Uber gains leverage against drivers with ruling on arbitration

Uber Technologies Inc.’s arbitration agreements were largely ruled by an appeals court to be valid and enforceable in a decision that undercuts drivers’ efforts to secure the benefits and protections of employees.

The decision is the first by a federal appellate court on whether Uber can require drivers to take any disputes to private arbitration, where the company can fight them one-on-one. Uber seeks to bar drivers from joining class-action lawsuits unless they opt out of the standard contract, which few do. The U.S. Court of Appeals in San Francisco on Wednesday mostly agreed with Uber on that point, while ruling that some claims don’t have to be sent to arbitration.

The ruling gives Uber the upper hand in a hard-fought lawsuit covering 385,000 current and former drivers in California and Massachusetts who sued to be treated as employees rather than independent contractors. It might also give Uber more leverage with drivers suing to upend its gig-economy workforce model in other states, where labor laws tend to give companies more leeway than in California. The company also faces lawsuits over its pricing and business practices, as well as efforts by local regulators to force it to comply with laws covering taxis.

The ruling overturns a decision by U.S. District Judge Edward Chen in San Francisco, who concluded the arbitration agreements were invalid and unenforceable in cases brought by drivers who challenged the company’s use of background checks to investigate their credit reports. That decision helped bring Uber to the negotiating table in a related case in which drivers claim they should be treated as employees and reimbursed for mileage and entitled to tips.

In August Chen rejected Uber’s $100 million settlement with drivers in the mileage and tips case as unfair. Uber, now armed with the appeals court ruling, may be able to extract more concessions and a more favorable settlement, legal experts following the case said before Wednesday’s decision. Or, it could walk away from negotiations altogether, confident that the vast majority of driver disputes would be left to arbitration.

Shannon Liss-Riordan, the drivers’ lawyer, said Wednesday’s ruling “is not good for the class."

“We were very aware that this decision was likely coming, which was the primary argument for why I was urging the district court to approve the settlement," she said in an emailed statement.

Ted Boutrous, a lawyer for Uber, hailed the ruling as a victory.

"Arbitration is a fair, speedy and less costly alternative to class-action litigation,” he said in an e-mail. “We’ve always believed our optional arbitration agreements should have applied in this case, and we’re pleased with the court’s decision today."

In a consolation for drivers, the appeals court said they will be able to proceed in court with claims brought under California’s so-called “bounty hunter” law, the Private Attorneys General Act, which allows employees to step into the shoes of the state’s labor commissioner and pursue penalties for violations.

"We do still have the possibility of the PAGA penalties (which are mostly for the state of California), and we have more than 1,500 Uber drivers signed up in California to pursue individual arbitrations if necessary,” Liss-Riordan said in her statement.

If negotiations in the three-year-old lawsuit collapse, the world’s most valuable technology startup would escape without any significant changes to its business model or financial sacrifice.

Chen is the only federal judge who has found Uber’s arbitration agreements unenforceable. Uber has since revised its driver contracts, allowing it to smother similar challenges in Arizona, Ohio, Florida and Maryland, with federal judges in those states upholding its arbitration requirements this year.

The appeals court cases are Mohamed v. Uber Technologies Inc., 15-16178, and Gillette v. Uber Technologies Inc. 15-16181, U.S. Circuit Court of Appeals for the Ninth Circuit (San Francisco). The lower-court case is O’Connor v. Uber Technologies Inc., 13-cv-03826, U.S. District Court, Northern District of California (San Francisco).