Judge Rakoff’s soapbox: On Uber, arbitration and fair play

August 1, 2016

(Reuters) – Uber’s decision not to move immediately to compel arbitration in a long-shot antitrust class action against CEO Travis Kalanick continues to reverberate disastrously for the ride-sharing company.

As I told you in April, when U.S. District Judge Jed Rakoff of Manhattan denied a motion to dismiss allegations that Kalanick is the orchestrator of a vast price-fixing conspiracy involving hundreds of thousands of Uber drivers – the company initially believed it could dispose of the case quickly before Rakoff, who is the Usain Bolt of docket management. So rather than fight with lead plaintiff Uber rider Spencer Meyer over whether Uber’s arbitration clause applies to claims against the CEO, the company opted to litigate. That turned out to be a mistake when Rakoff refused to toss the case, however farfetched the antitrust theory. The fiasco deepened last month, when the judge sanctioned Uber for an outside investigator’s deceptive tactics.

And now Rakoff has denied Uber’s motion to compel arbitration – not because he found the company waived the right to arbitrate when it first chose to litigate or because he concluded the arbitration clause doesn’t extend to claims against the company’s executives. His ruling is much worse for Uber. Rakoff held the company cannot enforce its arbitration clause because it didn’t give customers fair warning of the provision’s existence. If Judge Rakoff’s ruling holds up, all Uber riders who followed the same sign-up procedures can sue Uber in court. That’s potentially a lot of collateral damage in a case Uber once regarded as an easy win.

Mostly, the company has only itself to blame for its problems in Judge Rakoff’s courtroom. It made the strategic choice not to try to compel arbitration in the very beginning of the case, before it captured the judge’s curiosity, and it brought in a private investigator whose methods allegedly included lying and illegal recording.

But it’s also true that Judge Rakoff often writes his opinions to be read by audiences outside of his courtroom. His first Uber opinion, denying the CEO’s motion to dismiss, was pretty tame. But Rakoff’s two more recent Uber decisions have provided the judge with a platform to talk about fair play and the court system. In the July 25 sanctions opinion, Rakoff’s theme was the danger of unscrupulous corporate investigators frightening would-be plaintiffs away from lawsuits. “Litigation is a truth-seeking exercise in which counsel, although acting as zealous advocates for their clients, are required to play by the rules,” the judge wrote. “Potential plaintiffs and their counsel need to know that they can sue companies they perceive to be violating the law without having lies told to their friends and colleagues.”

His decision on Uber’s arbitration clause was pitched even more broadly, arguing that Internet companies – with the cooperation of the court system – are stripping consumers of ancient legal rights. “Since the late 18th century, the constitution of the United States and the constitutions or laws of the several states have guaranteed U.S. citizens the right to a jury trial,” he wrote. “This most precious and fundamental right can be waived only if the waiver is knowing and voluntary, with the courts ‘indulging every reasonable presumption against waiver.’ But in the world of the Internet, ordinary consumers are deemed to have regularly waived this right, and, indeed, to have given up their access to the courts altogether, because they supposedly agreed to lengthy ‘terms and conditions’ that they had no realistic power to negotiate or contest and often were not even aware of.”

As you know, mandatory arbitration clauses have become de rigueur in consumer contracts since the U.S. Supreme Court okayed class litigation waivers in its 2011 ruling in AT&T Mobility v. Concepcion. The Consumer Financial Protection Bureau has proposed a prohibition on the use of such clauses by credit cards and banks, but, for the most part, judges have agreed that Supreme Court precedent constrains them from striking down arbitration clauses, as long as consumers knowingly signed away their rights.

Companies that operate online, as Judge Rakoff recounted in his Uber opinion have historically deployed two kinds of user agreements to impose arbitration provisions: browsewrap agreements, in which consumers implicitly accept the company’s terms of service by using the site; and clickwrap agreements, in which customers affirmatively click a button to accept terms. Browsewrap agreements have fallen into disuse after court rulings that they didn’t adequately inform consumers. Clickwrap arbitration clauses, though they occasionally fail to pass muster, generally stand up to class action challenges.

Uber’s rider agreement included an all-caps link to the company’s terms of service right below the customer registration button but did not affirmatively require riders to acknowledge accepting those terms. According to Judge Rakoff, that procedure obscured the actual contract terms customers were accepting, making Uber’s contract more akin to a browsewrap agreement than a clickwrap contract. (He actually used the term “sign-in wrap.”) In any event, the judge said that Uber didn’t give lead plaintiff Meyer sufficient notice of its purported contract terms.

Would Rakoff have been more likely to compel arbitration if Uber had asked him to do so at the outset of this case? We’ll never know, of course, but two other judges have tossed class actions by Uber riders in deference to its mandatory arbitration clause. Judge Rakoff found reasons to distinguish the case before him from those decisions. But if Uber’s spying scandal hadn’t provoked the judge’s concerns about litigating against corporations, maybe he wouldn’t have been as critical of the company’s consumer contract procedures.

From the beginning of this case, I said that Uber had piqued Judge Rakoff’s prodigious curiosity about Internet businesses. So far, it looks as though he doesn’t much care for what he has learned – and he wants it to be clear that the old rules of litigation conduct still hold sway in the new economy.

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