NEWS Archive

OUTDATED ARBITRATION AGREEMENTS MAY CREATE SIGNIFICANT RISK

In Stoker v. Blue Origin, LLC, __Cal.App.5th__ (2026), the California Court of Appeal determined that the employer’s arbitration agreement was unconscionable and could not be saved through a severance provision. The decision underscores the importance of carefully drafting arbitration agreements for California employees.

1. Background

Craig Stoker, a former senior director at Blue Origin, sued Blue Origin for retaliation, discrimination, harassment, breach of contract, and wrongful termination. Blue Origin moved to compel arbitration. The trial court denied the motion, and the Court of Appeal affirmed, finding that the agreement was unconscionable and unsalvageable, without reaching the question of whether the federal Ending Forced Arbitration Act applied.

2. Key Holdings

a. Adhesive Employment Agreements Carry Inherent Procedural Unconscionability

The evidence presented in this case showed that Blue Origin’s recruiter told Stoker the agreement contained “standard terms” that “everyone has to sign.” There was also no evidence the terms were negotiable. On these facts, the court reaffirmed that take-it-or-leave-it arbitration agreements are contracts of adhesion — even for senior employees. The court also noted that adhesion alone establishes only a low degree of procedural unconscionability, but an adhesive contract is enough to trigger close scrutiny of the contract’s substantive terms, since an agreement must be both substantively and procedurally unconscionable to be unenforceable.

b. Four Substantive Defects Rendered The Agreement Unenforceable

In reviewing the contract’s substantive terms, the court identified four independent grounds of substantive unconscionability:

i. Overbreadth

The agreement required arbitration of “any and all claims, disputes, or controversies” without limitation to employment-related matters. The court held that forcing an employee to arbitrate claims with no nexus to the employment relationship — like a hypothetical car accident with a coworker — is unconscionably broad.

ii. Lack Of Mutuality

The agreement funneled virtually all employee-side claims (discrimination, wage and hour, and whistleblower claims) into arbitration, while carving out claims employers are more likely to bring (trade secrets, intellectual property, and non-solicitation breaches). The court found this one-sided structure unconscionable.

iii. Predispute Jury Trial Waiver

For claims falling outside arbitration, the agreement waived the right to a jury trial. The court reiterated that predispute jury trial waivers are unenforceable under California law.

iv. PAGA Representative Action Waiver

The agreement barred all class, collective, and representative claims, including PAGA actions. The court confirmed that a blanket predispute waiver of representative PAGA claims is unenforceable in California.

c. Severance Was Not Available To Save The Agreement

The employer argued that any unconscionable provisions should be severed but the court refused to sever the offending provisions, finding that:

(a) the overbreadth and mutuality defects could not be fixed by deleting language and the court would have to rewrite the agreement to rectify these issues;

(b) four unconscionable provisions reflected a “systematic effort” to tilt the forum in the employer’s favor; and

Blue Origin’s severability clause did not change the outcome and could not override a court’s discretion to void the entire agreement. This is an important holding for employers to consider.

3. Practical Considerations

In light of this decision, employers should review their arbitration agreements to ensure the following:

a. Narrow The Scope Of The Arbitration Clause

Arbitration provisions should be limited to claims “arising out of or relating to” the employment relationship. Broad, catch-all language covering “any and all disputes” should be avoided.

b. Ensure Mutuality Of Obligation

If the employer carves out trade secret or intellectual property claims from arbitration, the employee should be afforded a reciprocal carve-out. Alternatively, employers may consider subjecting all claims to arbitration without one-sided exceptions.

c. Eliminate Predispute Jury Trial Waivers

Such waivers are unenforceable in California and serve only to compound an unconscionability finding.

d. Do Not Include Waivers Of Representative PAGA Claims

While class action waivers may be enforceable, blanket representative PAGA waivers remain invalid under California law. Representative PAGA actions should be expressly carved out of any representative action waiver.

e. Audit Agreements For Cumulative Defects

A single unconscionable provision may be severable but multiple unconscionable provisions likely are not. The greater the number of unconscionable terms, the more likely a court will void the agreement in its entirety.

f. Do Not Rely On Severability Clauses As A Safeguard

While such clauses may be helpful, they will not rescue an agreement that is fundamentally one-sided.

g. Exercise Care In The Rollout Process

Employees should be afforded adequate time to review the agreement, an opportunity to ask questions, and (where feasible) the ability to negotiate terms. While these measures will not eliminate procedural unconscionability concerns entirely, they may mitigate them.

4. Conclusion

Stoker v. Blue Origin sends a clear signal: California courts will void arbitration agreements that systematically favor the employer, and neither severability clauses nor the federal policy favoring arbitration will alter that result. Employers who have not recently reviewed their arbitration agreements should do so promptly.

To read more articles like this one, subscribe to the ALERT Newsletter today!

About The Author

Carina Novell is an attorney in Sheppard’s Labor and Employment Practice Group in the firm’s San Diego (Downtown) office. Ms. Novell helps companies navigate complex California employment laws and defends both single-plaintiff and complex class action lawsuits. Carina focuses her practice on labor and employment law matters, as well as advising and representing management clients. Carina handles various types of employment litigation, including wage and hour class actions, discrimination, wrongful termination, retaliation, and harassment lawsuits.

Carina is a contributor to the California Labor and Employment ALERT.

Ms. Novell received her law degree from the University of California, Davis and her undergraduate degrees from Saint Mary’s College of California, summa cum laude.

U.S. SUPREME COURT RECOGNIZES AN FAA EXEMPTION FOR “LAST-MILE” DRIVERS

The Federal Arbitration Act (“FAA”) has been at the center of employment litigation for decades. Courts have consistently held that properly drafted employment arbitration agreements are enforceable and require parties to arbitrate disputes arising from employment rather than litigate such disputes in court before a judge or jury. Courts have also ruled that state laws cannot stand as an obstacle to the enforcement of covered arbitration agreements, including agreements that bar class actions. The important role arbitration agreements play in employment settings has encouraged litigation focusing on exemptions from the FAA that afford individuals an opportunity to bypass arbitration and instead litigate claims in court.

The U.S. Supreme Court addressed the exemption that exists in Section 1 of the FAA. It provides that “nothing” in the law shall be used to compel arbitration in disputes involving the “contracts of employment” of any class of workers “engaged in . . . interstate commerce.” 9 U.S.C. § 1. In Flowers Foods, Inc., v. Brock, __ U.S. __ (May 28, 2026), the Supreme Court examined the scope of the exemption and found it applicable to certain drivers sometimes referred to as “last-mile” drivers. The case arose from a proposed class action asserting that Flowers violated state and federal laws by misclassified drivers as independent contractors rather than employees.

1. Background

Flowers Foods is one of the nation’s largest producers of packaged baked goods, such as Wonder Bread. It distributes its products across the country from its bakeries in 19 states. To get its products to market, the company depends in part on franchisees who buy the rights to distribute the products in specific territories, including Angelo Brock, a franchisee who serves the Denver area. Brock picks up products from a warehouse in Colorado and delivers them to local stores, all without leaving the state.

2. The Lawsuit

In 2022, Brock sued Flowers in federal district court, alleging that the company had underpaid him and other distributors in violation of various federal and state laws. In response, Flowers filed a motion asking the court to send the dispute to arbitration. It argued that Brock had signed a distribution agreement promising to arbitrate any disagreement that might arise between himself and Flowers.

