Tag: Arbitration

Court to Consider Whether California Ride Share Drivers Who Make Airport Runs Are Exempt from the Federal Arbitration Act

On November 26, 2019, San Francisco Superior Court Judge Richard B. Ulmer ruled that the Federal Arbitration Act (“FAA”) might not apply to Uber drivers who are engaged in interstate commerce while driving passengers to or from international airports.

In his claims before the Division of Labor Standards and Enforcement (“DLSE”), driver Sangam Patel (“Patel”) seeks recovery of unpaid wages, overtime pay, vacation pay, meal and rest break premiums, and unpaid business expenses allegedly owed by Uber. Uber petitioned to compel arbitration of Patel’s (“Patel”) claims under the FAA.

The Labor Code provides a right to bring an action to collect wages notwithstanding the existence of an arbitration agreement. Cal. Lab. Code § 229. If the FAA applies, a written arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The FAA applies to any “contract evidencing a transaction involving commerce” that contains an arbitration provision. Id. The FAA does not apply, however, to “contracts of…workers engaged in foreign or interstate commerce.” Id., at § 1.

Notably, there is a distinction between the term “involving” for purposes of section 2 and the term “engaged in” for purposes of section 1.

As the California Court of Appeal explained earlier this year in Muller v. Roy Miller Freight Lines, LLC (2019) 34 Cal.App.5th 1056, 1062, “the [United States] Supreme Court reasoned the plain meaning of ‘engaged in’ interstate commerce in section 1 is narrower in scope than the open-ended phrase ‘involving’ commerce in section 2. Unlike section 2’s reference to ‘involving commerce,’ which ‘indicates Congress’ intent to regulate to the outer limits of its authority under the Commerce Clause’ and thus is afforded an ‘expansive reading,’ section 1’s reference to ‘engaged in commerce’ is ‘narrower,’ and therefore ‘understood to have a more limited reach,’ requiring ‘a narrow construction’ and a ‘precise reading.’” (Internal citations omitted.)

Uber argued that the FAA applies to its arbitration provision because it involves commerce as the Uber app is available to riders and transportation providers in over 175 cities across the United States. Relying on precedent that stands for the proposition that workers need only engage in activities that affect interstate commerce to be considered “engaged in interstate commerce,” the Labor Commissioner argued that Uber drivers such as Patel engage in interstate commerce when they transport passengers to and from international airports, thus rendering the FAA inapplicable.

The argument is similar to that raised Singh v. Uber Techs. Inc. earlier this year, where the U.S. Court of Appeals for the Third Circuit rejected Uber’s argument that a group of New Jersey drivers suing for unpaid overtime wages were required to arbitrate their claims. The Singh Court found that transportation workers who transport passengers may be exempt from the FAA if they are engaged in interstate commerce. Singh claimed that he frequently transported passengers on the highway across state lines, between New York and New Jersey. In light of the factual dispute as to whether Uber drivers engaged in interstate commerce, the Third Circuit sent the case back to the district court to decide, after discovery on the issue, whether Singh and the proposed class of Uber drivers engaged in interstate commerce. If they did, the FAA would not apply.

Consistent with the Third Circuit in Singh, Judge Ulmer granted the Commissioner’s request for limited discovery on the issue of whether Uber drivers engage in interstate commerce. Following that discovery, Uber may then re-calendar its petition for hearing.

The case bears watching as it may provide employees in some industries with arguments to try to circumvent the otherwise enforceable arbitration agreements that they signed with their employers. Ultimately, if Uber drivers are found to be engaged in interstate commerce such that the FAA is inapplicable, the FAA would not preempt their right to file suit under Labor Code section 229 notwithstanding any private agreement to arbitrate. But section 229 only applies to actions to collect due and unpaid wages. Any other claims – such as claims for missed meal or rest periods, failure to reimburse business expenses, or failure to provide accurate wage statements – would not be covered and, thus, should still be subject to a valid and enforceable arbitration agreement. It will be interesting to see if and how that issue is addressed.

©2019 Epstein Becker & Green, P.C. All rights reserved.

More on the Federal Arbitration Act can be found on the National Law Review ADR, Arbitration and Mediation law page.

Court Finds Medical Bill Reimbursement Claim Subject to “Biblically-Based Mediation and Arbitration”

A Mississippi federal court granted a motion to compel arbitration of a claim for reimbursement of medical expenses from the defendant, a company that provides health care sharing plan alternatives to those of Christian faith. The plaintiff had signed a membership agreement stating that he would abide by the defendant’s guidelines, under which members, such as the plaintiff, were required to exhaust an “appeals” process for challenging bill-sharing decisions before resorting to any sort of legal procedures against the defendant. If the appeals process did not resolve the dispute, a “biblically-based mediation and arbitration” clause in the guidelines stated that any and all disputes arising out of the membership agreement shall be settled by “biblically-based mediation.” If that mediation fails, the member may submit the dispute to an independent and objective arbitrator for binding arbitration but otherwise waives his or her right to file a lawsuit.

