Velarde v. Monroe Operations, LLC

Facts

Monroe Operations, LLC, doing business as Newport Healthcare, is “a nationwide behavioral health care company” with residential treatment facilities in several states. (Velarde v. Monroe Operations, LLC (2025) 111 Cal.App.5th 1009, 1012.) It hired Karla Velarde as a care coordinator after she had been unemployed for nine months, having been laid off from a customer-service job at the onset of the COVID-19 pandemic. (Id. at pp. 1012–1013.)

On her first day, Velarde was escorted to a conference room and “presented … with ‘a stack of [31] documents’” that she was “required to complete … before [she] could start working.” (Velarde, supra, 111 Cal.App.5th at p. 1013.) The HR manager told her, “‘we gotta get through [these to] get you onboard. We’ll try to get through them as fast as possible,’” and Velarde “‘felt pressured to fill out the forms quickly, since [the HR manager] was waiting.’” (Ibid.) One document was a five-page preprinted “Mutual Agreement to Arbitrate” with 15 sections referencing the FAA, the American Arbitration Association Employment Arbitration Rules, the Federal Rules of Civil Procedure, and the Federal Rules of Evidence; the parties agreed the FAA would govern, that discovery would proceed under the Federal Rules, and that “each party would bear their own attorney fees unless the arbitrator ordered otherwise.” (Ibid.)

Velarde refused to sign the arbitration agreement because she “‘did not understand what it was,’” and said so. (Velarde, supra, 111 Cal.App.5th at p. 1013.) The HR manager responded that “‘if there are ever any issues, [the arbitration agreement] will allow us to resolve them for you,’” and, when Velarde asked whether she had to sign to start working, answered: “‘Yes. This will help us resolve any issues without having to pay lawyers.’” (Ibid.) Velarde signed because she “‘knew that [she] had to sign it to begin working.’” (Ibid.) After Newport Healthcare terminated her, she sued for disability discrimination, retaliation, and whistleblower violations, among other claims, against the company and its director of residential services. (Id. at pp. 1012–1013.)

Procedural history

Newport Healthcare moved to compel arbitration; Velarde opposed on unconscionability. The trial court denied the motion, finding procedural unconscionability in the 31-document signing session and the pressure to sign before starting work, and finding substantive unconscionability in a provision it read to bar judicial review of the arbitrator’s award. (Velarde v. Monroe Operations, LLC (2025) 111 Cal.App.5th 1009, 1013–1014.) Newport Healthcare appealed, principally attacking the trial court’s reading of the judicial-review provision. (Id. at p. 1013.)

The Court of Appeal affirmed, but on a partly different basis and without reaching the judicial-review question. Reviewing de novo where the evidence is not in conflict (and for substantial evidence as to any factual findings), the court held the agreement procedurally and substantively unconscionable and therefore unenforceable, adding: “We need not reach the issue of whether the agreement unlawfully prohibited judicial review.” (Velarde, supra, 111 Cal.App.5th at pp. 1012–1014, citing Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478, 493.) The Supreme Court denied review on August 20, 2025 (No. S291976).

Issue

Whether an adhesive employment arbitration agreement is unconscionable — and thus unenforceable — where the employee was pressured to sign it quickly amid a stack of onboarding documents she could not meaningfully review, and where the employer’s HR manager, in response to her stated confusion, made oral representations about the agreement’s effect that contradicted its actual written terms. (Velarde v. Monroe Operations, LLC (2025) 111 Cal.App.5th 1009, 1012–1013.)

Holding

Reasoning

The sliding-scale framework. The court restated the familiar rule that unconscionability requires both a procedural and a substantive element, which “‘need not be present to the same degree,’” with procedural unconscionability addressing “‘oppression or surprise due to unequal bargaining power’” and substantive unconscionability the “‘fairness of an agreement’s actual terms.’” (Velarde v. Monroe Operations, LLC (2025) 111 Cal.App.5th 1009, 1014–1015, quoting Ramirez, supra, 16 Cal.5th at pp. 492–493.) Substantively unconscionable terms are those that “‘impair the integrity of the bargaining process or otherwise contravene the public interest or public policy’” or that “undermine the nondrafting party’s reasonable expectations.” (Id. at p. 1015, quoting OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 130.)

Ample procedural unconscionability. The contract was adhesive — a preprinted form Velarde had to sign to begin work. (Velarde, supra, 111 Cal.App.5th at p. 1015.) Beyond adhesion, Newport Healthcare “pressured Velarde into agreeing to arbitration by presenting her with the agreement, alongside 30 other documents, to review and sign while its HR manager stood and waited,” leaving her “little to no time to review the terms.” (Ibid.) The terms themselves referenced the FAA and the federal rules — bodies of law a “lay person” is unlikely to have “ever heard of,” which deprived Velarde of a “meaningful opportunity to reflect and decide for herself if she wanted to speak to an attorney.” (Ibid.) Compounding all this, the HR manager “misrepresented the terms and nature of the agreement,” telling Velarde it “would give Newport Healthcare the power to resolve all disputes … without either party having to pay for lawyers” — “manifestly untrue,” because the agreement “required the parties to resolve all covered disputes in an adversarial arbitration … in which all parties would bear their own attorney fees.” (Id. at pp. 1015–1016.) The court declined to find intent, focusing instead on effect: the misinformation “may have been given out of negligence, ignorance, or inadvertence[,] … [b]ut we focus on the effect, not the intent.” (Id. at p. 1016.) Velarde’s signature was thus “not the product of a ‘voluntary or informed agreement to its terms.’” (Ibid., quoting OTO, supra, 8 Cal.5th at p. 129.)

