Uber and the gig economy’s existential litigation threat

April 6, 2016

(Reuters) – Uber calls itself a tech company. Its product, according to the company, is not transportation but a mobile device app that connects customers who want rides with drivers who supply them. And those drivers, according to Uber, are not employees entitled to protection under state and federal labor laws. They are independent contractors who use Uber’s app to monetize their time and access to a car.

As a pioneer of the gig economy, Uber’s business model – like those of its competitor Lyft and a host of delivery and services apps such as Postmates, Washio and Handy – depends on defining the people who fulfill demands for services as freelancers who make personal decisions about their work schedules. Uber and similar companies disavow responsibility under the labor laws for the hundreds of thousands of workers who sign up with them.

That is a controversial proposition. For nearly three years, Uber has been fending off several class actions in San Francisco federal court that claim the company owes drivers money for, among other things, their gas and vehicle maintenance expenses, as well as unpaid tips. The named plaintiffs who filed the class actions contend they are Uber employees, regardless of what Uber calls them.

They also argue that they are not bound by a mandatory arbitration provision Uber has included, with variations, in driver contracts since 2013. Uber’s clause purports to require drivers to arbitrate their claims individually instead of suing as a group in a class action. But in a series of rulings in 2015, U.S. District Judge Edward Chen of San Francisco has found the provisions to be unenforceable, even though he participated in the drafting of the latest version of the arbitration clause.

Judge Chen said the arbitration provisions were invalid in part because they foreclosed representative actions under California’s Personal Attorney General Act, which allows employees to sue employers for labor law infractions in the name of the state. California’s Supreme Court ruled in 2014 that employers cannot require employees to waive their rights to bring PAGA actions. In 2015, a three-judge panel of the 9th U.S. Circuit Court of Appeals said in a split opinion that the state court’s PAGA rule is not preempted by the Federal Arbitration Act – but also said employers could sever PAGA provisions from arbitration agreements and still compel arbitration of other employee claims. (The appeals court has also agreed to rehear en banc the case that prompted the split decision.)

Uber has appealed six different orders by Judge Chen to deny mandatory arbitration, arguing to the 9th Circuit that the judge, among other things, could simply have severed the question of the drivers’ PAGA rights and compelled arbitration of their other claims. Those appeals are all pending. Three are due to be argued, in a high-stakes consolidated 9th Circuit proceeding, in June.

In the meantime, Judge Chen has been unbowed by Uber’s harsh assessment of his rulings and his allegedly activist engagement with the company’s arbitration provision. Last December, he certified a class of about 160,000 Uber drivers in California to pursue state-law claims for tips and expenses. The judge set a June 2016 trial date for the class action and refused to stay the case while Uber asked the 9th Circuit to grant an interlocutory appeal of Chen’s class certification order.

On Tuesday, Uber finally slowed what its lawyers at Gibson Dunn & Crutcher have called a “runaway class action.” The 9th Circuit agreed to hear the company’s appeal of Judge Chen’s class certification ruling from December. As The Recorder reported late Tuesday, the 9th Circuit order is expected to delay the class action trial slated for June, though as of Wednesday afternoon, the trial docket didn’t indicate any change in the schedule. Lead plaintiffs’ counsel in the California drivers’ case, Shannon Liss-Riordan of Lichten & Liss-Riordan, didn’t respond to my phone message.

Uber’s brief to the 9th Circuit portrayed its litigation over the classification of its drivers to be a do-or-die test of the business model of “innovative companies operating online software platforms that connect buyers with sellers, owners with renters, or, in this case, drivers with riders.” Already, the class actions against Uber have spawned similar suits against similar companies, Uber’s filing said. If the class actions succeed, the company suggested, that will be the end of this new economy of enterprise. Individual agreements with drivers are the bedrock of its business.

But as I told you last week, Uber is also facing exposure from the supposed independence of drivers. U.S. District Judge Jed Rakoff of Manhattan allowed an antitrust class action against the company to move forward, holding that the named plaintiff, an Uber customer, had adequately stated a vast conspiracy based on drivers’ agreement to Uber’s terms. Uber said it was absurd to think of individual contracts with hundreds of thousands of drivers as a nationwide scheme amongst people who, for the most part, have no idea of one another’s identity. Judge Rakoff was nevertheless intrigued by Uber’s unusual business setup to deny the company’s motion to dismiss. (Ironically, considering its 9th Circuit appeal, Uber is mired in the antitrust litigation in federal court because it made a strategic decision not to invoke the mandatory arbitration provision in its user agreement with riders, hoping for a quick dismissal from Judge Rakoff.)

My prediction is that Uber will withstand both the drivers’ class actions and the antitrust case. The company is a newfangled business but its law firms are very adept at old-school advocacy. Uber may end up having to defend a PAGA case and claims by drivers based on contracts predating its mandatory arbitration clause but I doubt sweeping class actions by drivers or customers will survive intact.

Still, the pincer of the employment and antitrust cases shows, once again, that litigation is all too often an unintended consequence of innovation.

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