Reprinted with permission from the American Bar Association's TIPS Dispute Resolution Committee Newsletter. 

Consumer class actions have targeted innovative companies that engage with millions of customers, such as Uber and DoorDash. These cases threaten such companies with consolidated litigation that, while potentially reducing the burden of litigation by facilitating economies of scale, nevertheless often expose companies to large aggregate damages claims. However, backed by U.S. Supreme Court precedent, companies have successfully enforced class action waivers that are written into arbitration clauses within consumers’ electronic agreements to purchase goods and services. [2] These waivers have the potential to save the service provider millions of dollars from class claims that would otherwise be brought in court as a consolidated action. Adversaries point out, however, that the savings to the company comes at the cost to society. They argue that the right to bring a class action helps consumers prevent a company from taking advantage of the power imbalance inherent in the company-consumer relationship. This debate helps explain the recent public, governmental and court scrutiny of arbitration clauses.

Over the last decade, the issue of class action waivers gave rise to a remarkable drama involving Uber, which prevailed in having its class action waivers upheld, only to lament the unforeseen circumstances that ensued. Uber’s travails exemplify the dilemma faced by service companies who are exposed to class actions.

I. Wish Granted: Uber’s Class-Action Waivers are Deemed Enforceable

By way of background, in 2016, Uber Technologies Inc., the parent company of Uber Eats, scored two notable wins in the employment context. In Varon v. Uber Technologies Inc.,[3] and in Suarez v. Uber Technologies Inc.,[4] two separate federal courts enforced Uber’s arbitration clause with its drivers. The key to these victories: In both contracts, Uber gave the driver the option to opt-out of the arbitration clause, free of any penalty. Both courts cited the opt-out provision as the basis for ruling that the arbitration clauses were not unconscionable, but instead enforceable.

In Suarez, drivers brought a class action against Uber alleging it misclassified them and other drivers as “independent contractors,” rather than as employees. Uber filed a motion to compel arbitration and strike class/collective allegations, based upon an arbitration clause between the parties that included a class action waiver. The drivers argued the arbitration clause was unconscionable.

The court rejected the drivers’ argument and granted the motion. In reaching its decision, the court focused upon several important aspects of the agreement (which the court called the “services agreement”). First, the court noted that before the drivers could accept a passenger, they had to first electronically accept the services agreement through the Uber app. When logging onto the app, the drivers had the option to review the services agreement by clicking on a hyperlink. Before they could advance past the screen with the hyperlink, the drivers had to confirm they reviewed the services agreement by clicking “YES, I AGREE,” and then had to confirm their review again a second time. After the second confirmation, the services agreement was sent to each driver’s portal for further access and review.

Second, the court highlighted that the arbitration clause within the services agreement included bold and capitalized language, which emphasized that agreeing to arbitration was “an important business decision,” which would resolve disputes “that otherwise would be resolved in a court of law,” and that it would “preclude [the driver] from bringing any class, collective or representative action” against Uber. The clause also counseled the drivers to take reasonable steps to consult with others because “the information provided in this agreement is not intended to contain a complete explanation of the consequences of arbitration.”

Third, the court recognized that, after twice confirming their review and acceptance of the services agreement, the drivers were provided an additional thirty days to opt out of the arbitration clause, without penalty. Indeed, several other drivers not part of the lawsuit had opted out of the arbitration clause.

Based upon these considerations, the court concluded the arbitration clause was not unconscionable, stating:

As the defendant points out, there is no procedural unconscionability because the plaintiffs had the absolute right to opt out of the arbitration provision. The Plaintiffs could opt out of the arbitration provision within 30 days; the opt out mechanism was conspicuously highlighted in the contract; opting out would not have any adverse effect on the other terms of plaintiffs’ contract; and numerous Uber drivers have exercised their right to opt out of the arbitration provision. Even as the party with less bargaining power, the plaintiffs had the ability to reject the arbitration provision without consequence to their relationship with the defendant. Therefore, because the plaintiffs were not required to accept the arbitration provision, there can be no finding of procedural unconscionability. [5] 

Accordingly, the court granted Uber’s motion to compel arbitration. However, Uber would soon have reason to rue the ultimate impact of this contractual preclusion of the class action procedure.