Substantive unconscionability by defeated expectations — the lesson of OTO. Because even overwhelming procedural unconscionability cannot alone void an agreement, the court had to find “some measure of substantive unconscionability.” (Velarde, supra, 111 Cal.App.5th at p. 1016, quoting Roman v. Superior Court (2009) 172 Cal.App.4th 1462, 1471.) It found the guide in OTO, where the Supreme Court held that a Berman-hearing waiver embedded in a litigation-style arbitration agreement — presented by a “‘porter’” who waited while the employee signed — was substantively unconscionable in context, even though the same terms “‘might pass muster under less coercive circumstances.’” (Id. at pp. 1016–1018, quoting OTO, supra, 8 Cal.5th at pp. 130, 136.) Substantive unconscionability, OTO taught, “‘must be sensitive to context.’” (Id. at p. 1018.)

Applying OTO, with the misrepresentation as the decisive addition. The court found the procedural unconscionability here “greater than it was in OTO,” because — “a fact which was not present in OTO” — “Newport Healthcare expressly misled Velarde as to the nature and the terms of the agreement.” (Velarde, supra, 111 Cal.App.5th at p. 1018.) The HR manager’s assurance “conveyed the expectation Velarde could resolve any claimed violation of her rights in an inexpensive, speedy, and informal manner” — something that “may have been important” to a person unemployed for nine months. (Ibid.) But the actual agreement subjected her claims to “an adversarial arbitration process” with Federal-Rules discovery, so it “did not match up with Velarde’s reasonable expectations given what was expressly conveyed to her.” (Ibid.) The complexity favored the repeat-player employer: it was “unlikely a lay person … would be able to navigate the procedural complexities of the Federal Rules,” while Newport Healthcare, “a nationwide corporation, had an attorney available.” (Ibid.) On these facts the terms were “so one-sided as to benefit only Newport Healthcare.” (Ibid.) Even the ordinarily unremarkable each-side-bears-own-fees term was “made unconscionable by Newport Healthcare telling Velarde she would neither need an attorney nor have to pay for one.” (Id. at p. 1019.)

The contextual limit. The court was careful to disclaim any per se rule. “Taken in isolation, like in OTO, ‘the arbitration process here is no more complicated than ordinary civil litigation.’” (Velarde, supra, 111 Cal.App.5th at p. 1019, quoting OTO, supra, 8 Cal.5th at p. 136.) It was the coercive formation and the misrepresentation that supplied the substantive edge: “Had Newport Healthcare either correctly explained the terms of the agreement, or had not explained them at all, and had given Velarde a reasonable opportunity to review the agreement and to consult counsel, ‘this would be a different case.’” (Ibid.)

Significance

Velarde extends OTO, L.L.C. v. Kho into a distinct and practically important channel of substantive unconscionability: an employer’s oral misrepresentation about what an arbitration agreement does. The doctrinal move is that substantive unconscionability need not always be found in a facially harsh term; it can arise from the gap between what the employer told the employee the agreement meant and what the agreement actually provides. Where an HR representative, faced with an employee’s stated confusion, affirmatively mischaracterizes the agreement — here, as a cheap, lawyer-free way to “resolve issues” — the resulting agreement “did not match up with [the employee’s] reasonable expectations,” and terms that would otherwise be enforceable become unconscionable in that context. The court’s refusal to require intent (“we focus on the effect, not the intent”) makes the rule broadly usable: a negligent or careless misstatement counts.

The decision’s limits are equally clear, and equally important. Velarde does not hold that adversarial, federal-rules arbitration or a bear-your-own-fees clause is unconscionable in the abstract; the court expressly said the same terms “might pass muster under less coercive circumstances,” and that a correct explanation — or none at all — coupled with a fair chance to review would make it “a different case.” The holding is contextual, tethered to the combination of high procedural unconscionability and a contradicted expectation. The court also did not reach the trial court’s separate theory that the agreement unlawfully barred judicial review of the award, so that question remains open. As a published decision with review denied, Velarde is a citable addition to California’s formation-integrity line alongside OTO and Ramirez.

Key quotes

“[I]n response to Velarde’s statements that she was uncomfortable signing the arbitration agreement as she did not understand it, false representations were made by Newport Healthcare’s HR manager to Velarde about the nature and terms of the agreement. These representations, which specifically and directly contradicted the written terms of the agreement, rendered aspects of the agreement substantively unconscionable.” (Velarde v. Monroe Operations, LLC (2025) 111 Cal.App.5th 1009, 1012.)

“We do not mean to suggest the HR manager intentionally misled Velarde. The misinformation may have been given out of negligence, ignorance, or inadvertence. But we focus on the effect, not the intent.” (Velarde, supra, 111 Cal.App.5th at p. 1016.)

“Had Newport Healthcare either correctly explained the terms of the agreement, or had not explained them at all, and had given Velarde a reasonable opportunity to review the agreement and to consult counsel, ‘this would be a different case.’” (Velarde, supra, 111 Cal.App.5th at p. 1019.)

Read the full opinion (CourtListener) →

Practice pointer

Open questions

The court “need not reach the issue of whether the agreement unlawfully prohibited judicial review” of the arbitrator’s award — the trial court’s original substantive-unconscionability ground — so the enforceability of that judicial-review provision, and provisions like it, is left undecided. (Velarde v. Monroe Operations, LLC (2025) 111 Cal.App.5th 1009, 1012.) The opinion also does not map the outer boundary of its misrepresentation theory: it holds that a misstatement contradicting the written terms can supply substantive unconscionability in a highly coercive formation, but it does not decide how large a gap between representation and reality is required, or how the analysis would come out where procedural unconscionability is only modest. Because the court disclaimed any per se rule and stressed that the same terms “might pass muster under less coercive circumstances,” future cases will have to sort out how much misrepresentation, coupled with how much procedural unfairness, tips an otherwise-enforceable agreement into unconscionability.