October 27, 2015 Top Story

Enforceable Arbitration Requirement May Not Be Worth the Fare

Uber decision will likely force rethinking of arbitration agreements

Adam E. Lyons

The district court in Mohamed et al v. Uber Technologies, Inc., struck down employment arbitration agreements, calling them procedurally and substantively unconscionable. This decision is “the latest front in the assault against the enforceability of arbitration agreements,” says Brian Koji Tampa, FL, cochair of the ABA Section of Litigation’s Employment & Labor Relations Committee. Section leaders believe the decision is a signal for attorneys to consider rethinking the language contained in arbitration agreements.

Finding a Car: Background

The plaintiffs electronically signed arbitration agreements to become drivers for Uber, a transportation company that uses apps to connect riders with drivers. Uber, whose website promises that drivers can “be your own boss,” contends its drivers are independent contractors, while the driver plaintiffs contend they are employees.

The plaintiffs filed suit against Uber, alleging several claims, including putative class claims under the federal Fair Credit Reporting Act (FCRA). Uber moved to compel arbitration under the terms of its contracts with the plaintiffs. Multiple agreements were at issue, each containing an arbitration provision. The agreements purported to reserve to the arbitrator questions of the validity of the arbitration provision, precluded the pursuit of class action or private attorney general (PAGA) claims, and required the employee to share the cost of any arbitration. Based on those provisions, the U.S. District Court for the Northern District of California refused to force arbitration. The court reached the validity of the arbitration clauses after first determining that the delegation of the question of validity to the arbitrator was not sufficiently clear because of “inconsistencies” in the contracts. Key among those “inconsistencies” was that the contracts required arbitration but also included a forum selection clause in the case a dispute was brought to court.

Starting the Meter: Procedural Unconscionability and Inconsistency

The court found several variations of the contract to be procedurally unconscionable. One contract was procedurally unconscionable because it failed to provide a meaningful opt-out provision and did not draw the drivers’ attention to its existence. Another, which corrected these problems, was procedurally unconscionable because it “failed to notify drivers of a specific drawback” in that the drivers “may be required to pay considerable forum fees” and because the drivers “would feel at least some pressure not to opt out of the arbitration agreement.”

The discussion on procedural unconscionability is a “good analysis of arbitration agreements,” particularly “what works and what doesn’t work,” according to Louis F. Burke, New York, NY, cochair of the Section of Litigation’s Alternative Dispute Resolution Committee. “Certainly [employers are] going to have to give some disclosure,” even to the point of having “to lay out two columns setting forth the pros and cons” or a pop up window that specifically addresses these points, rather than only an “I agree” button, says Burke. That, however, does not mean that the decision was wrong.

Adding such language to arbitration agreements increases the possibility of inconsistency. Inconsistency on the question of whether arbitration is required is what allowed the court to consider whether arbitration was required in the first place. At the same time as an employer will need to increase disclosure, the employer will also need to keep the clause “short and simple,” says Burke.

Additional Tolls: Substantive Unconscionability

Even if the contracts were procedurally conscionable, the court held that they still would not be enforced because they were “permeated” with substantively unconscionable terms. In the court’s determination, the waiver of PAGA claims was enough to render the whole contract unconscionable. Even without that, the combined effect of the splitting of arbitration fees, confidentiality, a carve-out for the employer’s most likely claims, and the employer’s right to unilaterally alter the terms of the agreement created unconscionability.

In making that determination, the “court is scrutinizing arbitration provisions more closely than the Supreme Court intended,” says Teresa R. Bult, Nashville, TN, cochair of the Section’s Employment & Labor Relations Committee. Bult disagrees with the decision in general. In her opinion, the district court spends “70 pages trying to justify how [it] can overturn what should be a valid arbitration agreement,” a navigation that becomes “almost laughable” at times.

The Practical Effect of the Uber Decision

If a company complies with all of the requirements of Uber, would arbitration still have value? To a small employer, it might not, opines Koji. Avoiding the uncertainty of jury verdicts has some worth, but for a small employer, arbitration does not offer significant cost savings, Koji adds. The real advantage in arbitration is in avoiding the class action, notes Koji, and that advantage remains under Uber. Nonetheless, with the court’s rejection of a provision disallowing PAGA claims, placing the full cost of arbitration on the employer, rejection of confidentiality, and rejection of the employer’s right to change its agreements, the overall value of arbitration is reduced, Koji concludes.

While this decision may be limited by its reliance on California law, Burke considers it “a good example of what we need to think about, even if it may not be the law of some other jurisdiction.” The decision will likely appear in pleadings both pro- and con- on the arbitration issue throughout the country, notes Koji. “Businesses that have operations throughout the country will have to confront it. California is an outlier . . . [but employers] may have to have one agreement for California and one for everyone else.”

Adam E. Lyons is a contributing editor for Litigation News.

Keywords: arbitration, Uber, unconscionability, employment contract

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