II. Be Careful What You Wish for: With Class Actions Barred, Individual Arbitration Demands Swamp Uber

By way of background, Uber’s platform, “Uber Eats,” allows customers to order takeout from restaurants and have it delivered by an Uber driver. As a precondition to accessing the service, customers were required to agree to Uber’s “Terms of Use,” which contained a provision stating that any dispute between the customer and Uber would be settled by binding arbitration administered by the AAA in accordance with AAA’s rules, the Consumer Arbitration Rules (CA Rules). This provision came to play a key role in New York state court litigation, Uber Techs., Inc. v. Am. Arbitration Ass’n, Inc., 204 A.D.3d 506, 167 N.Y.S.3d 66 (N.Y. App. Div. 2022), after Uber brought suit against AAA over fees for approximately 31,500 similarly situated arbitrations. 167 N.Y.S 3d at 68.

The court described the underlying circumstances as follows:

“Following the death of George Floyd in June 2020, Uber announced it would waive its delivery fee charged to customers for orders placed at certain qualifying Black-owned restaurants from June 4, 2020 through December 1, 2020. Shortly after, the law firm of Consovoy McCarthy PLLC began searching for Uber Eats customers who paid a delivery fee to a nonblack owned restaurant during the relevant time and asking them to challenge the lawfulness of Uber’s policy by claiming it constituted unlawful reverse race discrimination.”

Id. On behalf of the Uber Eats customers, the Consovoy Firm filed over 31,000 substantively identical arbitration demands with AAA against Uber. Id. at 69.

In December 2020, AAA accepted and agreed to administer the claims according to its Commercial Arbitration Rules, which included a fee schedule for individual cases. According to the fee schedule, for each case, Uber would owe AAA a $500 filing fee, a $1,400 standard case management fee, and a $1,500 arbitrator fee, which for the 31,000 filings would amount to approximately $107 million. AAA exercised its discretion as to the filing fee, and reduced it to approximately $4.3 million, which Uber paid without objection. However, AAA informed the parties that, absent an agreement between them, it ultimately would charge fees according to the fee schedule. This would result in AAA invoicing Uber a minimum of approximately $92 million. Thereupon, Uber brought suit against AAA, seeking to enjoin AAA from forcing Uber to pay these fees, alleging AAA’s conduct was unlawful, and seeking declaratory judgment based upon breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, restitution, and unfair competition. Id. at 508. Uber demanded a preliminary injunction enjoining the AAA from issuing additional invoices or closing arbitrations against it based upon nonpayment. Id.

The trial court found against Uber on its motion for injunctive relief and on appeal the New York Appellate Division agreed that Uber was not entitled to injunctive relief insofar as it had “failed to establish a likelihood of success on the merits” of any of its claims. According to the court’s April 2022 decision, Uber had failed to demonstrate AAA breached any contractual terms by charging fees that exceeded AAA’s reasonable, actual costs. While Uber contended that it, the claimants, and AAA were all bound by the Commercial Arbitration Rules as well as AAA’s “Consumer Due Process Protocol Statement of Principles,” neither of those documents required AAA to charge “reasonable” fees related to its actual costs. Rather, the Rules repeatedly stated that AAA will charge the fees set forth in the attached fee schedule. Further, the Rules allowed AAA to “exercise sole discretion” whether to adjust the fee schedule to reduce cumulative fees for related case filings. Id. at 509-10. And while the Protocol Statement, while not explicitly mentioned in Uber’s Terms of Use, had wording regarding reasonableness of fees, the sections invoked by Uber primarily dealt with ensuring consumers receive due process and the impartiality of the arbitrators.

