United States: District Judge Rules Uber's Arbitration Agreements Unenforceable On Public Policy Grounds

Last Updated: December 17 2015
Article by John B. Lewis

On September 2, we addressed the much-publicized O'Connor v. Uber Technologies, Inc. case (No. 13-cv-03826-EMC) pending before the U.S. District Court for the Northern District of California. In O'Connor, a group of 160,000 current and former drivers contend that they were Uber's employees rather than independent contractors and hence entitled to protections provided by the California Labor Code. Specifically, the Plaintiffs raised claims for expense reimbursement and converted tips under the California Labor Code.

Now the court has issued a 32-page Order granting in part and denying in part the Plaintiff employees' Supplemental Motion for Class Certification. One problematic component of the Order is Judge Edward Chen's determination that Uber's arbitration agreements with Private Attorneys General Act (PAGA) waivers are unenforceable as a matter of public policy. The Order illustrates some of the pitfalls surrounding the creation of enforceable arbitration agreements with representative action waivers in California. The evolving law regarding PAGA claims, their waiver, and related judicial procedures only increases the difficulty of decision making.

Arbitration, PAGA Waivers, and Public Policy

As a threshold matter, Judge Chen reviewed recent decisions (well-known to our readers) on the enforceability of PAGA waivers. The court cited Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348, 360 (2014) (analyzed in our June 23, 2014, blog), for the proposition that "an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any form is contrary to public policy." Further, according to the court, a public policy prohibiting a waiver of PAGA claims would not be preempted by the Federal Arbitration Act (FAA). Indeed, Judge Chen also found that the Ninth Circuit in Sakkab v. Luxottica Retail North America Inc., 803 F.3d 425, 431-40 (9th Cir. 2015), (covered in our October 7, 2015, blog article), agreed that a PAGA waiver is void based on public policy and that the Iskanian rule was not preempted by the FAA. Armed with these two holdings, the court further laid the basis for invalidating the Uber arbitration agreements by citing Securitas Security Services USA, Inc. v. Superior Court, 234 Cal. App. 4th 1109, 1127 (2015), for the principle "that an arbitration agreement with a non-severable PAGA waiver was unenforceable on public policy grounds."

Moving to the language of the arbitration agreements, the court found that the PAGA waiver could not be severed "without completely undermining arbitration."

The court explained this terminal conclusion as follows:

[T]he blanket PAGA waiver is inextricably linked with the remainder of the arbitration agreement . . . . This is emphasized by the inability of this Court to linguistically excise the unenforceable PAGA waiver from the rest of the agreement. Moreover, the central purpose of the arbitration agreement is to funnel all disputes, except those expressly excluded by the arbitration agreement, into arbitration, which can then only be conducted on an individual basis.

This purpose is not collateral to or distinguishable from the blanket PAGA waiver, but directly dependent upon it, as the arbitration agreement is designed to prevent PAGA claims from ever being brought.

The court also found that as a matter of equity, severance was not appropriate because any driver reviewing the arbitration agreements would be "misled into believing that they had no right to bring a PAGA claim" as the language specifically forecloses representative actions but also states all claims will be arbitrated on an individual basis.

And the opt-out provision did not salvage the PAGA waiver either. Relying on the 2015 California Court of Appeals decision in Securitas, the court agreed that a valid PAGA waiver is only effective "when an employer and an employee knowingly and voluntarily enter into an arbitration agreement after a dispute has arisen." So while an opt-out provision may impact procedural unconscionability, it does not signal that an employee has made a "knowing and intelligent waiver" of his or her right to bring a PAGA claim.

Finally, the court found that Plaintiffs had not waived the argument that the PAGA waiver is void based on public policy by not raising it in a timely fashion. "This Court has already rejected this agreement and found that a PAGA waiver is unenforceable regardless of whether the plaintiff brings or even can bring a PAGA claim."

Based on the invalidity of the arbitration agreements, the court also certified a sub-class of drivers in the state of California since August 16, 2009, to pursue tip and expense reimbursement claims. The original class certified by the court on September 1, 2015, may also pursue the expense reimbursement claim. On December 9, Uber filed its Notice of Appeal from the District Court's Order which held Uber's 2014 and 2015 arbitration agreements "as a whole [are] unenforceable."

The O'Connor case illustrates that employers must proceed cautiously when drafting or revising arbitration agreements with class, representative, or aggregate action waivers to be enforced in California. Indeed, it shows the lengths some courts in California will go in order to undo the Supreme Court's repeated pronouncements that arbitration agreements should be routinely enforced. Tactical judgments must be made concerning the preferred venue for the case when PAGA waivers are not enforced. Employers must question how individual arbitration, if available, and PAGA claims in court can mesh. And if severance of any problematic provisions is desired, it must be clearly and unmistakably stated.

BOTTOM LINE:

The Uber litigation is the poster child for emerging arbitration, waiver, and misclassification issues arising from a new business model operating in California.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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