By Lisa Milam-Perez, J.D.
Unconvinced that the terms were fair and reasonable, a federal district court in California refused to grant preliminary approval to a $100 million settlement forged on the eve of trial in a hard-fought pair of landmark "gig economy" lawsuits alleging that Uber misclassified its drivers as independent contractors. Even if it were to approve a likely $84 million in relief—a 90 percent discount from the estimated verdict amount of $854.4 million for non-PAGA claims against the rideshare company—the court was unwilling to sign off on a waiver of an additional $1 billion in potential PAGA recovery in exchange for a comparatively paltry $1 million additional payout (O’Connor v. Uber Technologies, Inc.
, August 18, 2016, Chen, E.).
In its decision denying the plaintiffs’ motion for preliminary approval of the settlement, the court summarized the contentious three years of litigation to this point: its determination that a jury would have to decide, under California’s test for gauging employee vs. independent contractor status, whether Uber drivers were in fact employees of the rideshare giant; how the court eventually came to certify a class of more than 240,000 California drivers on expense reimbursement and gratuities claims; the district court’s invalidating the arbitration agreements between the parties; Uber’s appeals to the Ninth Circuit; and the subsequently filed Massachusetts class action that was tacked onto the docket (as yet uncertified).
Shortly before trial, Uber reached a settlement with the drivers in both cases, which the court also outlined in some detail: Uber would pay $84 million (along with an additional $16 million contingent on Uber’s initial public offering reaching one-and-a-half times its most recent valuation), creating a pool of $56-66.9 million for the California drivers and $5.5-6 million for the Massachusetts drivers. In the face of protests from objectors, plaintiffs’ counsel agreed to reduce her proposed $21-25 million share of the settlement fund by $10 million, leaving additional money for the class. At bottom, the overwhelming majority of class members would see less than $100 each (although, with an anticipated 40 percent claim rate, that amount could increase).
The settlement also provided various forms of nonmonetary relief, including Uber’s agreement to implement comprehensive due process rights, of sorts, before drivers could be deactivated, and to give drivers more information about the company’s driver ratings system. (As it stands now, Uber seemingly can rid itself of drivers for any reason at any time.) Also, Uber would create an internal mechanism for drivers to raise concerns about specific fare payments (at least in California and Massachusetts) and "clarify" its messaging to customers that tips are not included in fares (but that they are neither expected nor required). Uber also would collaborate with the plaintiffs to create and bankroll a "driver association" in order to establish a "dialogue" with the drivers—not
a union, though, and with no collective bargaining rights.
What Uber gets.
In exchange, plaintiffs would release all
claims against Uber—not just the expense reimbursement and tips claims, but any claims "reasonably related" to their misclassification—and not only by the certified class, but by all California Uber drivers (including those who were previously excluded) and all Massachusetts drivers. In fact, the plaintiffs would have to filed amended complaints expanding their causes of action to include (and release) such claims—effectively terminating claims brought in more than 15 other lawsuits in state and federal courts in California—and would further settle all civil penalties potentially due under the PAGA, thereby prohibiting any other driver from bringing a PAGA claim (or obtaining relief through a PAGA representative suit) for the time period up to preliminary approval, even if that driver opts out of the settlement.
Additionally, the plaintiffs agreed not to challenge the enforceability of Uber’s revised arbitration agreement, unveiled in December 2015 in response to the court invalidating the company’s prior mandatory arbitration provision, and to withdraw NLRB charges challenging the earlier arbitration provision under the NLRA. (In turn, Uber would pay the filing fees for drivers to arbitrate any misclassification claims or cases arising out of their having been deactivated.) The parties also agreed to stipulate to retrospectively vacating the district court’s Rule 23(d) orders and agreed that Uber can void the settlement if these orders are not
vacated. "The effect of such action, if agreed to by the Court, would be to retroactively strip drivers of the protections afforded by this Court’s Rule 23(d) order," the court noted.
Risks to both parties.
