kornbluthmichaelBy Michael A. Kornbluth

Last week the U.S. Court of Appeals for the 9th Circuit held that whether or not a contract should be arbitrated was a question to be decided by an arbitrator, not a judge. In Mohamed v. Uber Technologies, 15-16178 (9th Cir. Sept. 7, 2016), the circuit court used scathing language in reversing the district court, which had held that the issue of arbitrability was properly before  the district court and went on to determine that the arbitration clause at issue was unconscionable.

This case originated in 2015 in the U.S. District Court for the Northern District of California, where a number of Uber drivers filed a class action against Uber and a few other companies, alleging violations of the Fair Credit Reporting Act, the Massachusetts Consumer Credit Reporting Act, and the California Consumer Credit Reporting Agencies Act, for improperly using consumer credit information to effectively terminate the plaintiffs’ ability to work for Uber.

In 2013, the plaintiffs were required to agree to two licensing agreements, a “Software License and Online Services Agreement” and a “Driver Addendum” that included an arbitration provision. Subsequently, in 2014, when there was an updated software release, an additional licensing agreement was sent to the drivers.  Uber required these software applications as a condition for its drivers to pick up customers.  Both the 2013 and 2014 licensing agreements contained arbitration provisions, which required individuals to waive their right to bring class actions.

In its opinion, the 9th Circuit acknowledged that there is a presumption that courts will decide the issue of arbitrability, but determined that there existed clear and unmistakable evidence that the parties agreed to have the issue of arbitrability itself delegated to an arbitrator (citing Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002)). Addressing the issue of unconscionability, the circuit court noted that, under California law, unconscionability has both a procedural and substantive element and that if either requirement is not met, the licensing agreements could not be unconscionable.  The Uber court only reached the issue of procedural unconscionability, holding that because the contract allowed drivers to opt-out of the arbitration requirement, the contract was not procedurally unconscionable and accordingly could not meet both elements of unconscionability. In so holding, the circuit court rejected the district court’s determination that the opt-out provision was buried deep in the in the 2013 and 2014 Licensing and Services Agreement and was therefore illusory.

The Uber court also did not agree with plaintiff’s effective vindication argument, which stated that because there was arbitration fee splitting between Uber and its drivers, the arbitration clauses should be struck on public policy grounds.  The circuit court noted that Uber had agreed to pay for the full costs of arbitration, contrary to the language of the licensing agreements.  The court then concluded that if Uber continues to abide by its commitment to cover the arbitration fees, then the plaintiffs will not have this obstacle, and thus plaintiff’s argument should fail.

Beyond the 9th Circuit jurisprudence, there is a circuit split as to the issue of the arbitrability of the determination of whether a case should be arbitrated.  In analyzing this question, the 4th Circuit has distinguished bilateral from class arbitrations and recently ruled against the notion that the arbitrability of a class should be determined by an arbitrator.  In Dell Webb Communities, Inc. v. Carlson, 817 F.3d 867 (4th Cir. 2016), the circuit court initially stated that arbitrators should generally make the determination of the arbitrability of arbitrations clauses.  The court further noted the general rule that it is the prerogative of the court to determine the threshold question of arbitrability unless there is a clear and unmistakable agreement for the question to be decided by the arbitrator.  In Dell, the relevant agreement did not expressly indicate that the question of arbitrability would be decided by the arbitrator. In addition, the court separated the issues of bilateral and class arbitration, noting that “leaving the question of class arbitration for the court also flows logically from our own cases.”  Id. at 876.  In closing, this author perhaps states the obvious by observing it would have been quite strange 15 years ago to have the 9th Circuit ruling against class members with the 4th Circuit on the opposite side.

Michael Kornbluth is the managing partner of Taibi Kornbluth Law Group, P.A. and the secretary of the NCBA Labor & Employment Law Section.