Addressing the defendant’s motion, the court first held that the provision above constituted a valid arbitration agreement and that the subject dispute fell within the scope thereof. The court noted that the plaintiff had indeed agreed that he “will bring no suit, legal claim or demand of any sort … in the civil court system, with the sole exception of enforcing any favorable arbitration award or mediated agreement.” As such, the court explained that arbitration was required unless a federal statute or policy rendered the plaintiff’s claim non-arbitrable. Because the plaintiff failed to identify any such statute or policy, the court granted the defendant’s motion to compel arbitration.

Pettey v. Medi Share, No. 2:19-cv-00059 (S.D. Miss. Oct. 1, 2019).

©2011-2019 Carlton Fields, P.A.

ARTICLE BY Alex B. Silverman of Carlton Fields.

Second Circuit Confirms Arbitration Awards That Are (Literally) Out of This World

Arbitration over whether a South Korean company or a Bermuda company headquartered in Hong Kong owns a geostationary satellite in light of an order from a South Korean regulatory agency can be complicated. The Second Circuit recently affirmed a decision confirming an arbitration award adjudicating ownership of the satellite in question and awarding damages related to a party’s failure to obtain regulatory approvals necessary to complete the sale over claims that the arbitration panel exceeded its power, disregarded the law, and violated public policy.

KT Corp., a Korean company, agreed to sell a satellite to ABS Holdings Ltd., a Bermuda company headquartered in Hong Kong. The companies signed a purchase agreement to convey the title to the satellite and an operations agreement under which KT agreed to operate the satellite on behalf of ABS. Both agreements contained New York choice-of-law provisions and mandatory arbitration clauses. The purchase agreement required KT to obtain and maintain all necessary licenses and authorizations for the sale and the continued operation of the satellite.

The sale was completed and title to the satellite was transferred.

Nearly two years later, a South Korean regulatory agency issued an order declaring the purchase agreement null and void because KT had failed to obtain a required export permit. The agency canceled KT’s permission to use certain frequencies to operate the satellite.

KT and ABS arbitrated who held title to the satellite and whether KT had violated the purchase agreement before a panel of the International Chamber of Commerce. In two awards, the panel concluded that ABS held title to the satellite because title had lawfully passed when the conditions precedent to the purchase agreement were completed when there was no requirement that KT obtain an export permit. And even if that was not the case, the panel concluded, the regulatory order had no effect because it was issued retroactively without notice to the parties in violation of New York law, and KT breached its obligations by failing to obtain all the approvals necessary for the continued operation of the satellite (even though an export permit may not have been required for the sale of the satellite, one was necessary to maintain the satellite’s operations).

KT petitioned the Southern District of New York to vacate the award, and ABS petitioned the court to confirm it. The district court granted ABS’ petition and confirmed the panel’s award.

The Second Circuit affirmed. KT argued that the panel had exceeded its authority and that the award disregarded the law and violated public policy. KT claimed that the panel’s conclusion that the regulatory order was without effect violated due process principles. The court disagreed, noting that KT had not challenged the order, its counsel had questioned its validity, and the panel did not rest on the validity of the order; the panel referenced the propriety of the order as an alternate basis for its primary conclusion that title to the satellite properly changed hands. The court also rejected KT’s argument that the panel had disregarded New York contract law. Regarding public policy, although the court recognized that it is the public policy of the United States to enforce foreign judgments that are not repugnant to U.S. policy, it was unclear whether that public policy extended to foreign regulatory orders, and it was not even clear that the regulatory order in this case was enforceable under South Korean law according to KT’s expert.

KT Corp. v. ABS Holdings, Ltd., No. 18-2300 (2d Cir. Sept. 12, 2019).

©2011-2019 Carlton Fields, P.A.

ARTICLE BY Brendan N. Gooley of Carlton Fields.
For more arbitration decisions, see the National Law Review ADR / Arbitration / Mediation page.

California Arbitration Roundup: Employers Are 3-1 For Favorable Arbitration Rulings

California employers received mostly good news this past month on the arbitration front, with a trio of pro-employer arbitration-related rulings.  The California Supreme Court’s recent ruling invalidating an employer’s arbitration agreement (discussed below) is a notable exception.

California Supreme Court Invalidates Employer’s Arbitration Agreement As Unconscionable.

