Chee v. Tesla Inc.

Background

Jeremiah Chee brought this action against Tesla Inc., doing business as Tesla Motors, Inc., and Does 1–50. The complaint asserted employment-related claims under California law, including discrimination and retaliation under the Fair Employment and Housing Act, failure to prevent discrimination and harassment, failure to provide reasonable accommodation, failure to participate in the interactive process, retaliation under the California Family Rights Act, retaliation under California Labor Code section 230(a), wrongful termination, and unfair and unlawful business practices. Chee also sought declaratory and injunctive relief.

Tesla removed the case to federal court based on diversity jurisdiction and moved to compel arbitration and stay the proceedings. Tesla submitted a July 8, 2021 offer letter that Chee electronically signed on July 9, 2021. The offer letter required disputes arising from or relating to Chee’s employment or termination to be resolved, to the fullest extent permitted by law, through binding arbitration conducted by the Judicial Arbitration and Mediation Services/Endispute, Inc., or JAMS, under its employment-dispute rules.

Chee did not dispute that he signed the offer letter, that it contained an arbitration provision, or that his claims fell within the provision’s scope. He argued instead that the arbitration agreement was procedurally and substantively unconscionable. Under California law, unconscionability requires both procedural unfairness and substantively unfair contract terms, evaluated on a sliding scale.

Procedural Unconscionability

The court found some procedural unconscionability because the arbitration provision was part of a contract of adhesion: Tesla presented the offer letter on a take-it-or-leave-it basis, with no opt-out provision, and Chee had to sign it to begin employment. The court also found a marginal element of surprise because the arbitration provision appeared midway through the second page in the same small print as the rest of the four-page letter and was not highlighted with a heading, boldface, or italics.

The court rejected Chee’s argument that the time provided to review the offer letter created additional procedural unfairness. Chee received the letter on July 8, 2021, had until July 12 to accept it, and signed it the next day. The court also concluded that Tesla’s failure to attach the JAMS rules added little to the procedural unconscionability analysis because the rules were available online, Chee had four days to review them, and he did not argue that he would have refused to sign had he read them. The court therefore found no additional factors showing a high degree of oppression or surprise.

Substantive Unconscionability

The court rejected Chee’s arguments that the arbitration agreement provided inadequate discovery, that Tesla’s repeated use of JAMS made the agreement unfair, and that JAMS Rule 26 imposed an unconscionable confidentiality requirement. The arbitration agreement authorized the arbitrator to compel adequate discovery and provided that Chee and Tesla would have the rights and remedies they could pursue in court. The court found no basis to conclude that the agreement itself improperly limited discovery. It also found no evidence that JAMS Rule 26 imposed confidentiality obligations on the parties; the rule stated that JAMS and the arbitrator must maintain the confidential nature of the arbitration proceeding.

Chee also challenged provisions in Tesla’s separate Employee Non-Disclosure and Inventions Assignment Agreement, or NDIAA. He argued that the NDIAA lacked mutuality, imposed a heightened proof requirement, granted Tesla access to legal and equitable remedies, and included a non-solicitation provision. The court found merit in the argument that the NDIAA was substantively unconscionable because it effectively allowed Tesla to bring in court the types of claims it was most likely to assert against employees while requiring employees to arbitrate other employment disputes.

Severance and Disposition

The court concluded that the NDIAA could be severed from the offer letter without affecting the arbitration agreement. Because the NDIAA was severable, its unfair terms did not make the arbitration agreement unenforceable.

The court granted Tesla’s motion to compel arbitration. It ordered the NDIAA severed and enforced the remainder of the arbitration agreement. The action was stayed pending arbitration of all claims that an arbitrator determines are subject to the agreement. The parties were ordered to provide joint status updates every 90 days from the date of the order. The opinion does not decide the merits of Chee’s underlying employment claims.