Ultimately, the district court denied Flowers’ motion and the Tenth Circuit Court of Appeals affirmed. The Tenth Circuit rested its decision on Section 1 of the FAA, which contains an exception from the requirement directing courts to enforce arbitration agreements. Reasoning that Brock belonged to a class of workers engaged in interstate commerce, the court concluded that it lacked authority to compel the arbitration Flowers sought. The court explained that Brock did not cross state lines himself or interact directly with those who did. But, those facts were not dispositive because, what mattered was that Brock’s “interstate route formed a constituent part of the . . . interstate journey of Flowers’ goods from out-of-state bakeries to their intended destinations at retail stores.”

3. The Issue Before The Supreme Court

Flowers petitioned the Supreme Court to review the case to resolve a single question: “whether someone can qualify as a worker ‘engaged in interstate commerce’ under Section 1 of the FAA if he never crosses state lines and never interacts with vehicles that do.”

Flowers’ sole theory was that, to be engaged in interstate commerce for purposes of Section 1, a worker must either cross state lines or interact with a vehicle that does (say, by loading or unloading the goods it carries). The Supreme Court concluded that theory is incorrect. In some instances, a worker “who transports goods on an intrastate leg of an interstate journey can qualify for Section 1’s exemption” without satisfying either of those criteria. It observed that “individuals can sometimes be direct, necessary, and active participants in moving goods ‘from . . . points in one state” to “points in another state” without crossing state lines or interacting with vehicles that do,” citing Blacks’s 1001.

4. The Supreme Court’s Added Remarks

The Supreme Court appeared to question the arguments made by Flowers in the litigation. It noted that Flowers did not ask the Supreme Court to decide the legal significance of several facts raised by the litigation, but instead ventured to ask the Supreme Court to adopt a bright-line rule that an individual can never qualify for Section 1’s exemption unless he crosses state lines or interacts with vehicles that do. The Supreme Court could not see how the FAA’s statutory text could support that interpretation. It thus affirmed the judgment of the Tenth Circuit.

The Flowers decision recognizes the significance of the FAA’s Section 1 exemption and discussed its scope. While the case focusses on drivers, it can be expected to lead to creative arguments that others will qualify for an FAA exemption that will enable them to evade the impact of arbitration agreements. Employers are encouraged to discuss the potential implications of the decision on other individuals.

To read more articles like this one, subscribe to the ALERT Newsletter today!

About The Author

Richard J. Simmons is a Partner in the law firm of Sheppard, Mullin, Richter & Hampton LLP in Los Angeles. He represents employers in various employment law matters involving litigation throughout the country and general advice regarding state and federal wage and hour laws, employment discrimination, wrongful discharge, employee discipline and termination, employee benefits, affirmative action, union representation proceedings, and arbitrations. Mr. Simmons received his B.A., summa cum laude, from the University of Massachusetts, where he was a Commonwealth Scholar and graduated in the Phi Kappa Phi Honor Society. He received his J.D. from Berkeley Law at the University of California at Berkeley where he was the Editor-in-Chief of the Industrial Relations Law Journal, now the Berkeley Journal of Employment and Labor Law.

Mr. Simmons argued the only case before the California Supreme Court that produced a victory for employers and business in 2018. He was recently recognized as the Labor and Employment Attorney of the Year by the Los Angeles Business Journal and was inducted into the Employment Lawyers Hall of Fame. He has lectured nationally on wage and hour, employment discrimination, wrongful termination, and other employment and labor relations matters. He is a member of the National Advisory Board to the Berkeley Journal of Employment and Labor Law, published by Berkeley Law at the University of California at Berkeley. He was also appointed by the California Industrial Welfare Commission as a member of three Minimum Wage Boards for the State of California.

MARCH 30 DEADLINE FOR EMERGENCY CONTACT REQUIREMENT

California employers face an important compliance deadline on March 30, 2026 under the Workplace Know Your Rights Act (SB 294). Before that date, employers must take concrete steps to allow employees to designate or update an emergency contact and to indicate whether that contact should be notified if the employee is arrested or detained. SB 294 places new obligations on employers that go beyond traditional workplace notices.

1. What Employers Must Do By March 30, 2026

By the March 30 deadline, California employers must ensure that all current employees have the opportunity to:

• Designate or update an emergency contact, and

• Indicate whether that contact should be notified if the employee is arrested or detained on the worksite or, in certain off site circumstances, during work hours or the performance of job duties.

For new hires after March 30, 2026, employers must offer the same opportunity at the time of hiring.

If an employee chooses to designate such a contact, employers are legally obligated to notify that contact if the employer has actual knowledge of the arrest or detention.

2. How This Requirement Differs From Typical Emergency Contact Policies

Unlike standard emergency contact information collected for medical or safety purposes, SB 294’s requirement:

• specifically ties the contact designation to arrest or detention scenarios, and

• requires employees to opt in to notification in those situations.

Existing forms that do not include explicit language about notification in arrest or detention scenarios will not satisfy the legal requirement. Employers should update or replace old forms accordingly.

3. Penalties For Non Compliance

Failure to comply with SB 294’s emergency contact requirement can result in civil penalties imposed by the California Labor Commissioner or through civil action, including:

• up to $500 per employee per day that the violation continues after March 30, 2026, and

• up to $10,000 per employee maximum for emergency contact violations.

4. Recommended Employer Action Plan

To meet the March 30 deadline and demonstrate good faith compliance, California employers should:

a. Revise Emergency Contact Forms

Update or create a form that lets employees designate a contact and specify whether they authorize notification in arrest/detention scenarios.

b. Integrate Into HR Processes

Incorporate the updated form into onboarding, annual updates, and any time employees request a change.

c. Train HR And Management

Ensure HR and supervisors understand when notification obligations arise and how to handle requests.

d. Maintain Records

Retain copies of the completed forms in personnel files as proof of compliance.

5. Conclusion

The March 30, 2026 emergency contact designation deadline under SB 294 is a distinct and non negotiable compliance obligation for all California employers. Updating forms, processes, and HR workflows now will help protect employers from potential penalties and demonstrate a commitment to lawful workplace practices.

An updated emergency contact form is included in the new 2026 Book of Human Resources Forms by Sheppard Attorney Richard Simmons. It is now available from Castle Publications, LLC.

To read more articles like this one, subscribe to the ALERT Newsletter today!

About The Author

Carina is a contributor to the California Labor and Employment ALERT.

Ms. Novell received her law degree from the University of California, Davis and her undergraduate degrees from Saint Mary’s College of California, summa cum laude.

WHAT EMPLOYERS NEED TO KNOW ABOUT I-9 ERRORS AND PENALTIES

The I-9 form was created in 1986 based on congressional legislation. It requires employers to timely inspect and record the work authorization documents of every new hire and reverifications when needed. Employers enrolled in E-Verify are still required to complete a paper or digital I-9 for each employee.

While ICE I-9 audits are statistically rare, increased staffing at the agency may lead to more frequent audits going forward.

In March 2026, ICE announced on its website that it has overhauled its I-9 audit process and compliance guidance, expanding the categories of substantive violations, narrowing the scope of correctable technical failures, and thereby expanding employers’ civil penalty calculations.

