Uber Arbitration Agreement Held Unconscionable

On Tuesday, in a decision with major implications for ongoing litigation concerning the employee status of Uber drivers, Judge Chen ruled that Uber’s arbitration clause is unenforceable.  In a seventy-page decision, the court held that the arbitration clause, which contained a class-action waiver, is both procedurally and substantively unconscionable under California law. The order comes in two cases involving claims related to background checks (Mohamed v. Uber and Gillette v. Uber), but it will apply to the O’Connor litigation, which we have covered in some depth and which raises directly the employment status question.  Unless the decision in Mohamed and Gillette is reversed, this means that the claims in O’Connor can proceed to trial and will not be subject to mandatory – and individual – arbitration. This is clearly a major procedural development in what is shaping up to be the most important legal challenge to Uber’s classification of its drivers as independent contractors.

The order is detailed and worth reading in its entirety.  In sum, though, the court’s holding proceeds in three essential steps.

First, agreeing with Uber’s arguments, the court held that the plaintiff-drivers had in fact assented to be bound by the arbitration provisions and the contracts of which they were a part.  In order to gain access to the Uber app, the plaintiffs had clicked a “Yes, I agree” button that appeared near hyperlinks to the contracts at issue, and then clicked a second “Yes, I agree button” confirming that that had “reviewed all the documents and agree to all the new contracts.”  Judge Chen found these acts sufficient to constitute assent to the contracts, including to the arbitration provisions.

But the court then found two components of the relevant contracts unenforceable.  The first unenforceable clause was the so-called delegation clause which stipulated that questions concerning the enforceability of the arbitration clause would themselves be resolved by the arbitrator.  Such delegation clauses are enforceable only when they are “clear and unmistakable,” and Judge Chen found that the Uber delegation clause did not meet this standard: although the delegation clause’s language was itself clear, that language conflicted with other portions of the contract that created ambiguity about which decision maker – the arbitrator or a court – would decide enforceability.  This ambiguity defeated Uber’s claim that the delegation was clear and unmistakable.  Judge Chen also held, in the alternative, that the delegation clause was unconscionable under California law: procedurally unconscionable because (at least with respect to one version of the contract) the opt-out clause was “buried in the contract” and substantively unconscionable because it required – in certain cases – employees to pay substantial forum fees.

Having determined that the delegation clause was ineffective, the court thus had jurisdiction to decide whether the arbitration provision was itself enforceable, and held that it was not.  Under California law, the court concluded that the provision was both procedurally and substantively unconscionable.  The provision was procedurally unconscionable because, again, the opt-out clause was “inconspicuous and incredibly onerous to comply with.”  And the provision was substantively unconscionable because it is “permeated with substantively unconscionable terms:” it waives plaintiffs’ right to bring certain claims in any forum, it has an impermissible fee-shifting clause, a carve-out that “permits Uber to litigate the claims most valuable to it in court . . . while requiring its drivers to arbitrate those claims. . .they are most likely to bring against Uber,” and a provision that gives Uber authority to modify contract terms unilaterally and at any time.

We will keep close tabs on this decision and the ongoing Uber litigation.