In OTO LLC v. Ken Kho, the California Supreme Court ruled that an Oakland Toyota dealership’s arbitration agreement with a former employee was unenforceable and was so unfair and one-sided that it was procedurally and substantively unconscionable.  “Arbitration is premised on the parties’ mutual consent, not coercion, and the manner of the agreement’s imposition here raises serious concerns on that score,” the majority opinion said.

In 2013, Ken Kho, then an employee of the dealership, One Toyota, was asked to sign several documents, including an arbitration agreement.  Kho signed it, and was later terminated.

The California Supreme Court acknowledged that California and federal laws strongly favor arbitration. However, the Court considered the following factors in determining that One Toyota’s arbitration agreement was unconscionable:

  • The arbitration agreement purported to waive Kho’s right to file a wage claim with the Labor Commissioner and to have a “Berman” hearing before the Labor Commissioner (while not dispositive, the Court noted that this remains a significant factor in considering unconscionability of employee arbitration agreements);

  • The agreement was presented to Kho in his workspace, along with other employment-related documents;

  • Neither its contents nor its significance was explained;

  • Kho was required to sign the agreement to keep the job he had held for three years;

  • Because One Toyota used a piece-rate compensation system, any time Kho spent reviewing the agreement would have reduced his pay;

  • A low-level employee (a porter) presented the agreement to Kho, “creating the impression that no request for an explanation was expected and any such request would be unavailing”;

  • By having the porter wait for the documents, One Toyota conveyed an expectation that Kho sign them immediately, without examination or consultation with counsel;

  • There was no indication that the porter had the knowledge or authority to explain the terms of the agreement;

  • Kho was not given a copy of the agreement he had signed;

  • The agreement was written in an extremely small font in the form of a “single dense paragraph” of 51 lines, and the text was “visually impenetrable” and “challenge[d] the limits of legibility”;

  • The sentences were complex, filled with statutory references and legal jargon;

  • Kho was not offered a version to read in his native language (while the Court noted this factor, it did not consider it because it did not know Kho’s English proficiency);

  • The arbitration agreement did not make clear One Toyota’s obligation to pay arbitration-related costs (and rather cited to statutory provisions and referenced legal precedent; the Court noted “It would have been nearly impossible to understand the contract’s meaning without legal training and access to the many statutes it references. Kho had neither.”);

  • One Toyota’s agreement did not mention how to bring a dispute to arbitration, nor did it suggest where that information might be found (e.g., by citing to a commercial arbitration provider such as JAMS or AAA); and

  • One Toyota’s arbitration process was complicated to navigate and would likely require an attorney, making it cost-prohibitive for Kho.

The Court concluded that “[w]e have not said no arbitration could provide an appropriate forum for resolution of Kho’s wage claim, but only that this particular arbitral process, forced upon Kho under especially oppressive circumstances and erecting new barriers to the vindication of his rights, is unconscionable.”

Employers would thus be well-advised to revisit their employee arbitration agreements to ensure that they do not contain any of the defects discussed by the Supreme Court in the Kho case.

NLRB Upholds Employer Conduct Related to Mandatory Arbitration Agreements

In Cordúa Restaurants, Inc., 368 NLRB No. 43 (2019), the National Labor Relations Board (NLRB) addressed the lawfulness of employer conduct surrounding mandatory arbitration agreements for the first time since the U.S. Supreme Court’s 2018 decision in Epic Systems v. Lewis, where the Court held that mandatory arbitration agreements do not violate the National Labor Relations Act (NLRA) (see here).  In Cordua Restaurants, the NLRB ruled in part that employers are not prohibited under the NLRA from: (1) informing employees that failing or refusing to sign a mandatory arbitration agreement will result in their discharge; and (2) promulgating mandatory arbitration agreements in response to employees opting in to a collective action under the Fair Labor Standards Act or state wage-and-hour laws.

The NLRB’s decision in Cordua Restaurants is a natural extension of the Supreme Court’s analysis and ruling in Epic Systems.  There, the Court held that Congress, when passing the Federal Arbitration Act (FAA) in 1925, instructed courts to enforce arbitration agreements as written.  Since the passage of the FAA predates the NLRA by ten years, and since the NLRA says nothing about overruling the FAA, the NLRB could not, under the guise of enforcing the NLRA, rule that an arbitration agreement that otherwise is lawful on its face violates the NLRA.  This decision by the NLRB is further evidence of that agency’s retreat from past policies advanced by the NLRB in the prior administration and likely will not be overruled.

