Labor & Employment Law Daily Wrap Up, ARBITRATION—9th Cir.: Arbitration agreement in employment contract wasn’t substantively unconscionable, (Nov 17, 2025)

By Nicholas Kaster, J.D.

The evidence adequately established the arbitration agreement’s involvement with interstate commerce and, thus, the FAA applied.

An arbitration agreement in an employment contract was not “substantively unconscionable” under the Federal Arbitration Act (FAA), the Ninth Circuit has ruled in an unpublished opinion, reversing and remanding a district court’s order denying a motion to compel arbitration in a wage and hour collective action brought by former employees (Larios v. Township Building Services, Inc., No. 25-1936 (9th Cir. Nov. 13, 2025, unpublished)).

Township Building Services, Inc. and its subsidiary appealed the order of a federal district court in California denying its motion to compel arbitration in a wage and hour class and collective action brought by former employees. Township challenged only the district court’s determination that the arbitration agreement in the employment contract was substantively unconscionable.

FAA applied to arbitration agreement. The district court properly determined that the Federal Arbitration Act (FAA) applied to the arbitration agreement at issue, the Ninth Circuit found. The FAA generally applies to any “contract evidencing a transaction involving commerce.” Although contracting parties may agree to apply nonfederal arbitrability law, the courts require “clear and unmistakable evidence” that the parties agreed that nonfederal law should govern instead of the FAA.

The employees contended that Township failed to present competent evidence that the contract involved commerce under 9 U.S.C. § 2 and therefore fell within the coverage of the FAA. However, the employees forfeited this argument by failing to raise it before the district court, the court noted.

Setting forfeiture issues aside, however, the appeals court determined that the evidence before the district court nonetheless adequately established the arbitration agreement’s involvement with interstate commerce. The FAA applies to any “contract evidencing a transaction involving commerce” that contains an arbitration provision. Township presented uncontroverted evidence that it provides commercial janitorial services to commercial, industrial, and retail businesses in multiple states. Township regularly hires janitors from multiple states, including the named employees, who are from different states and provided services in different states. This was sufficient to establish that their employment at Township “affected commerce.” As a result, their arbitration agreements involved commerce within the broad meaning of 9 U.S.C. § 2 and are covered by the FAA, the Ninth Circuit determined.

To establish that the FAA does not apply here, the parties must have “clear and unmistakable evidence” that they agreed to apply nonfederal arbitrability law. The employees argued that the arbitration agreement’s choice of law provision was evidence of the parties’ intent not to be governed by the FAA. The relevant provision states that the arbitration agreement “shall be governed by and shall be interpreted in accordance with the laws of the State of California.” But general choice-of-law clauses do not incorporate state rules that govern the allocation of authority between courts and arbitrators, the Ninth Circuit said. The FAA therefore governs all arbitration issues arising from the parties’ arbitration agreement, including arbitrability.

Agreement was not substantively unconscionable. Applying the FAA, the district court erred in holding that the arbitration agreement was substantively unconscionable under California law, the Ninth Circuit held.

First, the district court erred in concluding that the arbitration agreement was substantively unconscionable because it contained a class action waiver. The FAA preempts state court decisions prohibiting class action waivers as unconscionable, the Ninth Circuit said, citing Iskanian v. CLS Transp. L.A., LLC, 59 Cal. 4th 348, 364 (2014) and AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). In light of Concepcion and Iskanian, the Ninth Circuit found that the district court “clearly erred in holding the class action waiver in this arbitration agreement is unconscionable, given that rules to that effect are preempted by the FAA.”

Not overbroad. The district court also erred in concluding that the arbitration agreement was substantively unconscionable because it was overbroad, the Ninth Circuit determined. On the contrary, the appellate court said, the arbitration agreement was expressly limited to claims arising out of the employment relationship.

In support of this argument, the employees relied on decisions from other circuits and district courts within the circuit finding arbitration agreements overbroad if they purport to encompass claims unrelated to the subject matter of the contract containing the arbitration agreement. However, said the appellate court, in analogizing to these cases, the employees and the district court mischaracterized the parties’ arbitration agreement.

Language used. The arbitration clause on the Signature Page was expressly limited to “claims, disputes, and or grievances which [plaintiffs] may have in regard to, or related to [their] employment with Township Building Services.” The full arbitration agreement does provide that “[t]his agreement to submit and settle any potential claims or legal issues to binding arbitration extends to all claims which the employee or employer may have.” That sentence, however, follows a lengthy passage which begins by requiring any dispute that cannot be settled directly by the parties “that involves the employee employer relationship or the termination of the employee-employer relationship” to be submitted to binding arbitration. The remainder of the passage enumerated claims subject to mandatory arbitration, all of which were expressly related to the employment relationship.

In light of this context, the concluding reference to “all claims” is best read, as Township argued, to clarify that binding arbitration was bilateral—it applied equally to claims by the employer. The employees’ argument that “the agreement applies to all possible claims”—and the district court’s conclusion to that effect—was not supported by the text of the agreement, the Ninth Circuit concluded.

The employees also argued that the arbitration agreement was substantively unconscionable because it waived their right to seek public injunctive relief, meaning “injunctive relief that has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public.” The employees, however, did not raise this argument before the district court and therefore forfeited it.

Waiver of right to administrative relief? Finally, the employees argued that the arbitration agreement was unconscionable because it “improperly restricts” their right to recover damages through administrative proceedings, including those available under the Fair Labor Standards Act and California labor laws. The Ninth Circuit disagreed. The agreement does not, by its plain language, waive the plaintiffs’ right to seek administrative relief. Rather, it provides that “[t]he employee, in consideration of employment with Township Building Services, waives all other rights or remedies which may be available to said employee had the employee not agreed to Binding Arbitration except for those rights afforded either party by State or Federal rulings, processes or laws, which allow and/or require governmental administrative hearings.”

The arbitration agreement also provides that “Township and its employees hereby agree that they do not waive all other rights, remedies[,] and advantages that may be available to them had they not agreed to binding arbitration.” Because the arbitration agreement did not in fact waive administrative relief, this argument also failed.

Thus, because the employees could not demonstrate that the employment contract was substantively unconscionable, the district court erred in denying Township’s motion to compel arbitration, the Ninth Circuit held. Accordingly, the case was reversed and remanded.

The case is No. 25-1936.

Judge: Per Curiam.

Attorneys: Ori Edelstein (Schneider Wallace Cottrell Kim) for Salvador Flores Larios. Michael Eugene Wilbur (Apex Employment Law) for Township Building Services, Inc.

Companies: Township Building Services, Inc.

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