant to. The contract said everything; the company meant employment. When your own witness admits your contract says more than you intended, you have done the other side’s work for them — and we are always happy to accept that kind of gift.

Here is what it means for you: signing an arbitration agreement is not the end of the story. Courts actually read these things, and the greedier the drafting, the weaker the agreement — this one was so one-sided the court threw out all of it, and Ms. Phan keeps her jury. So before you assume that page you skimmed on day one locks you out of court, have an employment lawyer read it. It may turn out to be the weakest thing your employer ever asked you to sign.

Useful Plaintiff-Side Facts

Phan signed seven arbitration agreements across two dealerships in roughly two years; the two controlling standalone agreements were word-for-word identical, letting the court decide both at once.
The trial court found procedural unconscionability was only “low” — standalone documents, clear language — and the agreements still fell, because the substantive one-sidedness was that severe. The sliding scale did the work.
Knight’s HR declaration, offered to justify the broad scope, admitted the agreements were “only meant to... cover the employment-related claims” — narrower than what the contract said.
Several third-party beneficiaries named in the agreements never moved to compel at all, and remain free to sue Phan in court while she would have been locked into arbitration against them.
The refusal to sever meant Knight lost arbitration entirely — including as to Phan’s individual claims — and her class claims survived the motion to strike.

What Happened

Michelle Phan sold cars. Between 2022 and 2024 she worked stints at Elk Grove Volkswagen and Elk Grove Subaru, two dealerships operated by Knight Sacramento SU Inc. Along the way she signed seven arbitration agreements — three at Volkswagen, four at Subaru — including, at each dealership, a “standalone” agreement that superseded all the others. The two standalone agreements were identical.

In August 2024, Phan filed a wage-and-hour class action against Knight: unpaid minimum wage and overtime, missed meal and rest periods, inaccurate wage statements, late final pay, unreimbursed expenses, and unfair competition. She demanded a jury. The same day, she filed a separate PAGA notice with the LWDA. Knight responded the way employers holding a signed arbitration agreement usually do — it moved to compel arbitration of her individual claims and strike the class claims, or at minimum to sever anything unenforceable and arbitrate the rest. The trial court denied the motion outright, and the Third District affirmed.

A Contract With No Edges

Start with what Phan actually agreed to. Not arbitration of employment disputes — arbitration of “any and all claims which arise out of the employment context or any other interaction/relationship we had, have or may have in the future,” against Knight and its “third-party beneficiaries”: owners, directors, officers, managers, employees, agents, partners, attorneys, sister companies, subsidiaries, parent companies, joint venturers, affiliated entities, and independent contractors. Any claim. Any theory. Any relationship. Forever.

That is the same architecture the Second District condemned in Cook v. University of Southern California (2024) 102 Cal.App.5th 312, where the agreement covered all claims “whether or not arising out of” the plaintiff’s employment. Knight argued its language was really the narrower, employment-tethered clause the Supreme Court enforced in Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064. The Third District read the two side by side and disagreed: the Little clause stops at claims connected to seeking or holding the job. Phan’s agreement keeps going — “any other interaction/relationship,” including ones that don’t exist yet. That extra clause is the difference between a broad employment arbitration agreement and a contract with no edges.

Cook left employers a path: an agreement can build in a “margin of safety” beyond the strict employment context if a legitimate commercial need — the “business realities” — is explained in the contract or established by evidence. (Civ. Code, § 1670.5, subd. (b).) Knight walked that path and tripped on it. Its HR manager’s declaration explained the company drafts broadly to “capture” all potential claims, then added that the agreements “are only meant to be used with employees and to cover the employment-related claims they may bring.” The court took Knight at its word: if the need is employment claims, a clause covering every conceivable human interaction is not a margin of safety. It is overreach with no justification at all.

Binding for Her, Optional for Everyone Else

The second, independent problem was mutuality. Phan was required to arbitrate every claim she might ever have against that long list of third-party beneficiaries. Not one of them was required to arbitrate anything against her. Under Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, the stronger party cannot impose the arbitral forum on the weaker party while declining it for itself — and under Cook, extending that one-way benefit to “broad swaths” of corporate relatives makes the asymmetry worse, not better.

Knight’s answer was creative: since some of the third parties named in Phan’s lawsuit had joined the motion to compel, the agreement had “become mutual.” The court’s response was short. Unconscionability is evaluated when the contract is made. (Civ. Code, § 1670.5, subd. (a); Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478, 505.) A clause that was one-sided on the day Phan signed it does not become fair because the beneficiaries later found it convenient to invoke — and in any event, plenty of the listed beneficiaries never moved to compel and remain free to take Phan to court whenever they like.

Why It Matters

The ending is what should make employers rewrite their forms. Knight had a severance clause and asked the court to simply cut the bad language and enforce the rest. Applying Ramirez, the court refused: when the unconscionable terms are the central purpose of the agreement — arbitrate everything, against everyone, one way — there is nothing left to save. The whole agreement fell, Knight lost arbitration even of Phan’s individual claims, and a certified-for-publication opinion now marks the spot.

For employees — especially in dealership, retail, and hospitality jobs where these maximal forms are standard onboarding paperwork — Phan is the counterintuitive lesson worth remembering: the more your arbitration agreement claims to cover, the weaker it may actually be. And for the lawyers on the other side reading this page: two districts have now said it. The fix is not a better declaration. It is a narrower contract.

Read the Opinion. This review discusses Phan v. Knight Sacramento SU Inc., decided June 5, 2026; certified for publication July 2, 2026 by the Third District Court of Appeal. Final reporter citation should be confirmed against the official opinion before filing or briefing.

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The Bottom Line

Knight drafted for maximum coverage and walked away with zero. An arbitration agreement that reaches every dispute an employee could ever have — forever, against everyone connected to the company — while binding only the employee is unconscionable, and a severance clause cannot rescue a contract whose central purpose is the overreach. Phan’s wage-and-hour class action stays in court, jury demand intact.

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