California Court of Appeals Compels Employee to Arbitrate Claims Even Though He Filed Suit Before Signing Arbitration Agreement

In Quiroz Franco v. Greystone Ridge Condominium, the California Court of Appeals compelled an employee to arbitrate his claims against his employer even though the employee filed his lawsuit two days before he signed an arbitration agreement.  The Court held that the arbitration agreement was clear in that it required arbitration of any claims and that it did not contain any restriction based on when a claim was filed.

In the case, Quiroz Franco, the employee, was given an arbitration agreement on March 9, 2018, and a Spanish translation shortly thereafter.  On March 19, 2018, he filed a lawsuit against his employer, alleging harassment, discrimination, and wage and hour claims among others.  On March 21, 2018, Quiroz Franco handed in his signed arbitration form, which the employer used to attempt to compel him to arbitrate. The lower court ruled that the claims in the employee’s suit started to accrue before he signed the arbitration agreement, so arbitration couldn’t be compelled.  The employer appealed and the Court of Appeal overturned the lower court’s decision.

California Court of Appeals Rules that Unfair Competition Law Claims Are Arbitrable

In Clifford v. Quest Software Inc., the California Court of Appeals addressed whether an employee’s claim against his employer for unfair competition under Business and Professions Code section 17200 (the UCL) was arbitrable, ruling that it was.  The employee brought various wage and hour claims against his employer, and the employer moved to compel arbitration based on the parties’ arbitration agreement.  The trial court granted the motion in part and ordered to arbitration every cause of action except the employee’s UCL claim, which the court concluded was not arbitrable.  The Court of Appeals reversed, holding that the employee’s UCL claim was subject to arbitration along with his other causes of action—more good news for California employers.

© 2019 Mitchell Silberberg & Knupp LLP

Court Compels Arbitration Based on Text Message Agreement

A district court has granted a motion to compel arbitration based on an arbitration clause in an agreement sent via text message and agreed to via a reply text.

Lexington Law Firm, a debt collection company, was sued in a putative class action under the Electronic Funds Transfer Act after purportedly deducting funds without consent.

Lexington moved to compel arbitration. It had sent the named plaintiff a text message agreement that contained an arbitration clause requiring him “to arbitrate all disputes and claims between [him] and Lexington on an individual basis only.” The plaintiff responded with a text that said: “Agree.” The plaintiff opposed Lexington’s motion. He claimed, inter alia, that there was no mutual assent and that the arbitration clause was unconscionable because it was a contract of adhesion and because it was so broadly worded. The district court disagreed.

The plaintiff had been given the agreement and had agreed to it. The court distinguished, among other things, cases involving “browsewrap” agreements in which a website user “agreed” to terms and conditions merely by using a website. Although the court found the agreement minimally procedurally unconscionable because it was a contract of adhesion, that did not render the agreement unconscionable as a whole. The agreement was not substantively unconscionable merely because it was broadly worded, at least where, as here, the plaintiff’s claims were related to the agreement he signed. The court therefore dismissed the putative class action.

Starace v. Lexington Law Firm, No. 1:18-cv-01596 (E.D. Cal. June 27, 2019).

 

©2011-2019 Carlton Fields, P.A.

Needless Gamble: Eleventh Circuit Uses Exceedingly Broad Language to Address Narrow Issue of Arbitration in TCPA Text Suit

In Gamble v. New Eng. Auto Fin., Inc., No. 17-15343, 2018 U.S. App. LEXIS 14608 (11th Cir. May 31, 2018) the Eleventh Circuit upheld denial of arbitration of a TCPA claim involving text messages offering a consumer a new auto finance contract. While the Eleventh Circuit used unnecessarily broad language–discussed below– the holding is actually quite narrow; calls made to offer a consumer a second finance agreement do not arise out of a first finance agreement for arbitration purposes. The panel’s decision to reach this narrow conclusion through the vehicle of broadly-worded analysis might mean trouble for defendants seeking to compel future TCPA cases to arbitration in the Eleventh Circuit, however.

The arbitration clause at issue  in Gamble required arbitration of any “claim, dispute or controversy whether preexisting, present or future, that in any way arises from or relates to this Agreement or the Motor Vehicle securing this Agreement.”  The contract also contained a separate provision with a separate signature line appearing below the signature line for the auto loan agreement relating to consent to receive texts.  This separate provision was not signed by Plaintiff.

Defendant apparently emphasized the unsigned text message consent provision as the crux of its legal position. By offering Plaintiff the right to opt-in to text messages in the contract–the argument goes–the resulting text messages must have arose out of that contract. That’s a terrible argument, of course, and the Eleventh Circuit made short work of it concluding roughly that “no agreement regarding text messages exists between the parties.”

