When Confidentiality Clauses Undermine Arbitration Agreements
In Fuentes v. Empire Nissan, Inc., --- P.3d --- (Cal. Feb. 2, 2026), the California Supreme Court issued an important decision for employers who seek to protect their confidential information and arbitrate employment claims. Specifically, the state’s high Court held that when an arbitration agreement is paired with a “secondary” employment document (like a confidentiality agreement) that is silent or ambiguous on the forum for disputes, the agreement may contain an implied permission to litigate the dispute in court—potentially creating a one-sided litigation carveout that undermines arbitration. The Court remanded the case for further fact-finding on whether the parties’ confidentiality and arbitration agreements, read together, required arbitration of confidentiality-related disputes, thus putting the arbitration agreement at risk.
Overview of Fuentes v. Empire Nissan
In Fuentes, Plaintiff Evangelina Yanez Fuentes signed an arbitration agreement as part of her employment application. Later, Ms. Fuentes signed two substantially identical confidentiality agreements. The confidentiality agreements prohibited Ms. Fuentes from using or disclosing the company’s trade secrets or confidential information, and authorized the company to take “legal action” to enforce a breach of the agreement. The agreements were silent on whether the company could take such “legal action” in court or arbitration. The separate arbitration agreement Ms. Fuentes signed at the outset of her employment broadly required that the company arbitrate “all disputes which may arise out of the employment context,” which would include a breach of the confidentiality agreements. After the company discharged Ms. Fuentes, she sued for wrongful termination, and the company moved to compel arbitration.
Procedural vs. Substantive Unconscionability in California
To avoid enforcement of an arbitration agreement, the party resisting arbitration must establish both procedural unconscionability (surprise or unfairness in the formation of the agreement) and substantive unconscionability (that the actual terms of the agreement are unfair or one-sided).
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