Fines for substantive errors are typically $2,500 per I-9, so the penalties can add up. Going forward, what typically would be a technical error that would not result in a fine will now be determined to be a substantive error. The resulting penalties can be substantial.

As discussed below, employers are encouraged to review their I-9s for compliance. The statute of limitations for a substantive violation is five years which means liability continues for five years from the date of correction.

1. Key Changes Under the Updated Guidance

The updated guidance represents four principal shifts in enforcement posture:

1) Reclassification of Common Errors as Substantive Violations: Many I-9 errors previously treated as correctable technical failures, including dating errors, late document verification, incomplete Section 2 entries, and use of the Spanish-language form outside Puerto Rico, are now substantive violations carrying mandatory fines.

2) Remote Verification and Electronic I-9 Compliance: Errors in alternative document examination, such as failing to mark the “alternative procedure” box, lacking active E-Verify participation, and failing to meet the electronic I-9 standards in 8 C.F.R. § 274a.2(e) to (i), including audit trail, electronic signature, security, and legible-copy requirements.

3) Heightened Scrutiny of Supplement B: Previously routine Supplement B errors, missing rehire dates, late or incomplete reverifications, missing signatures, incorrect document information, and failure to mark the alternative procedure box, now carry mandatory fines. Failure to reverify before temporary employment authorization expires is treated with particular severity.

4) Civil Penalty Exposure: Penalty amounts are set by statute and adjusted annually for inflation; each substantive violation and each uncorrected technical failure is a separate chargeable offense. See the Federal Register for more details.

2. Notices Employers May Receive During An I-9 Audit

An I-9 audit begins when ICE serves a Notice of Inspection (“NOI”), giving the employer at least three business days to produce Form(s) I-9 and supporting documentation (e.g., payroll records, employee lists, and business licenses). During and after the audit, ICE may issue the following notices:

• Notice of Technical or Procedural Failures: Identifies correctable errors and provides at least ten business days to fix them. Uncorrected failures become substantive violations with mandatory fines. Employers should prioritize corrections within this window.

• Notice of Discrepancies: Indicates that Homeland Security Investigations cannot confirm work eligibility from the documents provided; the employer should give the employee a copy and an opportunity to present additional documentation.

• Notice of Suspect Documents: Informs the employer that employee documentation appears invalid or unrelated to the employee. The employer and employee may respond with evidence of valid work authorization.

• Notice of Inspection Results (Compliance Letter): Confirms the employer is in compliance.

• Warning Notice: Issued when substantive violations exist but future compliance is expected. A Warning Notice will not be issued if the employer has a prior enforcement history, failed to correct technical failures within the allotted period, committed substantive violations, or if there is evidence of fraud (e.g., backdating). A follow-up audit may occur.

• Notice of Intent to Fine (“NIF”): The most serious outcome, issued for substantive violations, uncorrected technical failures, and knowing-hire or continuing-to-employ violations. The NIF process and hearing rights are discussed below.

3. Substantive Violations: Summary Of Key Categories

The following are substantive violations per the updated guidance:

• General: Failure to prepare or present the Form I-9; failure to ensure timely completion of Section 1 and Section 2 (and Supplement B, if applicable); use of the Spanish-language form outside Puerto Rico; and failure to meet electronic I-9 standards under 8 C.F.R. § 274a.2(e), (f), (g), (h), and (i).

• Section 1: Failure to ensure the employee provides a legal name and date of birth; checks the correct citizenship/immigration status box; completes required alien registration, admission number, or foreign passport fields; signs the attestation; and dates Section 1.

• Section 2: Failure to examine and verify acceptable documents within three business days of hire; record required document information; handle receipts and replacement documents within the 90-day period; mark the alternative procedure box; maintain active E-Verify participation when noting an alternative procedure; print the employer’s name and title; provide the date of hire; and sign and date the Certification.

• Supplement A: Failure to ensure the preparer or translator provides a complete name, address, signature, and date.

• Supplement B: Failure to reverify by the authorization expiration date; provide the rehire date; record reverification document information; handle replacement documents within the 90-day period; print the employer’s name, sign, and date the reverification on or before the expiration date; and mark the alternative procedure box.

4. Technical And Procedural Failures

The following errors are correctable within the ten-business-day cure window; if uncorrected, they become substantive violations:

• Using an outdated Form I-9 version.

• Omitting the employee’s other last names or physical address in Section 1 (a missing email or phone number is not a violation).

• An incorrect Social Security Number when enrolled in E-Verify.

• Omitting the employee’s name at the top of page 2, Supplement A, or Supplement B.

• Omitting the business name or address in Section 2.

• Failing to record the employee’s new legal name in Supplement B.

For the full list, please visit I-9 Fact Sheet.

5. How Fines Are Calculated

Civil penalty amounts are adjusted annually for inflation under the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. The applicable penalty range is determined by the date ICE serves the NIF. Consult the current Federal Register for updated amounts.

ICE calculates the base fine by dividing chargeable violations by the total number of I-9s that should have been presented; the resulting percentage sets the base fine range, which may shift based on whether it is the employer’s first, second, or subsequent offense. Five statutory factors then adjust the base fine: business size, good faith, seriousness, involvement of unauthorized aliens, and history of previous violations. Each factor can move the fine up or down by five percent, for a cumulative adjustment of plus or minus twenty-five percent. Good faith, demonstrated through proactive self-auditing, training, and prompt correction, is the factor most within the employer’s control.

6. If You Receive A Notice Of Intent To Fine

The NIF outlines the charges, specifies the alleged violations, and states the fine amount.
Under 5 U.S.C. §§ 554–557, the employer may request a hearing before an Administrative Law Judge at the Office of the Chief Administrative Hearing Officer (“OCAHO”) within the Executive Office for Immigration Review. The request must be made within 30 calendar days of receipt.

If a timely hearing request is filed, the employer may request settlement negotiations with ICE before the hearing. If a written request for a hearing is not timely received, ICE will issue a Final Order, and there is no appeal from a Final Order.

If the parties reach agreement, ICE will not file a complaint with OCAHO. If not, ICE will file a complaint to initiate administrative proceedings.

7 What Employers Should Be Doing Now

Given the expanded violation classifications, employers should consider taking the following steps:

a. Conduct an internal I-9 self-audit focusing on missing signatures and dates, incomplete Section 2 entries, reverification accuracy, Supplement B maintenance, and remote verification documentation.

b. Train HR staff on the updated substantive violation standards, document review procedures, and reverification requirements.

c. Implement reverification tracking to ensure reverification is completed before temporary employment authorization expires. Consider enrolling in E-Verify to streamline verification and reduce compliance exposure.

d. Verify I-9 retention compliance (three years from the first day of employment or one year from the date employment ends, whichever is longer). A simpler rule is to keep the I-9 throughout employment and then for 3 years after termination. Digital I-9 Software: It is highly recommended to use digital I-9 software rather than paper I-9. The software will eliminate most I-9 errors other than a timeliness error. It should be noted that any digital I-9 software must comply with ICE’s strict standards, including the requirement that it maintain an electronic audit trail. Merely scanning your paper I-9s is not sufficient.

To read more articles like this one, subscribe to the ALERT Newsletter today!