Unfortunately the Court did not stop there–although it could have–and used unnecessarily broad language in passing on the dispute before it. For instance, the Court made the express finding that the Plaintiff’s claim “does not arise from any right implicated by the Loan Agreement nor from the parties contractual relationship.”  While that is undoubtedly true, the reason that is the case is because the texts at issue were unrelated to this contract and pitched a wholly different contract. Yet the Court’s failure to emphasize this critical fact makes it seem as if TCPA cases–which almost never arise from a right implicated in a loan agreement–are per se non-arbitrable.

Complicating matters further, the Court also emphasized, in seemingly gratuitous fashion, that TCPA claims arise “from post-agreement conduct that allegedly violates a separate, distinct federal law.”  Again, this is undoubtedly true, but that is not a predicate basis for denying arbitration–claims related to purported statutory violations are commonly compelled to arbitration, including by the Eleventh Circuit. See generally Walthour v. Chipio Windshield Repair, LLC, 745 F. 3d 1326 (11th Cir. 2014). And texts often arise out of contracts–such as where a consumer goes into default under the terms of a loan agreement resulting in text messages from a servicer seeking to collect. The loose language in Gamble needlessly implies, therefore, that claims related to such text messages are not subject to arbitration merely because the underlying right being enforced is a federal statutory right, rather than a contractual right. That’s an unnecessary–if not dangerous–implication, and surely not one that comports with the Congressionally-mandated policy favoring arbitration.

It remains to be seen exactly what district courts in the Eleventh Circuit do with Gamble, but one thing is for sure– Gamble just made defense efforts to compel arbitration of TCPA cases there a whole lot less certain. Care to roll the dice?

 

Copyright © 2018 Womble Bond Dickinson (US) LLP All Rights Reserved.
This post was written by Eric Troutman of Womble Bond Dickinson (US) LLP.

A Ruling of Epic Proportions: Supreme Court Upholds Employment Class Action Waivers

On May 21, 2018, the Supreme Court ruled in Epic Systems Corp. v. Lewis that employees can agree to: (1) arbitrate employment disputes; and (2) waive their right to resolve those disputes through class and collective actions. This decision represents an epic victory for employers and may limit an employer’s financial exposure in employment disputes.

In Epic Systems Corp., Epic Systems required its employees to sign an arbitration agreement that included a class and collective action waiver. Employees who signed the agreement thus agreed to resolve their employment disputes through individual arbitration and also waived their right to participate in or receive benefit from any class, collective or representative proceedings.

An Epic employee, Jacob Lewis, signed such an agreement with Epic. After his employment ended and despite the agreement, Lewis filed a class/collective action against Epic, claiming he and other Epic employees had been denied overtime wages in violation of the Fair Labor Standards Act (FLSA) and Wisconsin wage and hour laws.

Epic moved to dismiss the claim and to compel arbitration, citing the arbitration/class waiver agreement. The district court denied Epic’s motions, stating that the waiver was unenforceable because it interfered with employees’ right to engage in “concerted activities” for “mutual aid or protection” under the National Labor Relations Act (NLRA).

On appeal, the Seventh Circuit Court of Appeals agreed with the district court, becoming the first appellate court to agree with the National Labor Relations Board’s (NLRB) 2012 position in D.R. Horton (previously discussed here and here) that such waivers were unenforceable. As a result, employers in Wisconsin, Indiana and Illinois have been bound by this ruling since 2016.

In a 5-4 opinion authored by Justice Neil Gorsuch, the Supreme Court overturned the Seventh Circuit and ruled that the NLRA did not grant employees a right to class or collective actions, nor did the waiver of class rights violate any provision of the NLRA. According to the Court, the NLRA does not address class/collective action issues. Instead, the NLRA focuses on collective bargaining issues. In short, the Court gave its approval to arbitration agreements that require resolution of employment disputes on an individual basis.

Employers who currently use arbitration agreements with their employees should consult with legal counsel to ensure those agreements meet their needs and preferred outcomes. For employers who do not currently use such agreements, the Epic decision provides a perfect opportunity to implement such agreements. Before making changes to existing agreements, relying on such agreements going forward or implementing new agreements, employers should consult with legal counsel to discuss the potential benefits and drawbacks of arbitrating employment disputes. With the Epic decision, however, employers now know for certain that they have class action waivers at their disposal.

 

Copyright © 2018 Godfrey & Kahn S.C.
This post was written by Rufino Gaytán of Godfrey & Kahn S.C.

Fifth Circuit Judge Blocks Rule That Would Ban Arbitration in Nursing Home Disputes

nursing home arbitrationA federal district court recently issued a preliminary injunction barring enforcement of a rule prohibiting the use of pre-dispute arbitration agreements with patients in long-term care facilities that participate in Medicare and Medicaid programs.

