Uber and arbitration: A lethal combination

The recent settlements in the California Uber litigation demonstrate the perils of mandatory arbitration for our entire framework for regulating employment. Unfortunately, media coverage of the Uber controversies has not highlighted the damage that arbitration agreements have wrought to the individual workers involved and to our employment laws generally. But it is now more clear than ever that everyone who cares about employment rights and the fair treatment of workers should support federal legislation to end mandatory arbitration in employment and put workers and corporations on a more equal footing.

Uber has been in the news a lot lately. In the past month, it has settled a big class action lawsuit by California and Massachusetts drivers that was scheduled to go to trial in June, and it has agreed to permit its New York City drivers to form what they term a “drivers association”—that is to say, not a labor union. In each situation, Uber has preserved its right to treat its drivers as independent contractors. Uber also has pulled out of Austin rather than submit its drivers to the same fingerprinting requirements the city imposes on taxi drivers. Last fall, it pulled out of Alaska rather than provide its drivers with workers’ compensation.

This has also been a busy time for Uber litigation. There are currently dozens of lawsuits pending in state and federal courts, seeking to gain for its drivers all the various federal and state rights and benefits that accompany employee status. And the National Labor Relations Board is currently considering whether Uber drivers satisfy the test for employee status under the labor law.

The practices of Uber and other employers of on-demand workers raise many difficult issues under the labor and employment laws. The most important is the question of whether gig workers are employees or independent contractors. At stake is whether Uber has to provide the benefits of state and federal labor laws to its drivers. These include rights to minimum wage, overtime pay, and in many states, paid rest breaks, expense reimbursement, tips, workers compensation, and health and safety protections. The issue of employee status also implicates the ability of gig workers to form a labor union or whether their attempts to unionize make the workers liable for antitrust violations.

Uber is being sued both by drivers seeking to gain rights and benefits under existing labor and employment laws, and by municipalities seeking to hold Uber to the rules that apply to other businesses—rules designed to ensure consumer safety and worker protection. The drivers are running into a serious roadblock because of mandatory arbitration agreements.

Since at least 2013, Uber’s individual contracts with its drivers have contained an arbitration clause that prohibits the drivers from participating in a class or collective action. The arbitration clause has been revised from time to time, but each revision requires not only mandatory arbitration but also that the drivers waive the right to bring a class action in a court or arbitration. This composite mandatory arbitration/class action waiver clause has been the Sword of Damocles hanging over the Uber class action litigation. Now the sword is dropping.

Over the past twenty-five years, the Supreme Court has expanded the scope of the Federal Arbitration Act and narrowed the possibility for workers to avoid arbitration when they have disputes with an employer. More recently, the Court has approved the use of class action waivers in conjunction with mandatory arbitration. The result is that corporations can require their workers to bring any and all disputes they might have to arbitration on an individual basis. And the corporations can structure the arbitration proceedings for their own benefit—determining where it will be held, under what procedural rules, how the arbitrator will be selected, and how the costs will be allocated. They can also specify that there will be no punitive damages. The result has been that more and more workers who believe their rights have been violated are unable to vindicate their claims because they cannot bring a lawsuit and they find it too expensive to go arbitration.

The recently settled Uber litigation in California illustrates how under current law arbitration effectively extinguishes important worker rights. In O’Connor v. Uber, the plaintiffs sought to bring a class action for approximately 160,000 Uber drivers in California.[1] They alleged that Uber failed to reimburse drivers for expenses and failed to pass on tips that were left for them by customers. A district court judge in San Francisco, Judge Edward Chen granted their motion for class certification on September 1, 2015. Although he did not decide the ultimate question of whether the drivers are in fact employees, Judge Chen ruled that there was sufficient reason to think they are to permit the class to be certified. Uber filed an appeal.

One particularly relevant wrinkle in the O’Connor case was that some of the employees had contracts with Uber that not only included an arbitration clause that prohibited class actions, but also offered an opt-out. In light of the clause, Judge Chen’s initial order of class certification excluded any drivers who had accepted a contract with an arbitration clause and had not opted out.

