Last month, Judge Edward M. Chen of the Northern District of California rejected a proposed settlement in the O’Connor v. Uber litigation, a suit challenging Uber’s classification of drivers as independent contractors.  The rejection comes after another judge rejected a proposed settlement in Cotter v. Lyft, a similar suit before the same court brought by the same plaintiff’s attorneys, earlier this year.

Following the Lyft precedent, Judge Chen reviewed the proposed O’Connor settlement and applied “with full force” the factors used by the Ninth Circuit in reviewing such settlements. First, Judge Chen considered the risks to both the plaintiffs and Uber in continuing the litigation.  He acknowledged the risk to the plaintiffs that the Ninth Circuit would overrule his previous invalidation of Uber’s mandatory arbitration agreements, thus compelling individual driver arbitrations.  Judge Chen also opined (contrary to Professor Sachs’ conclusion here and here) that the factors used to determine the proper classification of workers under California law do not conclusively support a finding of either employee or independent contractor status for Uber drivers.  He further recognized that Uber challenged recovery and reimbursements even in the event drivers are found to be employees, and that drivers might not prevail on claims with respect to a) unavailability of meal and risk breaks, b) minimum wage and overtime, and c) workers’ compensation.

Judge Chen also reviewed the substantial risk to Uber of a finding that drivers are employees under California law, estimating a penalty against Uber in excess of $1 billion.  He noted that, even if Uber is successful in enforcing its mandatory arbitration agreements, a court could still decide the proper classification of drivers in considering non-waivable California Private Attorneys General Act (PAGA) claims.  Judge Chen additionally considered that absent a settlement one or more drivers not bound by arbitration (such as those who opted out) could litigate their proper classification and thus affect arbitration results, and that the costs of many individual arbitrations would be significant for Uber.

Next, Judge Chen analyzed the amount offered in settlement.  Looking to the monetary amount of the settlement ($84 million guaranteed plus a $16 million payment contingent on a successful IPO), he first concluded he could not consider the contingent payment since he could not evaluate the likelihood of a successful IPO.  He compared the $84 million guaranteed payment to the plaintiffs’ estimated value of released non-PAGA claims, $854.4 million.  Reasoning that the plaintiffs’ assessment was reasonably accurate, Judge Chen found that the proposed settlement constituted approximately 10% of the full verdict value of the non-PAGA claims, and that this was a “substantial discount” – one driver would receive, on average, merely $455 if a class member or $195 if a non-class member.

While Judge Chen noted the settlement included non-monetary relief, he found that much of it was less valuable then suggested by the parties.  For example, he found that despite Uber’s proposal to no longer deactivate drivers based on ride acceptance rates, it “will still exercise substantial control over a driver’s ability to accept or decline ride requests.”  He also noted that despite Uber’s addition of a Driver Appeal Panel, it would still be allowed to deactivate drivers for low star ratings, a frequent basis for deactivation that he said may be subject to the bias and subjectivity of passengers.

Judge Chen importantly expressed doubt that the allowance of tips will add significant compensation for drivers, since Uber will not add an in–app tipping function.  Thus riders will have to tip with cash “which many riders may not have readily on-hand, given Uber’s emphasis on the cashless transaction.”  He also recognized that Uber actively discourages tipping.  Finally, Judge Chen highlighted that by stipulating to the enforceability of Uber’s mandatory arbitration provision, “drivers will be prevented from challenging the validity of the December 2015 Agreement, even in cases unrelated to employment misclassification such as whether arbitration would violate the National Labor Relations Act or on the ground that it denies a class member a contractual right to effectual relief,” also expressing due process concerns for drivers who opted-out.

Other factors considered by Judge Chen included the significant extent of discovery completed and the stage of the proceedings, the experience and views of counsel, the lack of a governmental participant, and the objections of some class members to the proposed settlement.

In balancing the factors, Judge Chen agreed “with Plaintiffs’ assessment that there is a substantial risk on the arbitration question in light of the Ninth Circuit’s actions thus far, a risk that many of the objectors fail to appreciate” and that thus “the Court would be inclined, after weighing the Hanlon factors, to find the consideration afforded by the settlement to be adequate for release of the non-PAGA claims,” but that “the parties’ ‟inclusion of waiver of PAGA claims as part of the settlement considerably alters the Court’s assessment of the fairness and adequacy of the settlement as a whole.”  Judge Chen emphasized the importance and non-waivability of PAGA claims, noting that plaintiffs seek to add the claims to the suit and settle them for $1 million despite potential penalties of over $1 billion.  He failed to see a justification for what he called a “relatively meager value” of 0.1% of the potential verdict value.  Recognizing the incentive to settle PAGA claims as a bargaining chip and yet re-iterating their importance, Judge Chen could not find that “the PAGA settlement is fair and adequate in view of the purposes and policies of the statute.”  Thus, Judge Chen denied preliminary approval of the proposed settlement.

It will be interesting to see if Uber and the plaintiffs merely remove or re-negotiate the PAGA settlement, or also address the non-PAGA claims, or proceed toward trial.  In any case, Judge Chen demonstrated a willingness to allow a settlement, despite significant limitations of the non-monetary concessions by Uber and limited monetary value for individual drivers, because of the substantial risks of continuing litigation.  As with the invalidation of Uber’s mandatory arbitration agreements, the PAGA ultimately drove Judge Chen’s decision.  Time will tell whether Uber drivers, or other gig economy workers, can ride it to a finding of employee status.