The court acknowledged the considerable risks that both parties faced that inclined them toward settlement. For the drivers, there was the ominous prospect that the Ninth Circuit would uphold Uber’s previous arbitration agreements, jeopardizing the whole class action by decreasing the class from 240,000 drivers to 8,000, with a proportional reduction in monetary recovery. Indeed, the risk was heightened by the fact that the Ninth Circuit granted Uber’s petition for permission to appeal the court’s adverse decision finding those agreements invalid as a matter of public policy.
Both parties faced the substantial risk of losing on the merits of the misclassification question, the court added, given that "[t]he fundamental question of whether Uber drivers are employees or independent contractors is not a simple one," and there are factors supporting each side’s decision. Moreover, even if the drivers were found at trial to be employees, Uber would challenge recovery on their claims. On the other hand, if Uber lost, it stood to face a statutory PAGA penalty alone in excess of $1 billion, even if the earlier arbitration agreements were deemed enforceable, since PAGA claims cannot be compelled into arbitration. Also, even if a mere fraction of the 380,000 drivers invoked the right to arbitrate, Uber would face daunting transactional costs, let alone potential liability and damages (which, "for any driver could well be ten times greater than the award scheduled under the Settlement Agreement by the arbitrators."
Out of the gate, the court discounted as illusory the $16 million add-on payment in the proposed settlement, seeing little proof that the contingency (the favorable IPO) would be triggered. Thus, it presumed an $84 million payout. The plaintiffs estimated the verdict value of the non-PAGA claims to be $854.4 million, which the court deemed "reasonably accurate." The proposed settlement, then, represented about 10 percent of the full value of the non-PAGA claims.
Yet even if the court were willing to sign off on these terms, it said, a subsequently added waiver of PAGA claims made the deal far worse and "considerably alter[ed]" the evaluation of the settlement’s fairness as a whole. In essence, the plaintiffs were agreeing to waive PAGA claims in exchange for about $1 million, or 0.1 percent of its estimated full worth. Moreover, because an employee’s PAGA action acts as a "substitute" for a governmental action, the judgment binds all those who would be bound by an action brought by the government, including nonparty employees. (Indeed, the California Labor & Workforce Development Agency (LWDA), invited by the district court to weigh in, expressed serious reservations about the deal.) The court also discussed the significant policy issues in play here.
As for the nonmonetary relief, the court was largely unimpressed. It noted that despite the newly imposed restrictions on deactivation, Uber still retained the right to deactivate drivers based on low ratings—which were subjective, could be biased, and amounted to "a frequent reason for deactivation," the plaintiffs noted. And it could still log drivers out of the app temporarily for low acceptance rates, leaving it in substantial control over drivers’ ability to accept or decline ride requests. The modest change in the tipping policy was of little consequence, in the court’s view, given Uber’s adamant refusal to implement an in-app tipping function (a la Lyft) and its persistent stance of actively discouraging tipping as "inconsistent with its business model."
The court was also troubled by the parties’ stipulating to the enforceability of the December 2015 arbitration agreement and the court’s retroactively vacating its orders, citing the potential impact on the due process rights of drivers who may not have opted out of the December 2015 agreement in reliance on those orders, which directed Uber to beef up its notice provisions—with which Uber has yet to comply. "To retroactively revoke the protection that this Court imposed to protect the rights of drivers without affording drivers a right to now opt-out would be to put a driver in a worse position than if the Court had not issued the Rule 23(d) Orders at all," the court explained. It would "effectively circumvent and nullify" orders of both the district court and Ninth Circuit.
Citing the "eleventh hour" fold-in of new claims and class members for almost no value in exchange, in order to induce Uber to settle—and at the expense of litigation pending elsewhere, as well as the mounting number of objections filed both by drivers and attorneys representing drivers in other cases in the state, the court denied the motion for preliminary approval. And, while the court gave Uber the green light to enforce its December 2015 arbitration agreement without the enhanced notice provisions mandated in its earlier court order (at least as to drivers who did not timely opt out), it refused to vacate its earlier Rule 23(d) orders, as the parties had jointly hoped, and it refused to rule on whether the arbitration agreement was actually enforceable.