The new rule, promulgated by the Centers for Medicare and Medicaid Services (CMS), would have taken effect on November 28, 2016. It would have prohibited (1) entering into pre-dispute arbitration agreements and, (2) requiring the signing of an arbitration agreement as a condition of admission. The injunction was granted by U.S. District Court Judge Michael P. Mills, who sits in the Northern District of Mississippi, at the request of members of the nursing home industry to stop the rule from taking effect while it is being challenged in court. In their lawsuit, the American Health Care Association and four other state and local health care groups are claiming that CMS and the Department of Health and Human Services are overstepping their authority in issuing the rule. Specifically, the plaintiffs contend that Congress has repeatedly rejected legislation to invalidate arbitration agreements, and further argue that the rule isn’t necessary to protect the health and safety of nursing home residents.

In entering his order, Judge Mills did concede that the CMS rule does appear to be based on “sound public policy.” As some residents of nursing homes suffering from ailments such as dementia and the like might not have the capacity to grasp what an arbitration agreement entails, in addition to the fact that there is stress upon nursing home residents and their families that is inherent to the admissions process, it can be argued that arbitration and the nursing home admissions process do not belong together.

However, in granting the injunction, Judge Mills stated that, as sympathetic as the court may be to the public policy considerations that motivated the rule, it is not willing to allow the federal agency to overstep its executive authority and “engage in a rather unprecedented exercise of agency power. The court is unwilling to play a role in countenancing the incremental ‘creep’ of federal agency authority beyond that envisioned by the U.S. Constitution.”

The nursing home industry has said that arbitration offers a less costly alternative to court. Facilitating more lawsuits, the industry has said, could drive up costs, forcing some nursing homes to close. Lawyers representing residents, however, state that people being admitted to nursing homes are often at the most stressful juncture of their lives, and are not equipped or capable of understanding what it is they are being asked to sign. Regardless of whether one believes striking down the rule would help the nursing home industry reduce its legal costs, or that the rule assists the families of nursing home residents in getting justice, it is clear that the court’s grant of the injunction as well as the impending decision in the underlying case will have an impact upon the future of the nursing home industry.

ARTICLE BY Amee Lakhani of Heyl, Royster, Voelker & Allen, P.C.

© 2016 Heyl, Royster, Voelker & Allen, P.C

Are they Worth Price of Paper They're Printed On? – Ubersization of Arbitration Clauses

Arbitration has long been treated as an inferior method of resolving disputes, despite pronouncements to the contrary from the U.S. Supreme Court. However, arbitration does serve a purpose. The process is less formalized, so it moves much faster than the court system. That means less disruption to business. It’s also less expensive than bringing a civil action, making it easier for individuals to assert their rights or air their grievances. For these reasons and more, many businesses have incorporated arbitration provisions into their contracts and handbooks. The Federal Arbitration Act was enacted in 1925, yet these types of contractual agreements to arbitrate still get shot down in certain courts and by certain administrative authorities.more

Drivers v. Uber – The Arbitration Dispute

In Uber’s California litigation, Judge Chen has examined various aspects of the arbitration provisions contained in the various versions of Uber’s agreements with its drivers.  The 2013 Agreement and the 2014 Agreement shared several key features:

(1) all disputes not exempted from the scope of arbitration were subject to resolution by final and binding arbitration;

(2) arbitration could proceed only on an individual basis, not by class;

(3) the delegation clause in the provision stated that “disputes arising out of or relating to the interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision” shall be decided by the arbitrator; and,

(4) an opt-out clause allowed drivers to avoid the arbitration clause.

In separate litigation, the Court had Uber revise the opt-out provision to make it more conspicuous and less onerous on the drivers.  Because the 2013 Agreement contained the original opt-out provision, it did not stand a chance of being found enforceable.  In later 2014 and 2015 Agreements,  Uber included the provision in boldface and ALL CAPS with text larger than the provisions around it.  Language also was added to explain the significance of arbitration and the right to opt-out.  Additionally, to exercise that right now, a driver need only send an email to Uber stating his/her name and the desire to opt-out (although he/she could send a letter by regular mail, overnight delivery, or hand-delivery, too).  As a result, when the Court certified a class on September 1, 2015, those drivers who failed to opt-out of the provision were excluded from the class.  However, in December, the Court found the arbitration agreements were unenforceable on California public policy grounds, irrespective of the opt-out provision, thus dramatically increasing the size of the class.