At that time, the validity of Uber’s arbitration clauses was the subject of two other cases, also pending before Judge Chen. Those two cases, Mohamed v. Uber and Gillette v. Uber, were also brought as class actions (one for California drivers and one for Massachusetts drivers) and alleged that drivers had employee status. Uber moved to dismiss both on the grounds that the drivers involved were subject to a mandatory arbitration clause. The clauses, found in Uber’s 2013 and 2014 contracts with its drivers, provide that all disputes must go to final and binding arbitration, and that arbitration must proceed on an individual basis.[2] In June 2015, Judge Chen issued a decision in the Mohamed and Gillette cases finding the arbitration clauses in Uber’s 2013 and 2014 contracts were unenforceable because they were unconscionable under California law.

While the two contracts’ arbitration clauses differed, he found both to be unconscionable. First, he noted that the 2013 and 2014 contracts both required drivers to waive their right to bring a California Private Attorney General Act claim (PAGA claim) in a court. PAGA is a statute that authorizes private individuals to sue for violations of the California Labor Code on behalf of the state.[3] The 9th Circuit had previously ruled that PAGA waivers are not enforceable under California law.[4] Therefore Judge Chen concluded that Uber’s arbitration clauses could not be enforced.[5]

Second, Judge Chen found that both contracts were procedurally and substantively unconscionable apart from the PAGA waiver issue. He said they were procedurally unconscionable because, although they each contained an opt-out provision, the opt-out provisions were inconspicuous, inadequately explained, and onerous to use. He also found the arbitration clauses to be substantively unconscionable for four reasons:

  1. They required drivers who wanted to bring a claim to arbitration to pay half the cost;
  2. They contained a confidentiality clause that disproportionately disfavored the weaker party, i.e., the drivers, and favored the repeat player, i.e., Uber;
  3. They had a carve-out for intellectual property issues that operated solely to the benefit of Uber; and
  4. They gave Uber a right of unilateral modification.

Judge Chen provided extensive authority to show that each of these features made the clauses unconscionable under California law. He concluded that the unconscionability was so pervasive that the objectionable features of the arbitration clause could not be severed, but rather that the entire arbitration clauses were unenforceable.

Subsequently, the O’Connor plaintiffs also moved to have their arbitration agreements declared unenforceable and to have the class certification revised to include drivers who had not opted out of the arbitration agreements. Judge Chen ruled in favor of the plaintiffs on this motion on December 9, 2015, bringing an additional 240,000 plaintiffs into the class.

Uber appealed Judge Chen’s rulings on the arbitration clauses to the 9th Circuit. Predictably, Uber almost immediately altered its arbitration clauses with its current drivers to remove the issues Judge Chen identified as objectionable. Just two days after the December 9 ruling in the O’Connor case invalidating the arbitration agreement and expanding the class, Uber sent a new arbitration agreement to drivers across the country that removed the PAGA waiver from the arbitration clause and contained a new arbitration clause that would apply to all litigation, both current and in the future. Its cover letter stated, “This provision will preclude…you from participating in or recovering relief under any current or future class, collective, or representative (non-PAGA) action brought against the Company or Uber by someone else.” [6]

In April, while the appeals on both the class certification and arbitration clauses in the O’Connor case were pending, and just two months before the scheduled trial on the ultimate issue of whether Uber’s drivers are employees or independent contractors, Uber settled the case. The settlement gave the class members a significant monetary recovery and addressed some of the drivers’ specific grievances, but it did not settle the issue of the drivers’ employee status nor give them the protections of state or federal employment laws.

The settlement took many observers by surprise. After all, the plaintiffs had good reasons to be optimistic about their chances at trial because they had a series of favorable rulings from the trial court judge as well as indications from the court of appeals that it would likely affirm the lower court’s crucial pretrial rulings on the class certification and the unconscionability of the arbitration clause. So why did the plaintiff’s lawyer agree to the settlement?

