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Uber gambled on driver arbitration and might have come up the loser

Uber Drivers Protest Ahead Of Stock Market Flotation
Uber drivers protest outside Uber offices on May 8, 2019, in London.
(Peter Summers / Getty Images)
Bloomberg

For Uber Technologies Inc., using legal arbitration to deal with driver compensation complaints — over anything from pay to overtime to mileage reimbursement — seemed like the smart play: It would preclude costly class-action litigation, it was private and few drivers would go to the trouble.

That may have been a giant miscalculation.

As the ride-hailing titan prepares to go public this week, in a listing that could value Uber at almost $84 billion, the number of U.S. drivers who have filed arbitration demands against Uber has swelled to more than 60,000, according to the company’s prospectus. The figure surprised legal experts, who said resolving that many cases would take decades and cost Uber at least $600 million — with no end in sight.

Uber’s pending listing this week, on the heels of a planned strike by drivers, has brought the legal tactic into sharper focus. From Uber’s perspective, arbitration prevents drivers from banding together in class actions in open court, and from possibly winning a ruling with the power to threaten a linchpin of the company’s business model: treating drivers as independent contractors, avoiding the costs of full-time employees.

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Arbitration decisions, whether for or against the company, don’t set any legal precedent, and the results are confidential. “Uber kind of picked its poison in that regard,” said Nancy Cremins, general counsel at Globalization Partners in Boston.

But while the choice might have initially deterred lawsuits, 60,000 arbitrations are “a death by a thousand cuts,” Cremins said. “The volume is impossible to deal with from an administrative and legal perspective.”

Arbitration is especially popular among so-called gig economy companies, which rely on classifying workers as independent contractors. For the drivers, that confers more flexibility but lacks the benefits that come with a traditional job. The result is a flood of claims that Uber illegally foists the major costs of running its ride-hailing business, mostly car expenses such as fuel, insurance and maintenance, onto its drivers.

What Uber didn’t count on, experts said, is drivers and labor lawyers calling its bluff. Uber, especially after winning key court rulings upholding its use of arbitration, bet that drivers and their lawyers were more likely to throw in the towel than play David against the ride-hailing giant in individual arbitration cases — the legal equivalent of hand-to-hand combat against a vastly better-armed and stronger opponent.

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For most of corporate America, studies have found, one benefit of forcing employees into arbitration over their grievances is that relatively few workers actually do it. But that’s in a traditional workplace setting where the boss might sit nearby in the corner suite — not at a company reliant on often part-time contractors.

“No company really wants to have thousands of its workers bringing arbitrations against it,” said attorney Shannon Liss-Riordan, who represents workers filing such demands against numerous gig economy companies, including Uber. The companies’ hope is “that the claims will go away.”

“What we are doing against many companies is we’re taking them at their word and bombarding them with thousands of arbitration demands,” Liss-Riordan said.

Uber bears the lion’s share of arbitration fees, with conservative estimates of completing each arbitration at $10,000. Cremins projects the cost is closer to $20,000. Based on the number of drivers in the prospectus, that means that resolving all their arbitration proceedings would cost at least $600 million, and that doesn’t include any actual awards for drivers who win.

That’s significantly more than Uber would have paid to settle multiple class actions, according to legal experts. In March, Uber paid $20 million to settle a related lawsuit that Liss-Riordan brought on behalf of what ended up being about 13,600 drivers.

In arbitration, “you’re repeating the same thing over and over again with varying results, and it’s going to cost money and it doesn’t resolve the issue either way,” Cremins said. “You’ve got to take these on one at a time, and that seems potentially quite painful for Uber because it becomes a regular expenditure. It doesn’t give you any business value.”

Matt Kallman, a spokesman for Uber, declined to comment, citing the required regulatory quiet period before initial public offerings.

Uber acknowledged in its IPO filing that the already significant expense of arbitration “may become more costly for us, or the volume of arbitrations may increase and become burdensome.”

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“The use of arbitration provisions may subject us to certain risks to our reputation and brand, as these provisions have been the subject of increasing public scrutiny,” Uber said in the filing. To minimize such risks, it may “voluntarily limit” its use of arbitration.

Charlotte Garden, a law professor at Seattle University, said the statements suggest Uber “may be about to cry uncle on individual arbitration.” The disclosure “makes me wonder if Uber is in the process of considering whether arbitration is more trouble than it’s worth.”

That doesn’t help the drivers already embroiled in the process. Lawyers who claim to represent more than 12,000 drivers who have filed arbitration demands have sued Uber, arguing the company has refused to pay obligatory filing fees to get the process started. That leaves drivers “languishing in arbitration purgatory,” the lawyers said. Uber argues the drivers haven’t paid their required share, $400 each, to get the arbitrations started, and “manufactured the very dispute they contend Uber created.”

Uber spent years dismantling the lawsuit with Liss-Riordan representing drivers seeking reimbursement of car expenses, after prevailing in its argument that workers must arbitrate their claims. The alleged delays may lend credence to the argument that Uber “wants to prevent drivers from litigating their claims anywhere,” Garden said. “The optics are terrible.”

Investors don’t seem overly concerned. Uber has enough investor demand to price its IPO at the top of the marketed range, people familiar with the matter said Tuesday. That means Uber could raise about $9 billion in what is expected to be the year’s biggest IPO.

While many early investors are hoping for an initial pop in the stock price, it’s the longer-term investors who need to better understand how issues like Uber’s arbitration policy shape its relationship with drivers, said Tom White, an analyst at D.A. Davidson in New York.

The path forward isn’t clear. The company could theoretically settle the arbitrations, and there’s uncertainty in the regulatory arena as well. Under a ruling last year by California’s highest court, most legal experts agree Uber drivers qualify as employees. Unless the state’s Legislature changes the law, and especially if other states adopt the standard, Uber will have to consider offering, and paying for, traditional employee benefits.

Both Uber and rival ride-hailing company Lyft, which went public in March, will continue to need drivers, “and over the next several years are going to need a lot more,” White said. According to its initial prospectus, Uber has more than 65% market share in the U.S. and Canada, and more than 3.9 million drivers globally.

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Uber isn’t “negotiating from a position of strength” with drivers, he said, in part because it’s still recovering from practices and missteps that occurred before Dara Khosrowshahi joined the company as chief executive in late 2017.

Arbitration demands against Uber are rooted in dissatisfaction with how much money its drivers are earning. At the same time, according to White, to achieve profitability and satisfy investors after the public offering, Uber will quickly get pressure to do away with any incentives directed toward drivers, including bonus payments.

“How are they going to do that if drivers are already complaining about their compensation on the platform?” he said.

Rosenblatt writes for Bloomberg.


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