About The Authors

Greg L. Berk is a Partner in the law firm of Sheppard, Mullin, Richter & Hampton LLP in the firm’s Orange County office. He leads the Firm’s immigration practice and is a Certified Specialist in Immigration and Nationality Law by the State Bar of California Board of Legal Specialization. He has over 25 years of experience advising on all aspects of U.S. immigration matters. He assists employers worldwide with the hiring and retention of foreign national executives and highly talented individuals that are needed in their U.S. workforce. He also works with investors on E-2, L-1, and EB-5 matters. He also handles I-9 and other immigration compliance matters.

Greg frequently lectures on immigration issues and is a regular contributor to the California Labor and Employment ALERT Newsletter and Sheppard’s Labor & Employment Law blog. Mr. Berk received his J.D. from Western State University College of Law, his M.B.A. from George Washington University and his B.A. from California State University.

Mia Ndalugi is associate in the Labor and Employment Practice Group with the law firm of Sheppard, Mullin, Richter & Hampton LLP in the firm’s Orange County office. She is a frequent contributor to the California Labor and Employment ALERT Newsletter and Sheppard’s Labor & Employment Law blog. Ms. Ndalugi received her J.D. from Georgetown University, and her B.S. from University of California, Berkeley, magna cum laude, Highest Honors Distinction.

CALIFORNIA SUPREME COURT CLARIFIES UNCONSCIONABILITY ANALYSIS

In Fuentes v. Empire Nissan, Inc., 19 Cal.5th 93 (2026), the California Supreme Court addressed the following question: can an arbitration agreement’s nearly illegible print support a finding of both procedural and substantive unconscionability? The Court held that illegibility can significantly heighten procedural unconscionability, thereby lowering the threshold for the required showing of substantive unconscionability under the sliding scale analysis, but cannot itself render an agreement’s terms substantively unconscionable.

1. Background

When applying to work at Empire Nissan, Evangelina Yanez Fuentes signed a document titled “Applicant Statement and Agreement,” which contained a provision mandating arbitration of “all disputes which may arise out of the employment context.” The document was printed in a very small, blurry font that was nearly unreadable. The arbitration provision itself was a lengthy, densely printed paragraph filled with legal jargon and statutory references, described by the trial court as “visually impenetrable” and at the “limits of legibility.”

The document was part of an employment application packet that Empire Nissan gave Fuentes only five minutes to review. She was told the documents related to her application, that she had to complete them to be hired, and that she should hurry. She was not offered an opportunity to ask questions and did not receive a copy.

Fuentes later signed two confidentiality agreements prohibiting her from disclosing confidential information and trade secrets and from competing with the dealership. After two and a half years, Fuentes went on medical leave for cancer treatment. When she requested a brief extension before returning to work, Empire Nissan terminated her employment. Fuentes then filed suit alleging wrongful discharge and related claims.

The trial court denied Empire Nissan’s motion to compel arbitration, finding a very high degree of procedural unconscionability based on the agreement’s barely legible text and the lack of a meaningful opportunity for her to review or negotiate its terms. The court also found a low to moderate degree of substantive unconscionability, concluding that the agreement’s fine-print terms were indicative of substantive unconscionability and that the confidentiality agreements appeared to carve out from arbitration claims that only Empire Nissan would bring.

Empire Nissan appealed, and the court of appeal reversed. The court concluded that arguments about illegibility go exclusively to procedural unconscionability and, relying on the principle that the law strongly favors arbitration, interpreted the confidentiality agreements as requiring arbitration of claims brought under them. On that basis, it found no substantive unconscionability and directed the trial court to grant Empire Nissan’s motion to compel arbitration.

2. The Supreme Court’s Decision

The California Supreme Court reversed and remanded, clarifying the law on two significant points.

a. Illegibility And Substantive Unconscionability

The Court agreed with the court of appeal that tiny print and an almost illegible format do not indicate substantive unconscionability. An otherwise fair and mutual term is not made substantively unconscionable by being difficult to read. Small font size can require a lesser showing of substantive unconscionability under the sliding scale analysis, but because it does not affect the substance of an agreement’s terms, it cannot render a term substantively unconscionable.

The Court also clarified that “fine-print terms,” as used in OTO, L.L.C. v. Kho, 8 Cal. 5th 11 (2019), refers to substantively unfair or one-sided terms hidden in a legal document, not simply terms printed in a small font.

b. The Confidentiality Agreements And Mutuality

The Court also found that the court of appeal erred by relying on a presumption favoring arbitration over litigation to interpret the confidentiality agreements. The Court reaffirmed that the policy favoring arbitration is not one of promoting arbitration over litigation, but of ensuring that arbitration agreements are treated like other contracts.

Reading the confidentiality agreements’ text, the Court noted that nothing limited Empire Nissan’s right to bring its claims in court. The agreements specified that Empire Nissan could seek any remedies available at law or in equity and that the prevailing party in a “legal action” could recover attorney fees and costs. The Court interpreted “legal action” in its ordinary sense as a court proceeding and found that the agreements’ silence on arbitration suggested the parties did not intend claims under them to be arbitrated.

Reading the agreements together, however, the Court found an ambiguity — the confidentiality agreements stated that they “supersede any and all prior agreements” on the covered subjects, but the arbitration agreement limited modification to writings signed by Empire Nissan’s president. Because the court of appeal’s conclusion lacked an adequate factual foundation on the signature issue, the Court remanded for the trial court to make the relevant findings.

3. Practical Considerations

The Fuentes decision provides important guidance for California employers who use arbitration agreements.

Illegibility is a procedural problem, not a substantive one, but it can still significantly strengthen an unconscionability challenge. To minimize this risk, employers should ensure that arbitration agreements are presented in a legible format and that employees are given adequate time to review them.

Employers should also review their arbitration agreements and any related agreements, such as confidentiality or noncompete agreements, to consider ensuring that the arbitration obligation is genuinely mutual and does not carve out claims that only the employer would bring.

To read more articles like this one, subscribe to the ALERT Newsletter today!

About The Author

Ryan J. Krueger is a Partner with Sheppard, Mullin, Richter & Hampton LLP in the firm’s Los Angeles office. He specializes in labor and employment matters on behalf of employers, including wage and hour violations, employment discrimination, wrongful termination and sexual harassment. Mr. Krueger has experience in all aspects of employment litigation, including brief writing and oral argument, taking and defending depositions, and negotiating settlements. He has also second chaired multiple trials and arbitrations, and argued before the California Court of Appeal. Mr. Krueger also regularly counsels employers regarding California and federal employment law issues.

Ryan is a co-author of the California’s Private Attorneys General Act (PAGA) Litigation and Compliance Manual, and is a frequent contributor to the California Labor and Employment ALERT Newsletter. He is a co-speaker at the Castle Publications’ Seminars as well as the Labor Law Update for Sheppard.

He received his J.D. from the University of California, Los Angeles and his B.A. from the University of Wisconsin, with distinction. During law school, Mr. Krueger served as extern to the Honorable Morton Denlow, U.S. District Court for the Northern District of Illinois. He is admitted to practice in all California state courts, along with the United States District Court for the Central District of California and the Ninth Circuit Court of Appeals.

