Shortly before the holidays, the First District Court of Appeal in Wise v. Tesla Motors, Inc. held that the Federal Arbitration Act did not preempt California Code of Civil Procedure section 1642 and severed unconscionable arbitration terms from Tesla's nondisclosure agreement. The decision provides important guidance to employers on the enforceability of arbitration provisions in agreements such as NDAs that are executed alongside other employment agreements. 

Background Facts 

Plaintiff, Talia Shayla Alexis Wise ("Wise"), entered into two agreements in connection with her employment at Tesla: an offer letter containing an arbitration agreement and a nondisclosure agreement ("NDA") without an arbitration agreement. The arbitration provision in the offer letter was in small print, which was consistent with the rest of the document, and did not contain a header notifying that the following paragraphs constituted an arbitration agreement. Wise signed and returned the two agreements and began employment with Tesla on February 16, 2021.

Around October 2023, Wise was terminated and filed suit in Alameda County Superior Court, alleging disability discrimination, failure to accommodate, failure to engage in the interactive process, retaliation, and failure to prevent discrimination and retaliation, all in violation of the California Fair Employment and Housing Act (Gov. Code, § 12900 et seq.; FEHA). She also alleged wrongful termination in violation of public policy. 

The terms of the arbitration provision in the offer letter detailed that Wise and Tesla would arbitrate: "Any and all disputes, claims, or causes of action, in law or equity, arising from or relating to [Wise's] employment, or the termination of [her] employment." As exceptions to the arbitration requirement, the Agreement allowed the parties to bring certain administrative claims before a government agency and to obtain "injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration." The Agreement prohibited the parties from filing claims against each other except "in their individual capacities" and precluded them from filing "claims as a plaintiff and/or participat[ing] as a representative in any representative action against the other, except to the extent this provision is unenforceable under the applicable law."

Procedural History

First, the trial court denied Tesla's motion to compel arbitration and rejected Wise's argument that Tesla failed to authenticate Elon Musk's signature on the offer letter. The court found the arbitration agreement in the offer letter to have a low degree of procedural unconscionability. 

Instead, the trial court explained that it would construe the NDA alongside the arbitration agreement under California Code of Civil Procedure section 1642 because the agreements arose from the same transaction. In particular, Wise signed the agreements on the same day, and they were part of the same transaction, which outlined Wise's employment conditions. The court found that select sections from the arbitration agreement and NDA had a high degree of substantive unconscionability, including being "unconscionably one-sided." Accordingly, the trial court found that the unconscionability from these sections permeated the agreements and did not exercise its discretion to sever the provisions. 

Tesla appealed the decision.

Court's Analysis

The Court of Appeals disagreed with Tesla's arguments that: (1) any state law, including Section 1642, preempted the Federal Arbitration Act ("FAA"); (2) the parties' NDA and offer letter agreements should be read together to disprove unconscionability; and (3) any unconscionable terms should have been severed from the contract to allow enforcement of the arbitration provision. 

Although the court held that Tesla misinterpreted precedent on preemption, it agreed that the trial court erred by failing to sever the allegedly unconscionable provisions of the NDA. In applying the severability inquiry provided by the California Supreme Court in Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478, the Wise court concluded that the challenged arbitration provisions did not permeate the agreement to render it unenforceable. Specifically, the provisions "do not affect who must arbitrate, what can be arbitrated, or how the arbitration would proceed. Nor do they render arbitration an inferior forum that works to Tesla's advantage, particularly as to Wise's causes of action." In short, there was no nexus between the unconscionable provisions and the arbitration agreement.

Accordingly, the court reversed the trial court's order. 

Takeaway

The Wise court's interpretation of Tesla's agreements considers a CCP Section 1642 analysis of arbitration agreements. Under this analysis, parties may construe multiple contracts between themselves relating to the same subject matter when arbitration provisions may otherwise have been "missing" or "forgotten" from a singular employment agreement. Thus, employers and employees should factor in the enforceability of an arbitration provision in the context of agreements executed alongside a disputed arbitration provision/agreement. 

Wise v. Tesla should place employees and employers on alert that arguments challenging or defending arbitration provisions/agreements will need to consider whether multiple agreements are at play. While the decision does not unequivocally favor arbitration or transform the arbitration agreement landscape, parties should be knowledgeable of other contracts an employer will present to prospective employees or have presented to current employees, as these documents can and will be considered when an arbitration provision is tested. 

Wise provides a valuable reassurance to California employers that arbitration is not immediately forfeited if a concurrent agreement is found to be improper under California law. Wise should encourage employers to maintain arbitration agreements as a separate stand-alone document so as to not invite any scrutiny or conflicting provisions.