Inside the Uber apocalypse: Why the fast-growing tech giant could be in serious trouble

Uber's shady practices have been the subject of much debate — and now they could be the subject of a court ruling

Published November 3, 2015 8:15PM (EST)

 (Reuters/Lucy Nicholson)
(Reuters/Lucy Nicholson)

The New York Times performed a public service over the weekend with the first two installments of a three-part series on the shady clauses in consumer and employment contracts that enable corporations to divert legal disputes into secret, extra-judicial arbitration panels. The corporation pays the arbitrators hearing the case, and the rulings, from what we can tell about this opaque process, favor the corporation, if only because an arbitrator siding with the people who do the hiring ensures them more work in the future.

It’s amazing that we’ve allowed corporations to build their own parallel legal system, rupturing the fundamental right of access to courts. “It’s in two amendments of the Bill of Rights,” said Sen. Al Franken, one of Congress’ leading critics of mandatory arbitration, on a conference call reacting to the Times series. “The Second Amendment is supposed to be important, but that’s one amendment. [Trial by jury] is really important, that’s in two amendments.” (It’s the Sixth and the Seventh, incidentally.)

Two partisan Supreme Court rulings, 2011’s AT&T Mobility v. Concepcion and 2013’s American Express v. Italian Colors, entrenched arbitration in the law, preventing even criminal lawsuits from proceeding and significantly limiting class action cases. As the Times points out, Chief Justice John Roberts, who participated in the majority in both cases, unsuccessfully tried to limit class actions as a private lawyer for Discover Bank. When in a position to make the decision by himself, Roberts capitalized, and consumers and workers have suffered ever since.

But a case out of California could upend this blockade of the justice system, and it’s perhaps fitting that the company involved routinely breaks the law as part of its business strategy. Uber, the ride-sharing app, not only may have gone too far in the way it treats its drivers; it could bring down the arbitration house of cards in the process.

Uber treats its 300,000 drivers as independent contractors, allowing it to avoid granting worker’s compensation, overtime pay and other relevant labor benefits. Low labor costs enable the company to undercut competitors and win business. If forced to actually follow the law, Uber is just another car service.

A non-trivial number of drivers are not happy with being the low-paid cog in the Uber business model, and have sued the company over misclassifying their employment status. The California Labor Commission awarded $4,152.20 in business expenses and back wages to driver Barbara Berwick in June. But Uber can handle one driver at a time; a class action incorporating all its drivers would be a fatal blow. And this September, U.S. District Court Judge Edward Chen ruled that drivers could form a class to litigate employee misclassification.

The critical question is how big that class will be. Like so many other companies, Uber included a clause in its standard employment contract, binding driver disputes to an arbitration process. However, its initial language was faulty. One part of the contract says a private arbitrator gets to rule on whether a particular case goes to arbitration, but another part gives that choice to a judge. Also, an opt-out clause allowed drivers to retain their right to sue, but it was hidden on the second-to-last page of the contract, and required drivers to hand-deliver a letter to Uber’s headquarters in San Francisco, or mail it overnight through a “nationally recognized overnight delivery service.”

Judge Chen ruled in June in a separate case that the arbitration language was contradictory, and the opt-out was “illusory” and “additionally meaningless.” A state judge in San Francisco backed up Chen’s contention in September. Uber updated its arbitration language in June 2014, and Chen removed drivers who signed after that from the class action. But all contracts under the old language are suspect. And in the June ruling, Judge Chen expressed problems with the new language as well, throwing the entire effectiveness of the arbitration clauses into disarray.

Lawyers for the class action are separately trying to nullify the new arbitration language. They have appealed to the National Labor Relations Board, asking them to invalidate the arbitration agreement entirely as incompatible with state and federal labor laws.

The Wall Street Journal amusingly calls this a “technicality.” But the consequences are enormous. If Uber’s position holds, only 15,000 drivers would be eligible for the California class action. But if the plaintiffs win, all 160,000 of Uber’s California employees would be eligible. A successful, globally enforceable case would set a key precedent for other states and probably spell the end of Uber, at least as it’s currently structured.

A successful NLRB decision would still have to survive judicial review, and appeals to both of Judge Chen’s cases will be heard by the Ninth Circuit. That means that the cases could eventually filter up to the same Supreme Court judges who have repeatedly ruled for arbitration and against individuals seeking justice. But a couple factors could make things different this time.

First, Judge Chen’s argument that Uber’s arbitration contracts aren’t enforceable because of shoddy language and the inability to opt out makes this less a standard arbitration case ruled by precedent, and more a case about contract law, which could prove less effective for the companies. Second, there’s the issue of whether arbitration laws pre-empt labor laws; you can easily see the Roberts court argue that, but that’s a far more invasive argument than its prior rulings.

Third, the Times series puts a much bigger spotlight on the Court’s actions in this area, and that matters; just ask John Roberts in the Obamacare cases. It’s one thing to take away access to courts under cover of darkness, but it’s harder when people are watching. And Uber arguing so strenuously for arbitration, which corporations all characterize as a simpler and more effective process for individuals seeking relief, gives the game away. Uber would rather retreat to a secret system where decisions are almost never made public, to keep their scam of misclassifying their employees going.

Arbitrations were originally enacted to settle disputes between corporations, not to shield corporations from their customers or employees. The Uber cases could finally reverse this dispiriting trend of corporate immunity from prosecution.

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By David Dayen

David Dayen is a journalist who writes about economics and finance. He is the author of "Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud," winner of the Studs and Ida Terkel Prize, and coauthor of the book "Fat Cat: The Steve Mnuchin Story." He is an investigative fellow with In These Times and contributes to the Intercept, the New Republic and the Los Angeles Times. His work has also appeared in the Nation, the American Prospect, Vice, the Huffington Post and more. He has been a guest on MSNBC, CNN, Bloomberg, Al Jazeera, CNBC, NPR and Pacifica Radio. He lives in Los Angeles.

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