Court Rules Arbitration Provision Unenforceable, But On Narrow Grounds

Published: Dec. 18, 2015

Updated: Oct. 05, 2020

Arbitration agreements with class-action waivers are an important way companies minimize litigation risks. Reduced risk can often lead to benefits for the companies’ consumers or employees. But such arbitration provisions must be carefully crafted for enforceability. Under California law, for example, arbitration provisions may be unenforceable if they are deemed procedurally and substantively unconscionable.

On December 9, 2015 a district court in the Northern District of California held that an arbitration provision in agreements between Uber and certain drivers was not enforceable—but not under the usual unconscionability analysis.

Brought on behalf of Uber drivers in California, plaintiffs allege that they and 160,000 putative class members are Uber employees—not independent contractors—and thus eligible for various protections under California’s Labor Code. In determining the size of the class for class certification purposes, the court assessed whether drivers who agreed to an arbitration provision with a class-action waiver were eligible to be in the class. Uber had issued agreements that contained such an arbitration provision, and drivers were given 30 days to opt out of the provision. Uber argued that drivers who did not opt out were ineligible to be members of the class because those drivers had agreed to only litigate in an individual capacity. Plaintiff argued that California’s Private Attorney General Act (“PAGA”) affords individuals the right to bring representative suits related to labor disputes, and a waiver of such right is unenforceable as contrary to public policy. Because the arbitration provision with a class-action waiver effectively bars drivers from bringing representative suits under PAGA, the court determined the provision to be a PAGA waiver. And because the Uber agreements contained a non-severable PAGA waiver, the “entire arbitration agreement [is] also unenforceable.” Accordingly, the court certified an additional subclass of drivers who signed such agreements, even where those drivers did not timely opt out of the agreement’s arbitration provision.

Uber argued that the 30-day opt out afforded to drivers rendered the provision enforceable, because by not opting out, drivers knowingly agreed to arbitrate on an individual basis. The court disagreed, observing that under California law, “a valid PAGA waiver can only occur ‘where an employer and an employee knowingly and voluntarily enter into an arbitration agreement after a dispute has arisen.’” Accordingly, because these were non-severable pre-dispute PAGA waivers, they were unenforceable under California law. Significantly, the court held that, “[b]ecause the arbitration agreements are unenforceable as a matter of public policy, a procedural unconscionability analysis is no longer required.”

Thus, while the decision may have significance for disputes subject to PAGA, the court did not address the procedural unconscionability issue. Notwithstanding arguments attempting to expand the significance of this decision, the court’s order should not affect arbitration agreements with consumers and more specifically, whether those agreements are procedurally unconscionable. And with respect to the enforceability of class-arbitration waivers more generally, the Supreme Court recently emphasized (again) that class-arbitration waivers are enforceable when it reversed the California Court of Appeal in DirecTv, Inc. v. Imburgia, No. 14-462 (Dec. 14, 2015). Noting that the “Federal Arbitration Act allows parties to an arbitration contract considerable latitude to choose what law governs some or all of its provisions, including the law governing enforceability of a class-arbitration waiver,” the Court held that the lower court must enforce the arbitration agreement at issue. Though the Supreme Court’s ruling does not appear to affect the procedural unconscionability analysis conducted by California courts, the ruling does make clear that class-arbitration waivers are substantively enforceable, notwithstanding state court rulings to the contrary. So what’s the bottom line? Arbitration clauses with class actions waivers are generally enforceable in consumer contracts—so long as you draft them carefully in light of unconscionability analyses.

Photo by Mark Crossfield from Flickr