FTC DROPS NONCOMPETE RULE AFTER YEARS OF CHALLENGES

Recently, the Federal Trade Commission (“FTC”) pursued a sweeping prohibition on employee noncompete agreements. That effort has now concluded. In early September 2025, the FTC formally abandoned its appeals and acquiesced to court orders vacating its proposed nationwide noncompete rule. The practical result is that noncompete agreements are once again governed primarily by a patchwork of state statutes and common law, with a renewed overlay of targeted federal enforcement when an agreement crosses the line into an unfair method of competition. While abandoning its appeals, the FTC has made clear that it views broad or indiscriminate noncompetes as harmful to worker mobility and competition and will seek to invalidate them under Section 5 of the FTC Act.

1. Attempted FTC Noncompete Ban And Texas Challenge

Beginning in 2024, the FTC, under prior leadership, advanced a rulemaking effort to prohibit most postemployment noncompete agreements nationwide. The final rule adopted in the spring of 2024 would have voided nearly all existing and future noncompete clauses for employees across nearly all industries. The rule marked a significant departure from the FTC’s traditional case-by-case enforcement posture and rested on the assertion that the FTC possessed substantive authority to define and ban categories of business conduct as unfair methods of competition.

Legal challenges followed immediately. In August 2024, the Federal Court for the Northern District of Texas set the rule aside before it could take effect. The court concluded the FTC lacked substantive rulemaking authority with respect to unfair methods of competition and held the rule was arbitrary and capricious. The court recognized the FTC only had authority to adopt rules of agency organization, procedure, or practice, and rejected the FTC’s attempt to use rulemaking to prohibit a broad class of business agreements. A separate federal court in Florida also blocked enforcement of the rule.

While the FTC initially noticed appeals in the Fifth and Eleventh Circuits, on September 5, 2025, the FTC formally withdrew its appeals. In a public statement, the FTC Chair characterized the final rule as overbroad and announced that FTC would return to policing noncompete agreements through targeted enforcement actions rather than through universal rulemaking.

2. Noncompetes Under Section 5 Of The FTC Act

Although the blanket federal rule is gone, the FTC stated it will continue to police noncompete agreements under 15 U.S. Code Section 45, also known as Section 5 of the FTC Act. Section 5 prohibits unfair methods of competition or deceptive acts affecting commerce. In determining whether an act is prohibited, the FTC uses a reasonableness analysis focused on duration after employment ends, the geographic reach, the scope of roles or industry covered, and most importantly whether the agreement is narrowly tailored to protect a legitimate business interest rather than to broadly restrain worker mobility.

The FTC said a noncompete is more likely to be viewed as fair when the obligation lasts one to two years, reaches only the territories where the employer operates or where the employee regularly worked, and confines the restriction to the employer’s line of business and the employee’s role. It is also material whether the agreement is deployed only for positions where the employer has a legitimate interest to protect such as trade secrets, long lead research and development, or substantial investments in training. On the other hand, the FTC warned noncompetes are likely unfair when they sweep far beyond two years, extend to territories where the employer does not operate or where the employee did not perform their duties, attempt to bar work in unrelated industries, or apply to low wage workers and others with limited access to sensitive information.

This has been exemplified in a recent action by the FTC against Gateway Services and its subsidiary Gateway US Holdings, Inc. The company reportedly required nearly all United States employees, including drivers, customer service representatives, and other hourly workers, to sign noncompete agreements that barred work anywhere in the country in the pet cremation industry for one year after employment ended. Those terms applied across the workforce regardless of access to sensitive information. The FTC determined that, while noncompetes may be appropriate for certain senior managers and employees with meaningful access to confidential information so long as the agreement is limited in time, place, and scope, the company’s blanked noncompete constituted an unfair method of competition.

3. Where Things Stand Now

The end of the rulemaking means employers are back in a world governed primarily by state law, with federal enforcement targeted at particular practices that the FTC considers unfair. In practical terms, employers should expect a case by case enforcement approach aimed at practices that are broad, indiscriminate, or difficult to justify. Agreements that apply to large numbers of low wage or hourly employees, or that are imposed without tailoring to role and responsibilities, are likely to draw attention.

Even without the federal rule, a number of states have enacted comprehensive prohibitions or significant limitations on noncompetes. Several states have effectively banned most noncompetes including California, Minnesota, North Dakota and Oklahoma. Other states have adopted salary or wage thresholds that preclude noncompetes for low income or hourly workers, such as Illinois and Nevada. Some states, such as Massachusetts and Colorado, have layered in procedural requirements such as early written notice. Employers should also be cautious about choice of law clauses that select jurisdictions viewed historically as friendly to noncompetes, as several states, like California, have moved to limit or refuse enforcement of foreign law and forum selection related to restrictive covenants.

Certain industries have also received heightened scrutiny. Healthcare has seen especially active legislation. In recent months, the states of Arkansas, Louisiana, Maryland, Pennsylvania, Utah, Texas, Indiana, and Wyoming have narrowed the circumstances in which healthcare employers can enforce noncompetes. Many states bar enforcement of noncompetes against physicians based on concerns about patient choice. Virginia recently prohibited noncompetes for employees who are eligible for overtime pay under the Fair Labor Standards Act.

There are also outliers moving in the opposite direction. For example, recent decisions in Delaware reflect growing reluctance to rewrite overbroad agreements. Florida enacted the Contracts Honoring Opportunity Investment Confidentiality and Economic Growth Act, which permits most noncompetes and allows for a postemployment period up to four years. The statute also requires courts to issue injunctions at the outset of disputes over covered provisions, a feature that dramatically shifts leverage in litigation.

4. Practical Considerations

The FTC has shifted away from its pursuit of a universal ban on noncompete agreements but remains focused on scrutinizing those that unjustifiably restrict worker mobility. In response, employers should elevate the quality of their agreements by carefully identifying roles where noncompetes are essential, ensuring terms such as duration and geography are reasonable and defensible, and aligning with both state law and FTC guidance. Employers should consider removing noncompetes from lower wage positions or roles with limited access to confidential information. Documenting the legitimate interests behind each agreement, like safeguarding trade secrets or protecting substantial investments in training, and opting for less restrictive alternatives when possible, such as nondisclosure or nonsolicitation provisions, will help support their use.

Employers must also ensure compliance with varying state laws, particularly regarding pay thresholds, role carveouts, and notice requirements, and be mindful of heightened risks in certain sectors such as healthcare. Agreements should be regularly reviewed for enforceability, especially where remote or distributed workforces are involved, confirming the correct application of state law. With federal scrutiny increasing and the FTC actively pursuing feedback and enforcement, employers should prepare to justify and demonstrate tailored, fair agreements, and discontinue those that are purely anticompetitive.

To read more articles like this one, subscribe to the ALERT Newsletter today!

About The Author

Luke Bickel is an attorney in Sheppard’s Labor and Employment Practice Group in the firm’s San Diego (Del Mar) office. Mr. Bickel defends employers of all sizes in matters involving discrimination, retaliation, harassment, wrongful termination, and wage and hour. He has experience defending all aspects of employment-related claims, from single plaintiff to class and PAGA matters, in state and federal court. Beyond the realm of litigation, Luke advises clients on employment issues ranging from wage and hour compliance to federal OSHA and Cal/OSHA investigations. Luke’s experience also includes helping clients obtain workplace violence restraining orders and conducting workplace investigations.