Meanwhile, delegation clauses, like the one set forth under (3) above, seem to cause consternation in courts across the nation.  Even the U.S. Supreme Court has recognized that courts are the typical adjudicators of whether the parties have agreed to arbitrate in the first instance.  Because a delegation clause puts this determination in the hands of the arbitrator instead, it must be clear and unmistakable.  In Uber’s case, the clause was clear, but it was made ambiguous because it conflicted with other clauses contained in the Agreements.  For instance, a separate clause in Uber’s 2013 and 2014 driver agreements stated that the state and federal courts in San Francisco had exclusive jurisdiction over any disputes, actions, or claims arising out of the Agreement.  While Uber argued that the forum selection clause reserving jurisdiction in San Francisco courts was for any disputes found not subject to arbitration, Judge Chen did not buy into that argument.  He felt the clauses conflicted, and since the courts would have to apply rules of construction to resolve the ambiguity created by the competing clauses, that meant that the delegation clause was not clear and unmistakable, and therefore, was unenforceable.

The arbitration provision in Uber’s 2013 and 2014 Agreements also addressed responsibility for payment of the arbitrator’s fees.  It provided that if applicable law did not require Uber to pay for all of the costs and fees of arbitration, then the costs would be apportioned between the parties as required by law.  Judge Chen found that because the delegation clause would force drivers to pay exorbitant fees just to arbitrate whether or not their substantive disputes even belonged before the arbitrator in the first place, when drivers would not have to pay a court to make that determination, such a clause deprived drivers of any forum for their claims.

The arbitration provision contained three additional unfavorable terms which Judge Chen found were not sufficiently highlighted for the drivers’ attention.  For one, the confidentiality clause precluded the parties from disclosing the existence, contents, or results of any arbitration.  For another, the intellectual property carve-out clause excluded intellectual property disputes from arbitration – something the Court found favored Uber.  Finally, the unilateral modification clause permitted Uber to unilaterally modify the terms of the agreement without notice to the drivers.  As a result of all of the foregoing issues, the Court found the agreements to arbitrate were unconscionable.  Thus, Judge Chen refused to enforce them.

Can an enforceable arbitration agreement even be written? 

Arbitration agreements are evaluated on a case-by-case basis.  While many are still disfavored, as I mentioned earlier, they are more likely to be upheld if they are not unconscionable.  The procedural component of the unconscionability analysis usually deals with the formation of the agreement itself.  This includes the characteristics of the parties (e.g., age, literacy, sophistication), the manner and circumstances under which the contract was executed, and whether terms of the agreement are hidden or complex, among other things.  The substantive component looks at the unfairness of the agreement.  Judge Chen, acknowledging that the issue wasn’t fully settled, nevertheless evaluated the arbitration provision through the lens of an employer/employee relationship.  Let me provide some tips that make arbitration agreements more likely to be upheld by courts in the employment context.

  • Keep your agreement to arbitrate in a separate document requiring a separate acknowledgement.

  • While the agreement may cover all workplace disputes between the parties, do not preclude employees from filing charges with state or federal administrative agencies, like the EEOC.

  • If you reserve the right to modify or discontinue the arbitration clause, include a requirement that notice will be given to employees and that the modification or rescission will be applied prospectively.

  • Since cost is a big issue for courts reviewing these agreements, make sure the employee will only be required to pay what the arbitrator finds is reasonable should the employee lose, or make sure the costs to pursue arbitration are not more costly than those to bring a lawsuit.

  • The remedies available in arbitration should be similar to those available in court.

  • Avoid delegation clauses.

As always, there is no substitute for consulting with an attorney when attempting to draft one of these agreements.

ARTICLE BY Vanessa L. Goddard of Steptoe & Johnson PLLC
© Steptoe & Johnson PLLC. All Rights Reserved.

Are they Worth Price of Paper They’re Printed On? – Ubersization of Arbitration Clauses

Arbitration has long been treated as an inferior method of resolving disputes, despite pronouncements to the contrary from the U.S. Supreme Court. However, arbitration does serve a purpose. The process is less formalized, so it moves much faster than the court system. That means less disruption to business. It’s also less expensive than bringing a civil action, making it easier for individuals to assert their rights or air their grievances. For these reasons and more, many businesses have incorporated arbitration provisions into their contracts and handbooks. The Federal Arbitration Act was enacted in 1925, yet these types of contractual agreements to arbitrate still get shot down in certain courts and by certain administrative authorities.more

Drivers v. Uber – The Arbitration Dispute

In Uber’s California litigation, Judge Chen has examined various aspects of the arbitration provisions contained in the various versions of Uber’s agreements with its drivers.  The 2013 Agreement and the 2014 Agreement shared several key features:

(1) all disputes not exempted from the scope of arbitration were subject to resolution by final and binding arbitration;

(2) arbitration could proceed only on an individual basis, not by class;

(3) the delegation clause in the provision stated that “disputes arising out of or relating to the interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision” shall be decided by the arbitrator; and,

(4) an opt-out clause allowed drivers to avoid the arbitration clause.