According to Shannon Liss-Riordan, the lawyer for the O’Connor plaintiffs, the danger of the arbitration clause being found to be enforceable was paramount. As she explained:

[I]f we chose not to settle this case, we faced risks. We faced the risk that a jury in San Francisco (where Uber is everywhere and quite popular) may not side with the drivers over Uber. We faced a risk that the Ninth Circuit may disagree with the district court on his rulings certifying the case as a class action and holding Uber’s arbitration clause to be unenforceable…. And even if the Ninth Circuit agreed with us and affirmed the district court’s rulings regarding class certification and arbitration, Uber made clear it would try to appeal this case to the U.S. Supreme Court, which has been quite friendly in recent years to companies using arbitration agreements to prevent individuals from banding together to hold companies accountable to complying with the laws on a classwide basis.[7]

Attorney Liss-Riordan’s fears were not imaginary. On April 7, just two weeks before the O’Connor settlement, a federal judge in Arizona refused to follow Judge Chen’s reasoning, and instead found Uber’s arbitration clause to be enforceable. That case, like O’Connor, was filed as a class action. It alleged that Uber drivers in Maricopa County were entitled to rights under state and federal employment law.[8] The Arizona judge, Douglas Rayes, criticized the Mohamed decision, declaring that it was “in tension with Supreme Court and Ninth Circuit authority” regarding arbitration. He dismissed the class action and stated that the individual plaintiffs could assert their claim in individual arbitration. Within three weeks, federal district courts in two other states adopted Judge Rayes’s reasoning, upholding Uber’s arbitration agreements and dismissing class actions brought by drivers seeking to enforce labor rights.[9]

On the basis of this fast moving trend, it appears that Uber’s use of arbitration clauses could effectively wipe out all the class actions brought by drivers in all 50 states. Even if some judges adopt Judge Chen’s reasoning and invalidate the 2013 and 2014 arbitration agreements, Uber can and will modify their arbitration agreements to address any issues a court finds problematic going forward and require as a condition of continued employment that its drivers agree to give them retroactive application.

The Uber litigation demonstrates that a company can not only get an exemption from specific employment laws, it can avoid the entire issue of whether its workers are covered by the laws in the first place. The question of whether Uber drivers are employees or independent contractors has ramifications that go beyond Uber drivers and affect many other workers in the on-demand economy. However, as the Uber litigation portends, that issue may never be decided in an authoritative way. Individual workers can raise this argument in their individual arbitration proceedings, but even if they win, it will not apply to others and the outcomes will be hidden behind arbitration’s veil of secrecy. Thus not only do workers lose their employment rights—we as a society potentially lose our entire framework of employment protection that we spent a century constructing.

It is time to change the law by removing employment disputes from the Federal Arbitration Act altogether. The lesson is clear: we need Congress to enact the Arbitration Fairness Act if we want to preserve workers’ rights.

Katherine V.W. Stone is the Arjay and Frances Fearing Miller Distinguished Professor of Law at the UCLA School of Law.

[1] O’Connor v. Uber Technologies, Inc., No. C-13-3826, Order Granting in Part and Denying in Part Plaintiff’s Motion for Class Certification, Docket No 276 (N. D. Calif. Sept. 1, 2015)

[2] Mohamed v. Uber, Order Denying Defendants’ Motions to Compel Arbitration, 109 F. Supp. 3d 1185 (N.D. Calif. 2015).

[3] California’s Labor Code Private Attorneys General Act of 2004, Cal. Lab. Code § 2698 et seq., “authorizes an employee to bring an action for civil penalties on behalf of the state against his or her employer for Labor Code violations committed against the employee and fellow employees, with most of the proceeds of that litigation going to the state.” Iskanian v. CLS Transportation, 59 Cal. 4th 348, 360 (2014). An action brought under the PAGA is a type of qui tam action. Id. at 382.

[4] Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425, 431 (9th Cir. 2015). The Sakkab decision relied upon the California Supreme Court decision in Iskanian. id., which barred the waiver of representative claims under the Private Attorneys General Act of 2004 (PAGA), Cal. Lab. Code § 2698 et seq.

[5] Judge Chen also found that the PAGA waivers were not severable because the contracts expressly prevented severance of that waiver term.

[6] O’Connor v. Uber, Plaintiff-Appellees’ Response Brief to the Ninth Circuit Court of Appeals, 2016 WL 1050778, at 16.

[7] Available at uberlawsuit.com.

[8] Sena v. Uber, CV-15-02418-PHX-DLR (D. Arizona, April 7, 2016).

[9] Varon v. Uber, Civil Action No. MJG-15-3650 (D. Maryland, May 3, 2016); Suarez v. Uber, Case No. 8:16 CV-166-T-30MAP (M.D. Florida, Tampa Division, May 4, 2016).