Can Opt-Out Provisions Save Arbitration Clauses?

June 8, 2016Articles Law360

Brian A. Berkley authored the Law360 article, "Can Opt-Out Provisions Save Arbitration Clauses?"

It is no secret arbitration clauses are under attack. During the fall of 2015, The New York Times ran a three-part series detailing alleged injustices visited upon consumers by corporations using arbitration clauses. On May 5, 2016, the Consumer Financial Protection Bureau proposed a rule designed to eliminate mandatory arbitration clauses from consumer agreements covering financial products and services. And, state courts across the country have arguably increased scrutiny on the enforcement of arbitration clauses.[1]

One reason for the controversy: Backed by U.S. Supreme Court precedent, companies have successfully enforced class action waivers that are written into their arbitration clauses.[2] These waivers have the potential of saving a company millions of dollars from class claims that would otherwise be brought in court. 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.

Recently, Uber Technologies Inc. scored two important victories in the employment context that may prove valuable to companies engaged in the consumer arbitration debate. On May 3, 2016, in Varon v. Uber Technologies Inc.,[3] and on May 4, 2016, 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 latched onto the opt-out provision to find that the arbitration clauses were not unconscionable, but instead enforceable. This article will explore the reasoning in Suarez, one of the Uber cases, apply that reasoning to one state’s recent precedent in the consumer context, New Jersey, and consider the lessons learned.

The Uber Option

In Suarez, Uber 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 on 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 on 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, and critically, the court recognized that, after twice confirming their review and acceptance of the services agreement, the drivers were provided an additional 30 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.

The court concluded the arbitration clause was not unconscionable:

As the defendant points out, there is no procedural unconsionability 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.

(emphasis added).[5]

Applying New Jersey Law To The Uber Option

The arbitration clause in Suarez (and Varon) was used in the independent contractor/employment context. Might the Uber opt-out approach also work with consumer contracts? To see, let’s look at a recent New Jersey Supreme Court case, Atalese v. United States Legal Services Group.

In Atalese, the New Jersey Supreme Court considered whether the following arbitration clause, which was located on page nine of a 23-page contract, contained sufficient notice to a consumer that she was forgoing her right to sue in court:

Arbitration: In the event of any claim or dispute between client and the USLSG related to this agreement or related to any performance of any services related to this agreement, the claim or dispute shall be submitted to binding arbitration upon the request of either party upon the service of that request on the other party. The parties shall agree on a single arbitrator to resolve the dispute. The matter may be arbitrated either by the Judicial Arbitration Mediation Service or American Arbitration Association, as mutually agreed upon by the parties or selected by the party filing the claim. The arbitration shall be conducted in either the county in which client resides, or the closest metropolitan county. Any decision of the arbitrator shall be final and may be entered into any judgment in any court of competent jurisdiction.

The court concluded the clause did not. It started its analysis by emphasizing a party must have "full knowledge of his legal rights and intent to surrender those rights." The court then focused specifically on arbitration clauses in the consumer contracts: "But an average member of the public may not know — without some explanatory comment — that arbitration is a substitute for the right to have one's claim adjudicated in a court of law." It emphasized "any contractual waiver-of-rights provision" in consumer contracts must be clear and unambiguous.

Turning to the arbitration clause, the court found it did not comply with New Jersey law. Nowhere, according to the court, did the arbitration clause put Atalese on clear notice that the agreement to arbitrate was a substitute for the right to have her claims adjudicated in a court of law. While the court noted that no particular form of words is necessary to waive the "time-honored right to sue," the provision, "at least in some general and sufficiently broad way, must explain that the plaintiff is giving up her right to bring her claims in court or have a jury resolve the dispute." The court concluded that the arbitration provision at issue was not clear to the average consumer that she was giving up such rights.

Uber’s arbitration clause in Suarez would appear to satisfy the New Jersey test in Atalese for at least three reasons. First, unlike in Atalese, Uber required the drivers to confirm they read the services agreement, which included the arbitration clause, not once but twice. With the Atalese court’s focus on mutual assent, this fact — which the Suarez Court found persuasive — would go a long way in assuring such mutual assent between a company and consumer. Second, unlike the arbitration clause in Atalese, the Uber arbitration clause emphasized, in multiple ways using bold and capitalized language, the fact that the driver was giving up her right to sue in court, and the importance of that decision. This approach with consumers will likewise assist in meeting the Atalese standard.

Third, and most critically, the Uber arbitration clause gives the contracting party the right to opt-out. According to the Suarez court, this option effectively blunts the unequal bargaining concern that exists in the employment context. It stands to reason, therefore, that the opt-out option would similarly blunt the alleged unequal bargaining power in consumer contracts, which is the basis for the protection inherent in Atalese’ reasoning. If a consumer has the power to opt-out of the arbitration clause without penalty, then that should tilt in favor of finding an arbitration clause enforceable in a consumer contract. Indeed, in at least one recent decision post-Atalese interpreting New Jersey law, James v. Global Tel*Link Corp., et al.,[6] a court has enforced an arbitration clause with an opt-out provision in a consumer contract.

Lessons Learned and Notes of Caution

  • Allow for ample contract review: It proved helpful in Suarez that Uber permitted its drivers multiple opportunities to review the terms of the services agreement. The same principle should guide the drafting of consumer contracts.
  • Highlight the importance of the arbitration clause: Uber emphasized that by choosing arbitration a driver was foregoing her right to court, and it noted that was an important decision. Atalese confirms this approach is imperative in consumer contracts.
  • Use an opt-out provision: The opt-out provision saved the Uber arbitration clause, and could do the same in consumer contracts.

Finally, two notes of caution. First, while an opt-out provision can prove helpful, it may not save an arbitration clause that is inconspicuous. In Noble v. Samsung Electronics America Inc.,[7] the U.S. District Court for the District of New Jersey refused to enforce an arbitration clause in a consumer contract that contained an opt-out provision because the terms were unreasonably hidden.

Second, the CFPB’s rule seeking to eliminate mandatory arbitration clauses may apply even if the clause contains an opt-out provision. In its proposal, the CFPB noted it considered requiring an opt-out regime, but its study found such regimes would be ineffective. Thus, in the financial services industry, if the CFPB rule becomes adopted, an opt-out provision may not be effective.

[1] See, e.g., Atalese v. United States Legal Services Group LP, 99 A.2d 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)

Reprinted with permission from Law360. (c) 2016 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.