Luke is a consistent contributor to Sheppard’s Labor & Employment Law Blog, Trade Secrets Law Blog, and the California Labor and Employment ALERT.

Mr. Bickel received his law degree from the USC Gould School of Law and his undergraduate degrees from Cal Poly State University, San Luis Obispo, magna cum laude.

COVID POLICY DECISIONS CONTINUE TO FUEL DISCRIMINATION PRETEXT CLAIMS

Allegations that an employer’s stated reason for termination was “pretext” are nothing new in employment litigation, but they have become a recurring theme for employers in the wake of COVID-19 workplace rules. Vaccine mandates, exemption decisions, and compliance systems can provide a clear, facially neutral rationale for action, yet plaintiffs increasingly argue those policies were selectively invoked, or relied upon as a convenient cover, for discrimination or retaliation tied to earlier complaints or protected characteristics. In the newly filed matter, Stevens v. Netflix Inc., Case No.: 25STCV36193, Superior Court of the State of California, County of Los Angeles, a former production executive alleges the company terminated her employment in January 2021 for refusing a COVID-19 vaccine, but contends that rationale was pretext for retaliation.

1. What Is Pretext?

In the employment-law context, pretext refers to an employer’s stated reason for an adverse employment action (most commonly termination) that the employee alleges is not the actual reason for the adverse employment decision, but rather a justification masking an unlawful motive such as discrimination or retaliation. Put differently, the employer may articulate a legitimate basis–such as a policy violation, performance concerns, or noncompliance with a workplace rule–while the employee contends that rationale is not credible and that the actual decision was driven by protected activity (e.g., reporting harassment) or protected status (e.g., sex, pregnancy, religion, disability).

Pretext is frequently litigated through circumstantial evidence, including temporal proximity between a complaint and the adverse action (a typical claim in retaliation lawsuits), shifting or inconsistent explanations for the employer’s decision, disparate enforcement as compared to other similarly situated employees, departures from established procedures, and documentation gaps suggesting the proffered reason was developed after the fact rather than reflecting the genuine basis for the decision.

2. COVID-19 Policies As Pretext

The former employee’s complaint alleged the company’s stated reason for discharge, noncompliance with a COVID-19 vaccine mandate, was allegedly a pretext for unlawful motives. She alleges she was fired in January 2021 after declining vaccination, and contends the company used her vaccination status “as the pretext it needed” to terminate her because she had complained about a sexually charged workplace environment and about mocking of employees’ religious beliefs related to remaining unvaccinated.

On the underlying workplace culture allegations, the employee reportedly claims she was the first woman hired onto the company’s original series production team in 2017 and that the company promoted a “flirtatious” environment through encouraged one-on-one meetings tied to a stated core value of “curiosity.” She alleges those meetings often became uncomfortable and provided male employees opportunities to flirt and engage in unwanted hugging and touching, and that she complained about what she viewed as a sexually charged workplace. She also alleges off-site events where alcohol “flowed freely” contributed to an “alcohol-fueled” culture of inappropriate sexual behavior, and she cites her director’s alleged 2017 firing after an accusation of inappropriate touching as an example offered to support her contention that management was aware of potential issues.

In support of discrimination claims, the executive claims that after announcing her pregnancy in May 2017, her supervisor removed her from all shows, and that her responsibilities were restored only after she complained to HR and the supervisor was reprimanded. Separately, she alleges that after the pandemic began, the company used a lanyard system identifying vaccination status and created set “red zones” that unvaccinated workers could not enter, which she says enabled bullying and mocking of employees who chose not to vaccinate for religious reasons. She further alleges she sought an exemption from the mandate based on an autoimmune condition and requested remote work, but both were denied.

3. Familiar Claims?

The executive’s allegations echo themes raised in Combs v. Netflix, Case Number 24STCV18761, Superior Court of the State of California, County of Los Angeles, brought by a female director represented by the same company. In Combs, the director likewise described a workplace culture that allegedly encouraged frequent one-on-one meetings and social activity, which she claimed blurred professional boundaries and enabled flirtation or other inappropriate interactions. She also alleged that the company failed to respond meaningfully when concerns were raised internally. Against that backdrop, she framed her later separation, based on vaccination-related compliance rules, was retaliatory and not the true reason for the termination.

Procedurally, Combs turned quickly to a threshold forum dispute. The company moved to compel arbitration based on a signed arbitration agreement, and the employee did not dispute that she had executed the agreement. Instead, she argued that the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (“EFAA”) barred arbitration because at least one of her claims involved sexual harassment. The court rejected that argument on timing grounds, emphasizing that the EFAA applies only to disputes or claims that “arise or accrue” on or after March 3, 2022. On the allegations presented, the court concluded the employee’s claims accrued and the dispute arose no later than her December 1, 2021 termination.

Because the executive in Stevens alleges a January 2021 termination, also before March 3, 2022, the case may present a similar early arbitration posture if an enforceable pre-dispute arbitration agreement exists. Even if the pleading includes harassment-based allegations, the company would likely argue that the EFAA does not apply where the relevant claims accrued and the dispute arose before the statute’s effective date, making arbitration a viable threshold strategy.

4. What These Cases May Mean To Employers

These cases are a reminder that even neutral workplace rules, like COVID-era mandates and compliance tracking, can get recast as pretext when they are paired with allegations of earlier complaints, culture issues, or perceived bias. Even if an employer thinks it applied the policy the same way across the board, plaintiffs may try to shift the focus from “did you follow the rule?” to “why did you really terminate me?” by pointing to the timing of complaints, alleged uneven treatment, or changes after someone “spoke up.”

Employers are better positioned to defend against a pretext narrative when they can demonstrate a neutral, well-documented decision-making process. Examples include showing the policy requirements and consequences were clearly communicated and applied consistently, that exemption and alternative-work requests were evaluated through an objective framework with contemporaneous documentation, and that internal complaints were promptly addressed with recorded investigative steps and outcomes. In practice, the strength of the defense often turns on whether the employer can point to records that predate or are independent from the protected activity the plaintiff claims triggered retaliation.

5. Practical Considerations

The Stevens and Combs matters illustrate how employers’ enforcement of neutral workplace rules may be challenged as pretext when an employee can point to prior complaints, alleged culture issues, or perceived bias and then argue termination was the predictable endpoint. For employers, the practical focus is less on whether a policy existed and more on whether the organization can show it was applied consistently and through a neutral process, with well-supported decisions on exemptions and alternative work arrangements, and a documented, timely response to internal complaints.

To read more articles like this one, subscribe to the ALERT Newsletter today!

About The Author

Luke is a consistent contributor to Sheppard’s Labor & Employment Law Blog, Trade Secrets Law Blog, and the California Labor and Employment ALERT.

Mr. Bickel received his law degree from the USC Gould School of Law and his undergraduate degrees from Cal Poly State University, San Luis Obispo, magna cum laude.

DOL PROPOSES RETURN TO TWO-FACTOR CONTRACTOR TEST

On February 27, 2026, the U.S. Department of Labor’s Wage and Hour Division (“DOL”) released a Notice of Proposed Rulemaking that would reshape how employee versus independent contractor status is evaluated under federal wage and hour laws. The proposed rule, titled Employee or Independent Contractor Status Under the Fair Labor Standards Act, Family and Medical Leave Act, and Migrant and Seasonal Agricultural Worker Protection Act, would rescind the 2024 independent contractor rule and largely return to the approach published in January 2021. The DOL’s stated goal is to provide a clearer, more predictable framework for employers and workers navigating modern work arrangements, while continuing to apply an “economic reality” analysis focused on economic dependence.