The court added that AAA was within its express rights under the Commercial Arbitration Rules to charge the fees set forth in its fee schedule. Although AAA could have elected not to exercise its discretion and reduce the fees after the parties could not agree to a more efficient manner of proceeding with over 31,000 arbitrations, there was “no evidence AAA acted with dishonesty, deceit, or unfaithfulness to duty.” The court deemed Uber’s unjust enrichment claim deficient as, under California law, it was not a separate cause of action. Likewise, Uber had not shown likelihood of success on any other cause of action. Id.

Lastly, Uber failed to establish a likelihood of success on its claim under California Unfair Competition Law, because Uber hadn’t shown a likelihood of success on the underlying breach of the implied covenant claim. It was also unlikely to succeed under the “unfair competition” prong, as AAA’s enforcement of its fee schedule did not violate public policy, and was not “immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.” Id. at 510.

The court also held that injunctive relief was not warranted given that monetary damages were available for Uber’s substantive claims. Uber was “effectively seeking a substantial reduction to the additional $91 million AAA will invoice to arbitrate the claims, which would be a monetary judgment precluding the preliminary injunction.” As to Uber’s equitable arguments, the court concluded by pointing out that Uber found itself in its current situation because of its own decisions. “While Uber is trying to avoid paying the arbitration fees associated with 31,000 nearly identical cases, it made the business decision to preclude class, collective, or representative claims in its arbitration agreement with its consumers, and AAA’s fees are directly attributable to that decision.” As one commentator has observed: “The problem with Uber’s complaint against the AAA [was] that it almost read[] like a complaint against itself.” Andrew Stickler, “Uber Wrote the Script It Now Attacks in Arbitration Suit,” Law360 Pulse (Oct. 4, 2021), https// www.law360.com/pulse articles/1427278.

III. The Aftermath

Uber reportedly settled the underlying “discrimination claims” that were the subject of the New York Appellate Division decision. Prior to this, AAA had addressed the emerging issue of mass arbitrations by adopting “Supplementary Rules for Multiple Case Filings” to “streamline the administration of large volume filings involving the same party, parties, and party representative(s), or related party, parties and party representative(s).”

The Multiple Case filing rules apply to multiple demands (at least 25 or more, depending upon the kind of dispute) for arbitration where “representation of the parties is consistent or coordinated across the cases.” Notable provisions include:

i. Combined service of documents and notices.

ii. Single submissions for substantially similar filings.

iii. Administrative determinations for Multiple Case filings, addressing
issues such as whether subsequently filed claims will be part of the
same arbitration.

iv. System for appointment of “Merits Arbitrator(s)” for multiple proceedings.

v. Administrative fees to be billed according to the applicable “Multiple
Case Filings Administrative Fee Schedule” and flat fees payable for
administrative review of a mass filing.

Effective April 1, 2024, AAA broadened these Mass Arbitration rules to include Commercial, Construction, and International disputes (along with Consumer and Employment / Workplace matters). AAA’s adroit and flexible amendments of its administrative processes exemplifies the advantage that alternative dispute mechanisms often afford relative to litigation, where judicial innovation and corrective action is often, at best, delayed by many years.

[1] See, e.g., Atalese v. United States Legal Services Group LP, 99 A.3d 306 (N.J. 2014); see also Marmet Health Care Center Inc. v. Brown, 132 S. Ct. 1201, __ (2012) (reversing West Virginia court that invalidated arbitration clause) (percuriam).
[2] See, e.g., American Express Co. v. Italian Colors Restaurant, et al., 133 S. Ct. 2304 (2013)
[3] 2016 WL 1752835, at *1 (D. Md. May 3, 2016)
[4] 2016 WL 2348706, at *1 (M.D. Fla. May 4, 2016)
[5] See also Varon, 2016 WL 1752835 at *4-5 (concluding a similar Uber arbitration clause is not unconscionable for
similar reasons) (emphasis added)