In separate litigation, the Court had Uber revise the opt-out provision to make it more conspicuous and less onerous on the drivers.  Because the 2013 Agreement contained the original opt-out provision, it did not stand a chance of being found enforceable.  In later 2014 and 2015 Agreements,  Uber included the provision in boldface and ALL CAPS with text larger than the provisions around it.  Language also was added to explain the significance of arbitration and the right to opt-out.  Additionally, to exercise that right now, a driver need only send an email to Uber stating his/her name and the desire to opt-out (although he/she could send a letter by regular mail, overnight delivery, or hand-delivery, too).  As a result, when the Court certified a class on September 1, 2015, those drivers who failed to opt-out of the provision were excluded from the class.  However, in December, the Court found the arbitration agreements were unenforceable on California public policy grounds, irrespective of the opt-out provision, thus dramatically increasing the size of the class.

Meanwhile, delegation clauses, like the one set forth under (3) above, seem to cause consternation in courts across the nation.  Even the U.S. Supreme Court has recognized that courts are the typical adjudicators of whether the parties have agreed to arbitrate in the first instance.  Because a delegation clause puts this determination in the hands of the arbitrator instead, it must be clear and unmistakable.  In Uber’s case, the clause was clear, but it was made ambiguous because it conflicted with other clauses contained in the Agreements.  For instance, a separate clause in Uber’s 2013 and 2014 driver agreements stated that the state and federal courts in San Francisco had exclusive jurisdiction over any disputes, actions, or claims arising out of the Agreement.  While Uber argued that the forum selection clause reserving jurisdiction in San Francisco courts was for any disputes found not subject to arbitration, Judge Chen did not buy into that argument.  He felt the clauses conflicted, and since the courts would have to apply rules of construction to resolve the ambiguity created by the competing clauses, that meant that the delegation clause was not clear and unmistakable, and therefore, was unenforceable.

The arbitration provision in Uber’s 2013 and 2014 Agreements also addressed responsibility for payment of the arbitrator’s fees.  It provided that if applicable law did not require Uber to pay for all of the costs and fees of arbitration, then the costs would be apportioned between the parties as required by law.  Judge Chen found that because the delegation clause would force drivers to pay exorbitant fees just to arbitrate whether or not their substantive disputes even belonged before the arbitrator in the first place, when drivers would not have to pay a court to make that determination, such a clause deprived drivers of any forum for their claims.

The arbitration provision contained three additional unfavorable terms which Judge Chen found were not sufficiently highlighted for the drivers’ attention.  For one, the confidentiality clause precluded the parties from disclosing the existence, contents, or results of any arbitration.  For another, the intellectual property carve-out clause excluded intellectual property disputes from arbitration – something the Court found favored Uber.  Finally, the unilateral modification clause permitted Uber to unilaterally modify the terms of the agreement without notice to the drivers.  As a result of all of the foregoing issues, the Court found the agreements to arbitrate were unconscionable.  Thus, Judge Chen refused to enforce them.

Can an enforceable arbitration agreement even be written? 

Arbitration agreements are evaluated on a case-by-case basis.  While many are still disfavored, as I mentioned earlier, they are more likely to be upheld if they are not unconscionable.  The procedural component of the unconscionability analysis usually deals with the formation of the agreement itself.  This includes the characteristics of the parties (e.g., age, literacy, sophistication), the manner and circumstances under which the contract was executed, and whether terms of the agreement are hidden or complex, among other things.  The substantive component looks at the unfairness of the agreement.  Judge Chen, acknowledging that the issue wasn’t fully settled, nevertheless evaluated the arbitration provision through the lens of an employer/employee relationship.  Let me provide some tips that make arbitration agreements more likely to be upheld by courts in the employment context.

  • Keep your agreement to arbitrate in a separate document requiring a separate acknowledgement.

  • While the agreement may cover all workplace disputes between the parties, do not preclude employees from filing charges with state or federal administrative agencies, like the EEOC.

  • If you reserve the right to modify or discontinue the arbitration clause, include a requirement that notice will be given to employees and that the modification or rescission will be applied prospectively.

  • Since cost is a big issue for courts reviewing these agreements, make sure the employee will only be required to pay what the arbitrator finds is reasonable should the employee lose, or make sure the costs to pursue arbitration are not more costly than those to bring a lawsuit.

  • The remedies available in arbitration should be similar to those available in court.

  • Avoid delegation clauses.

As always, there is no substitute for consulting with an attorney when attempting to draft one of these agreements.

ARTICLE BY Vanessa L. Goddard of Steptoe & Johnson PLLC
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