Just in time for the new year, Wise v. Tesla Motors, Inc. (2025) offers fresh guidance on how California courts should treat allegedly unconscionable terms in collateral employment agreements when deciding whether to enforce an arbitration clause. The case arose after former production associate Talia Wise sued Tesla for disability discrimination, retaliation, and related violations of the Fair Employment and Housing Act, all claims that fell within the scope of an arbitration provision in her offer letter. The trial court, applying Civil Code section 1642 to read the offer letter and a separate nondisclosure and inventions assignment agreement (NDIAA) together as part of a single transaction, found two NDIAA provisions highly substantively unconscionable – a bond waiver for injunctive relief and a clear-and-convincing evidentiary standard to prove information was in the public domain – and concluded that unconscionability “permeated” the arbitration agreement, declining to sever the offending terms and denying Tesla’s motion to compel arbitration.

On appeal, Tesla argued, among other things, that the Federal Arbitration Act (FAA) preempts section 1642 by prohibiting courts from relying on non-arbitration terms in related documents to invalidate an agreement to arbitrate. The Court of Appeal rejected that contention, holding that section 1642 is a neutral rule of contract interpretation applicable to all contracts, neither favoring nor disfavoring arbitration, and therefore is not preempted by the FAA. The court then assumed without deciding that (1) the offer letter and NDIAA were properly construed together under section 1642 and (2) the NDIAA bond waiver and burden-of-proof provisions were unconscionable, but ultimately reversed the trial court’s decision because those terms should have been severed rather than used to invalidate the parties’ agreement to arbitrate.

The appellate court’s severance analysis applied the California Supreme Court’s qualitative framework from Ramirez v. Charter Communications, Inc., which requires courts to decide: (1) whether the central purpose of the contract is tainted with illegality, (2) whether the unconscionability can be cured by severance or restriction without rewriting the agreement, and (3) whether severance would further the interests of justice. In Wise, the Court of Appeal concluded that the central purpose of the agreement – to require arbitration of nearly all disputes between Tesla and Wise – remained lawful and untouched, because the NDIAA’s bond waiver and heightened burden applied only when Tesla sought equitable relief related to proprietary information and did not come into play in the adjudication of Wise’s FEHA and wrongful-termination claims, none of which implicated confidential or trade secret information. Severing the NDIAA provisions required no reformation of the arbitration clause itself, and the court emphasized the strong legislative and judicial preference to enforce arbitration agreements by severing collateral illegal terms where doing so does not perpetuate an inferior or one-sided arbitral forum.

Wise is particularly notable for how it distinguishes cases such as Alberto v. Cambrian Homecare and Silva v. Cross Country Healthcare, where courts declined to sever unconscionable provisions because those terms directly affected the arbitration forum by, for example, restricting disclosure of salary information in a way that undermined wage claims, requiring only employees (but not employers) to arbitrate, or forcing employees to concede the validity of broad restrictive covenants. In those cases, the illegalities permeated the arbitration process itself, supporting a refusal to enforce the agreement to arbitrate. By contrast, the unconscionable NDIAA provisions in Wise applied to all proceedings (including court proceedings) rather than targeting arbitration, did not change who must arbitrate or how the arbitration would proceed, and had no realistic impact on the arbitration of Wise’s specific claims; in the court’s view, there was “no nexus” between those provisions and the arbitration at issue.

In light of Wise, employers should continue to scrutinize NDAs and related agreements for terms that could be labeled unconscionable when read in combination with an arbitration agreement or clause. Fortunately, a defective collateral agreement will not automatically “poison” an otherwise fair arbitration clause when the offending provisions are collateral to the central purpose of arbitration, can be cleanly severed, and do not render the arbitral forum inferior or one-sided for the claims actually being litigated.

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