1. From Trump To Biden And Back Again

Federal wage and hour law has long relied on an “economic reality” inquiry to determine whether a worker is an employee entitled to protections like minimum wage and overtime, or an independent contractor who is in business for themselves. In January 2021, in the final days of President Trump’s first term, the DOL issued a rule that aimed to simplify application of this test by prioritizing two “core” factors as the most probative. The first factor was the nature and degree of control over the work, while the second factor was the worker’s opportunity for profit or loss based on initiative or investment.

That 2021 rule was short-lived. The Biden administration attempted to delay and then withdraw it, and after litigation over those actions, the DOL ultimately replaced it with a new rule finalized in January 2024. The 2024 rule adopted a six-factor economic reality test and emphasized a “totality of the circumstances” approach, stating that no factor or subset of factors carried greater weight. Those six factors were: (1) the opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the potential employer; (3) the degree of permanence of the work relationship; (4) the nature and degree of control; (5) the extent to which the work performed is an integral part of the potential employer’s business; and (6) the skill and initiative required. The 2024 rule framed the analysis as holistic and flexible, but critics viewed it as more difficult to apply consistently in real-world planning, especially where factors pointed in different directions.

In May 2025, the DOL announced it would not apply the 2024 rule in its own enforcement investigations and would instead revert internally to older subregulatory guidance–i.e., informal agency materials such as opinion letters, field assistance bulletins, and internal enforcement directives that direct investigators and enforcement staff but have not gone through formal notice-and-comment rulemaking and do not carry the binding legal effect of a published regulation.

2. The Proposed Return To An Economic Reality Test With Two Core Factors

The February 2026 proposal represents the DOL’s formal effort to convert that internal subregulatory guidance into binding regulatory text.

Under the proposed rule, the DOL would rescind the 2024 regulation in 29 C.F.R. Part 795 and readopt the 2021 framework with modest modifications. The central inquiry remains the same: whether, as a matter of economic reality, the worker is economically dependent on an employer for work or is instead in business for themselves. Notably, the proposal clarifies that economic dependence is about dependence for work rather than dependence for income, meaning that the amount a worker earns or whether they have other income sources is not the focus of the analysis.

Consistent with the 2021 approach, the DOL would again elevate two “core” factors as most probative: the nature and degree of control over the work, and the worker’s opportunity for profit or loss based on initiative or investment. The proposal would also retain several secondary guideposts, including the skill required, the permanence of the relationship, and whether the work is part of an integrated unit of production. The proposal further reiterates that actual practice matters more than what is theoretically possible under a contract.

The DOL’s stated rationale for the change is clarity and predictability. By replacing the 2024 framework with a rule “generally similar” to the 2021 approach, the agency contends that workers and businesses will be able to more clearly and predictably structure their relationships in ways that align with how federal courts have historically applied the economic reality test. Public statements accompanying the proposal emphasize the dual objectives of protecting entrepreneurial independence and simplifying compliance for job creators, while maintaining baseline protections for employees under the FLSA.

From an operational standpoint, the proposed rule would also extend this streamlined two-core-factor analysis beyond the FLSA to the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act. Because both statutes incorporate the FLSA’s broad “suffer or permit to work” definition of employ, the same economic reality framework used to determine independent contractor status for wage and hour purposes would also govern whether a worker qualifies as an employee eligible for FMLA leave protections or covered by the MSPA’s migrant and seasonal worker safeguards. This means that a single classification methodology would apply across all three statutes, reducing the need to conduct separate analyses for wage and hour, leave, and agricultural worker protection compliance at the federal level.

3. Next Steps And Timing

The proposed rule is open for public comment through 11:59 p.m. ET on April 28, 2026. After the comment period closes, the DOL will review submissions, potentially revise the proposal in response, and, if it elects to move forward, publish a final rule in the Federal Register. No finalization date has been set, and the timeline will largely depend on the volume and complexity of comments received.

Until a final rule is issued and takes effect, the 2024 rule technically remains on the books, though the DOL has made clear that its Wage and Hour Division investigators are no longer applying the 2024 framework in enforcement actions. That disconnect between the governing regulation and the agency’s stated enforcement posture creates a period of meaningful uncertainty. Employers–particularly those with significant independent contractor workforces or operating across multiple industries–should treat the proposal as a strong signal of regulatory direction rather than an immediate change in the legal standard, and should be prepared for potential litigation risk as the transition unfolds.

4. What This Means For Businesses

If finalized, the proposal would likely be viewed as more favorable to independent contractor models than the 2024 rule, primarily because it refocuses the analysis on control and entrepreneurial opportunity as the most important indicators of being “in business for oneself.” For workers, that could mean some roles are more likely to be classified as independent contractor relationships under federal standards, which generally do not carry minimum wage, overtime, and certain recordkeeping protections under the FLSA. At the same time, the proposal is not framed as eliminating protections, but as better distinguishing true employees from bona fide independent contractors using a familiar test grounded in federal precedent.

For employers and HR teams, the practical impact is that classification decisions will likely hinge more heavily on whether the worker has real control over key aspects of work performance and a genuine ability to affect profit or loss through initiative or investment, rather than simply whether the relationship looks continuous or whether the work is important to the business. The DOL’s repeated emphasis that actual practice controls means that operational realities, including scheduling practices, exclusivity expectations, pay-setting, and how assignments are handled, will matter as much or more than contract language.

5. State Independent Contractor Tests Still Apply

Even if the rule is finalized, it will not eliminate or preempt stricter state standards for employee versus independent contractor status. Many states apply their own tests that can be more restrictive than the federal economic reality analysis, including variations of ABC-style frameworks and other state-specific multi-factor tests. As a result, employers should continue to evaluate worker classification on a jurisdiction-by-jurisdiction basis and should not assume that a more employer-friendly federal rule automatically resolves state wage-hour exposure.

6. Practical Considerations

The DOL’s February 2026 proposal would replace the 2024 independent contractor rule with a modified return to the 2021 framework that emphasizes two core factors: control and opportunity for profit or loss. For employers, the proposal is designed to create more predictable classification outcomes and to better align with the way federal courts apply the economic reality test. However, even if finalized, the rule will not displace stricter state standards, so multi-state employers must continue to manage classification risk under both federal and state law.

To read more articles like this one, subscribe to the ALERT Newsletter today!

About The Author

Luke is a consistent contributor to Sheppard’s Labor & Employment Law Blog, Trade Secrets Law Blog, and the California Labor and Employment ALERT.

Mr. Bickel received his law degree from the USC Gould School of Law and his undergraduate degrees from Cal Poly State University, San Luis Obispo, magna cum laude.

NEW TRIAL ORDERED AFTER JURY AWARDED $238 MILLION VERDICT

The Ninth Circuit Court of Appeals recently confirmed a trial court’s decision to order a new trial after a jury returned a $238 million verdict for an employee. The jury’s verdict was irreparably tainted by repeated use of excluded evidence, which provoked the jury and resulted in an excessive award. In Gratton v. U.S. District Court for the Eastern District of Washington, No. 25-1724, 2025 U.S. App. LEXIS 24564 (9th Cir. Sep. 23, 2025), in an unpublished decision, the Ninth Circuit denied the employee’s petition to overturn the new trial order, noting the outsized scale of the award relative to the admissible proof and to comparable benchmarks.

