Ly v. Tesla, Inc.

Background

Jeannie Ly filed this action in Monterey County Superior Court against Tesla Motors, Inc. and unnamed defendants. She alleged violations of the California Fair Employment and Housing Act, the California Family Rights Act, and California public policy. Tesla removed the action to federal court based on diversity jurisdiction.

According to the complaint, Ly worked for Tesla from January 2021 through April 2024, first as an Operations Specialist and later as a Senior Operations Specialist. She took several periods of medical leave, including leave for in vitro fertilization treatment. Tesla terminated her employment on April 15, 2024. Ly alleged that the termination was based, in whole or in part, on her sex, medical condition, physical disabilities, requests for accommodations, and exercise of leave rights. Her claims included discrimination, failure to provide reasonable accommodations, failure to engage in an interactive process, and wrongful termination.

Tesla asked the court to compel arbitration under an arbitration clause in an employment offer letter that Ly signed on December 29, 2020. The clause covered disputes arising from or related to her employment or its termination and required final, binding, private arbitration before the Judicial Arbitration and Mediation Services, or JAMS. It also required claims to be brought individually rather than as class or representative actions, provided for discovery and written decisions, and stated that Tesla would pay arbitration fees exceeding those that would be required in court.

Ly did not dispute signing the offer letter or that the arbitration clause covered her claims. Instead, she argued that the clause was procedurally and substantively unconscionable—that is, unfair because of the way it was imposed and because of overly harsh or one-sided terms. Tesla argued that the clause was valid and that any offending provisions could be severed, meaning removed from the agreement without invalidating the rest.

Judicial Notice

Tesla asked the court to take judicial notice of 41 orders from state and federal courts involving Tesla motions to compel arbitration. Ly did not oppose the request. The court granted the request because the orders were court records and their existence was not reasonably disputable.

Procedural Unconscionability

The court found that the arbitration clause was part of an adhesive contract: a standardized employment agreement offered on terms Ly was not invited to negotiate. That circumstance created a minimal degree of procedural unconscionability, which concerns oppression or surprise caused by unequal bargaining power.

The court rejected Ly’s additional arguments. It found that she had not shown she was pressured to sign, that the arbitration clause was illegible or unusually hidden, or that Tesla was required to explain arbitration or advise her to consult a lawyer. The court also found that Tesla’s failure to provide the JAMS rules did not establish unfairness because Ly did not identify any unusual or unfair rule that had been hidden from her.

Substantive Unconscionability

The court found no substantive unconscionability in the arbitration clause itself. Substantive unconscionability concerns terms that are overly harsh, oppressive, or unreasonably favorable to the stronger party.

First, the court held that the clause allowing either side to seek injunctive relief in court was not unfair. Although Ly argued that employers are more likely to seek injunctions, the provision applied equally to both parties.

Second, the court considered a separate Non-Disclosure and Inventions Assignment Agreement, or NDIAA, together with the offer letter because both were signed on the same day, required as part of Ly’s hiring, and concerned disputes arising from her employment. The court found unconscionable the NDIAA provision giving Tesla the right to seek an injunction without posting a bond. The court was not persuaded that Tesla had a legitimate commercial need to avoid the ordinary requirements for obtaining an injunction.

Third, the court rejected Ly’s argument that Tesla had a unilateral right to modify the offer letter and arbitration clause. The court read the language requiring a written agreement signed by a Tesla officer as also requiring Ly’s consent.

Severability and Ruling

The arbitration agreement and the NDIAA each contained severability clauses. The court held that the unfair no-bond injunction provision did not permeate the agreements or taint their central purpose. The court therefore severed section 6 of the NDIAA without changing the arbitration agreement’s primary purpose of requiring Ly’s claims to be arbitrated before a neutral JAMS arbitrator.

Judge Virginia K. DeMarchi granted Tesla’s motion to compel arbitration. The court stayed the action pending completion of arbitration and ordered the parties to file a joint status report within 30 days after arbitration ended, or by August 25, 2025, whichever came first.