A federal district court judge in San Francisco issues a blockbuster opinion holding Uber’s arbitration policy with its drivers unenforceable under California law. The court holds that the policy – imposed by way of a cell-phone clickbox screen – created a one-sided forum for resolution of legal disputes.
Mohamed v. Uber Technologies, No. C-14-5200 (N.D. Cal. June 9, 2015): Two drivers, Mohamed and Gillette, filed putative class, individual and representative claims under the federal Fair Credit Reporting Act (FCRA), the California Investigative Consumer Report Agencies Act, the California Private Attorneys General Act (PAGA) and There laws.
The defendants – Uber and related entities – moved to dismiss the cases on the ground that the parties agreed to arbitration in two sets of arbitration contracts: the 2013 Agreement and the 2014 Agreement. Drivers could view the contracts via their cell phone screens, and were required to click two boxes to show their assent:
In a comprehensive 70-page decision, Judge Edward M. Chen of the U.S. District Court for the NorThern District of California rejects Uber’s arguments and holds that the claims should be decided by a court, instead of through arbitration. The court holds that the contracts are unenforceable because they are unconscionable under California law.
Intially, Judge Chen holds that the parties did enter into (assented to) the contracts, despite the use of an informal, possibly difficult-to-read cell-phone link:
“[I]t is beyond dispute that Mohamed and Gillette had the opportunity to review the relevant terms of the hyperlinked agreements, and the existence of the relevant contracts was made conspicuous in the first application screen which the drivers were required to click through in order to continue using the Uber application (i.e., driving for Uber). Uber has similarly presented uncontroverted evidence that Mohamed and Gillette clicked ‘Yes, I Agree.’ … Thus, plaintiffs cannot successfully argue that a binding contract was not formed here. … whether or not the drivers actually clicked the links or otherwise read the terms of the contracts is irrelevant ….”
Second, Judge Chen holds that the question of whether these agreements are enforceable belonged to the court, rather than an arbitrator. While such gateway issues of enforceability are indeed normally for a court to decide, Uber contended that the agreements clearly and unmistakably delegated that authority instead to the arbitrator, as authorized in Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010).
Judge Chen rejects that argument on two grounds. First, he holds that the so-called delegation clause – against the backdrop of the entire agreement – was not clear and unmistakable. While the delegation clause itself stated that “enforceability, revocability, or validity of the Arbitration Provision or any portion of the Arbitration Provision” was to be decided by an arbitrator, There provisions of the contract pointed to a court deciding the same issues. In particular, a forum-selection clause in the agreement stated that “any disputes, actions, claims or causes of action arising out of or in connection with this Agreement or the Uber Service or Software shall be subject to the exclusive jurisdiction of the state and federal courts located in the City and County of San Francisco, California.” While Uber made arguments seeking to reconcile these provisions, Judge Chen holds that the delegation clause set against the contract as a whole failed to pass the “clear and unmistakable” test.
In addition, Judge Chen holds that even if the delegation clauses were clear and unmistakable, they are themselves unconscionable, and thus unenforceable, under California law. The court observes that California law disfavors oppressive agreements that shift some or all of the fees to the claimant, especially where There is an imbalance of bargaining power. Even to simply challenge the enforceability of the agreement before an arbitrator might (according to the record presented) cost the claimants thousands of dollars in arbitration fees alone. The court notes, pointedly, that one of the plaintiffs was living on his Social Security check of $775 a month.
Third, Judge Chen reaches the merits and evaluates the different contracts to determine whether they were unconscionable under California law. California law provides that to prove the defense, a party must establish both procedural and substantive unconscionability.
Judge Chen holds that procedural unconscionability was shown by the “adhesion contract” nature of the agreements, i.e., imposed by one party with superior bargaining power and no opportunity by the drivers to bargain. Moreover, the agreements were difficult to access and were not highlighted in a way to make them conspicuous. Uber argued that the 2014 Agreement, at least, was purely voluntary because a driver could – in principle – opt-out of the arbitration program. But Judge Chen, citing a California Supreme Court decision (Gentry v. Superior Court, 42 Cal. 4th 443, 469 (2007)) ruling that the opt-out option alone did not rescue the agreement. The opt-out mechanism in this case was found not be conspicuous and difficult to use.
Judge Chen also holds that the 2013 arbitration policy was substantively unconscionable, lacking many protections deemed important to a fair and balanced arbitration system: it imposed potentially crushing fees on claimants, contained broad confidentiality terms, carved out Uber’s right to go to court to enforce intellectual-property claims, and allowed Uber to unilaterally modify the terms of the contract without notice to drivers. While the 2014 Agreement had better terms overall, the Court holds that the later agreement was legal deficient because it contained an unlawful and unseverable waiver of the PAGA claim (held non-waivable under Iskanian v. CLS Transp. L.A., LLC, 59 Cal. 4th 348 (2014)).
Overall, the opinion provides much fodder for the challenge of comparable, one-sided arbitration agreements in the employment field.