1. Allegation Of Race-Based Discrimination

The employee, a black package delivery driver, alleged supervisors demeaned him, denied him work opportunities, assigned him more burdensome and less desirable routes, and enforced minor rules against him more strictly than against white coworkers. The employee also had disputes over how to record large-volume pickups, route assignments, equipment, dress-code enforcement involving visible tattoos, and the timing of overtime and penalty payments. He made his grievances known to his union and filed an agency charge asserting discrimination and retaliation.

Later, the employee was terminated following an internal investigation into unwanted physical contact with a female supervisor. The company determined it was an unprovoked assault warranting discharge without warning. However, the employee denied this, stating he lost his balance and briefly braced himself by briefly holding onto the female supervisor. He argued animus and retaliation influenced the outcome of the investigation and sued in federal court in Washington state.

2. The Consistent Use Of Inadmissible Evidence

Before trial, the court established firm evidentiary boundaries for the parties to follow during the trial. The court excluded discrete acts alleged in the employee’s prior agency charge that fell outside the limitations period, including an on-road incident in which a supervisor allegedly used the term “boy” to refer to the employee, and a separate episode where a manager told the employee to leave company premises on a day off. The court further limited counsel to argue only admissible theories, avoiding arguments based on claims that had been dismissed before trial.

The district court also cautioned that compensatory damages cannot be driven by references to corporate wealth or punitive themes. Based on this ruling, the court excluded references to the company’s financial situation. The court explained these issues would risk jury confusion or invite punitive motives during an assessment of compensatory damages. A proper damages assessment must be tethered to admissible proof of the plaintiff’s emotional distress and related harm, not to the size of the employer or its financial wellbeing.

Despite those clear instructions, at trial, the employee’s attorney repeatedly placed excluded material before the jury. His counsel read the prior agency charge verbatim, elicited testimony about previously dismissed or excluded harassment allegations, and highlighted the barred excluded incidents in his opening statement and closing argument. The employee’s counsel also repeatedly referenced the company’s size and financial position.

At the end of trial, the jury awarded $238 million to the employee, with $39.6 million for emotional distress and $198 million in punitive damages. This victory was short lived.

3. New Trial Ordered When Award Based On Inadmissible Evidence

Reviewing the scope of admissible evidence, the trial court vacated the punitive award entirely. The trial court then determined the remaining $39.6 million emotional distress award was shocking and vastly outsized relative to the admissible proof and to comparable awards. The only conclusion was the reliance on excluded material permeated the proceedings, inflamed passion or prejudice, and pushed the verdict toward punitive considerations. As a result, the district court ordered a new trial.

On appeal, the Ninth Circuit agreed with the trial court’s order granting a new trial, pointing to the employee’s counsel’s repeated trial conduct of introducing previously excluded evidence and references to the company’s financial condition. The Ninth Circuit noted the improper conduct likely influenced the verdict, as evidenced by the outsized damage award.

4. Practical Considerations

At trial, parties must treat pretrial rulings as binding guardrails and structure trial strategy around them. Once the court excludes evidence, counsel must be vigilant for any attempt to introduce the evidence or repackage excluded theories as “background” to inflate compensatory damages or to revive claims that have already been excluded from the case.

To read more articles like this one, subscribe to the ALERT Newsletter today!

About The Author

Luke is a consistent contributor to Sheppard’s Labor & Employment Law Blog, Trade Secrets Law Blog, and the California Labor and Employment ALERT.

Mr. Bickel received his law degree from the USC Gould School of Law and his undergraduate degrees from Cal Poly State University, San Luis Obispo, magna cum laude.

NEW MANDATORY KNOW YOUR RIGHTS NOTICE TO EMPLOYEES

Beginning February 1, 2026, all California employers must provide to all new hires and each existing employee on an annual basis written notice of employee’s workplace and constitutional rights. Prompted by the recent enforcement actions by United States Immigration and Customs Enforcement personnel in California, the notice specifies that labor laws apply to all workers in the state regardless of immigration status. It also requires employers to request from employees a designated emergency contact and to indicate whether that contact should be notified if the employee is arrested or detained at the workplace, Cal. Labor Code § 1555. Additionally, the notice includes an anti-retaliation clause to protect employees from being retaliated against based on their immigration status.

The law comes out of California Senate Bill 294, the Workplace Know Your Rights Act, which aims to ensure transparency surrounding employee immigration-related protections and constitutional rights in the workplace. It also establishes a process for emergency contact notification in the event of workplace arrests or detentions.

To remain compliant, employers must (1) provide the notice to all current employees; (2) provide the notice at the time of hire; and (3) if applicable, provide the notice annually to the employee’s authorized representatives (i.e., union representative).

1. The Notice Includes The Following Protections:

a. Employees’ Right To Notice Of Immigration Inspections (Cal. Labor Code § 90.2)

If an employer receives notice of an upcoming immigration agency’s inspection of I-9 Employment Eligibility Verification forms or other employment records, the employer must post a notice informing workers and their union representative, if applicable, within 72 hours of receiving that notice.

b. Employees’ Right To Designate An Emergency Contact (Cal. Labor Code § 1555)

Employees may request notifications in the case of arrest or detention at work. Employers must allow employees to provide them with emergency contact information and to indicate if that employee prefers their emergency contact be notified upon arrest or detention at work.

If an employee is arrested or detained at work and an employer has knowledge of it, they must notify the employee’s designated emergency contact if the employee has chosen that option.

c. Employees’ Right To Organize A Union Or Engage In Protected Activity In The Workplace

Most employees in California have the right to organize, join, or participate in union activities. Employees similarly have the right to not participate in union activities or protected activities where they so choose.

These rights include employees’ ability to jointly act with co-workers to address work-related issues and concerns, to improve working conditions or for the purpose of collective bargaining. This means employees have the right to join with co-workers to request better working conditions or to raise work-related concerns, including about wages, hours, health and safety, and other terms of employment.

Note that it is illegal for employers to do the following:

• Interfere with or discourage employees’ union activity or protected activities.

• Threaten, retaliate against, or discriminate against employees because of their union support or participation in protected activities.

d. Employee Protections Against Unfair Immigration-Related Practices (Cal. Labor Code §§ 1019–1019.2)

An employer may not retaliate* against employees for exercising their rights, including:

• Filing a complaint with the California Labor Commissioner, Cal/OSHA, the California Civil Rights Department, or another government agency.

• Asking about an employer’s compliance with federal, state, or local law.

• Talking with others about their rights or helping them exercise their rights under federal, state, or local law.

*Examples of illegal retaliation include firing employees, reducing employees’ work hours, or threatening to report employees or a relative to immigration authorities because the employees exercised their rights.

2. Enforcement And Penalties

Employers who fail to comply with the emergency contact notification requirement may be subject to significant penalties. These penalties include fines of up to $500 per employee per day, with a maximum total penalty of $10,000 per employee.

To read more articles like this one, subscribe to the ALERT Newsletter today!