Court of Appeal holds FAA does not preempt Civ. Code § 1642 application, clarifies Ramirez severability test: Wise v. Tesla Motors, Inc.

In Wise v. Tesla Motors, Inc. (2025) 117 Cal. App. 5th 325, the Court of Appeal (First Appellate District, Division Five) clarified that the Federal Arbitration Act (FAA) does not preempt California’s “single agreement” rule under Civ. Code § 1642, but held that unconscionable provisions in a collateral confidentiality agreement must be severed rather than used to invalidate an entire arbitration agreement.

Plaintiff sued for wrongful termination and disability discrimination under the Fair Employment and Housing Act (FEHA). As a condition of employment, Plaintiff had signed both an arbitration agreement and a separate nondisclosure agreement (NDA). The trial court denied Tesla’s motion to compel arbitration, applying § 1642 to construe the two documents together as a single transaction. It ruled that the arbitration agreement was substantively unconscionable because the NDA contained illegal bond waiver and burden of proof provisions. Tesla appealed, arguing that the FAA preempted the application of § 1642 and that the trial court should have severed the illegal terms.

The Court of Appeal reversed the denial of the motion to compel arbitration. It first rejected the argument that the FAA preempts § 1642, noting that none of the three types of preemption—express, field, or conflict—applied to the state law rule that contracts regarding the same subject matter and transaction should be read together. The court distinguished federal precedents like Rent-A-Center, West, Inc. v. Jackson (2010) 561 U.S. 63 and Buckeye Check Cashing, Inc. v. Cardegna (2006) 546 U.S. 440, clarifying that Plaintiff was challenging the validity of the arbitration agreement itself based on integrated terms, not merely attacking a broader contract to avoid arbitration.

However, the Court of Appeal held that the trial court erred by failing to sever the offensive portions of the NDA. Applying the three-prong test established in Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478, the court determined that: (1) the illegal bond waiver and burden of proof provisions were “collateral” to the central purpose of arbitration; (2) severance was “plainly viable”; and (3) enforcing the remainder of the agreement served the interests of justice because the arbitration process itself involved no lack of mutuality. The court concluded that because the unconscionable terms did not “permeate” the arbitration agreement, the proper remedy was to strike the illegal provisions from the NDA and compel the matter to arbitration.

Full opinion

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