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1st Cir. Rejects Challenges to Arbitration of Putative Class Action

The U.S. Court of Appeals for the First Circuit recently affirmed dismissal of a putative class action lawsuit that challenged the company’s arbitration clause.

The Court rejected the named plaintiff’s primary argument that the arbitration clause’s arbitration-fee-splitting arrangement was unconscionable and unenforceable, because the trial court was allowed to consider the defendant’s offer to pay for the full costs of arbitration, thus rendering the clause enforceable under Massachusetts’ Wage Act, because the potential costs of arbitration were less than the cost of potential recovery.

A copy of the opinion in Bekele v. Lyft, Inc. is available at:  Link to Opinion.

In 2014, the rideshare drive plaintiff registered to become a driver for a prominent rideshare company through its mobile application.  Registration through the app required acceptance of the rideshare company’s terms of service agreement (“TOS agreement”).  The complete TOS agreement was provided below the initial 16 lines of text, which users could scroll through, but were not required to before accepting.

The TOS agreement provided an explanation that the rideshare company could modify the TOS agreement, along with an arbitration clause, provided under a bold, capitalized heading entitled “Agreement to Arbitrate All Disputes and Legal Claims.”

The arbitration clause contained standard terms requiring that any legal disputes or claims arising out of, or related to the TOS agreement that could not be resolved informally would be submitted to binding arbitration, subject to the American Arbitration Association’s Commercial Arbitration Rules, and that any such claim “must be brought in your individual capacity, and not as a plaintiff or class member in any purported class, collective, or representative proceeding.”

The driver accepted the TOS agreement on three separate occasions, and the parties agree that the TOS agreement in effect on Oct. 11, 2014 controlled.

The driver filed suit in state court on behalf of a class of the rideshare company’s Massachusetts drivers, alleging that the rideshare company violated the Massachusetts Wage Act by classifying drivers as independent contractors, rather than employees, and by requiring drivers to bear expenses such as gas and auto maintenance.  The rideshare company removed the action to federal court, and moved to dismiss the complaint and to compel individual arbitration under the Federal Arbitration Act (FAA).

The driver opposed the rideshare company’s motion to dismiss arguing that no valid contract to arbitrate had been formed under Massachusetts law, which supplies the principles for determining the validity, revocability and enforceability of written arbitration provisions in contracts.  9 U.S.C. § 2; Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 686-87 (1996).

Moreover, the driver argued that any such agreement was unenforceable under the FAA’s savings clause because (i) its class-waiver provision violates the right to engage in concerted action granted by the National Labor Relations Act (NLRA), and (ii) the arbitration clause’s requirement that AAA Commercial Rules govern initial arbitration costs — $7,500 to be split by the parties — was unaffordably high for the rideshare company’s drivers like himself, and thus unconscionably oppressive.

Over the driver’s objections, the district court granted the rideshare company’s motion to dismiss in favor of individual arbitration.  The instant appeal ensued.

The driver’s initial brief on appeal focused on the argument that the arbitration clause violated the NLRA.  Before the rideshare company filed its answer brief, the appeal was stayed in light of the Supreme Court’s decision to grant cert in Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016), 137 S. Ct. 809 (mem.) (2017), to decide whether class-action waivers in employment arbitration agreements violate the NLRA.  Meanwhile, while the appeal was stayed, this Court decided Cullinane v. Uber Technologies, Inc., 893 F.3d 53 (1st Cir. 2018), which held that no valid agreement to arbitrate had been formed under Massachusetts law between a different rideshare company and customers who registered on the other rideshare company’s mobile-phone application. Id. at 64.

In May 2018, the Supreme Court of the United States issued its opinion in Epic Systems Corp v. Lewis, which held that class and collective action bars in employment arbitration agreements were not incompatible with the NLRA, and thus enforceable under the FAA.  Accordingly, the stay in the instant appeal was lifted, and the parties stipulated that the arbitration clause did not violate the NLRA, and the driver was permitted to file a supplemental initial brief to consider the First Circuit’s ruling in Cullinane that no agreement to arbitrate had been formed.

However, the First Circuit’s analysis primarily noted that the driver waived his contract-formation argument by failing to argue it in his initial, opening brief, and rejected the driver’s arguments that the unusual briefing schedule did not constitute “exceptional circumstances” to excuse waiver.  Sparkle Hill, Inc. v. Interstate Mat Corp., 788 F.3d 25, 29 (1st Cir. 2015); Aetna Cas. Sur. Co. v. P & B Autobody, 43 F.3d 1546, 1571 (1st Cir. 1994).

Accordingly, the First Circuit’s analysis focused upon the driver’s argument that the arbitration clause was unconscionable.

To show unconscionability under Massachusetts law, one must prove “both substantive unconscionability (that the terms are oppressive to one party) and procedural unconscionability (that the circumstances surrounding the formation of the contract show that the aggrieved party had no meaningful choice and was subject to unfair surprise).” Machado v. System4 LLC (Machado II), 28 N.E.3d 401, 414 (Mass. 2015).

Moreover, in Massachusetts, an arbitration-fee-splitting arrangement is not substantively unconscionable when the arbitration fees a plaintiff would owe amount to less than the damages the plaintiff claims.  Machado v. System4 LLC (Machado I), 989 N.E.2d 464, 471 (Mass. 2013)

Here, the First Circuit noted that because the rideshare company offered to pay all fees for an arbitration, the driver faced $0 in arbitration fees — an amount lower than his estimated potential recovery of “about $1,000.”  The driver argued that the offer to pay for arbitration should not be considered, because unconscionability is determined at the time of contracting.

The First Circuit rejected the driver’s argument, citing Massachusetts’ case-specific approach to evaluate fee sharing arrangements, which allows courts to consider claims and potential recovery which are unknowable at the time of contracting, along with other facts developed during litigation, such as the rideshare company’s offer to pay.  Machado; Machado II; see also McInnes v. LPL Financial, LLC, 994 N.E.2d 790 (Mass. 2013).  This approach is also similar to federal courts’ evaluation of arbitration fees involving federal statutory claims, wherein offers to cover costs of arbitration have held such clauses as valid and enforceable.  See, e.g., Muriithi v. Shuttle Express, Inc., 712 F.3d 173, 183 n.10 (4th Cir. 2013); Ragone v. Atl. Video at Manhattan Ctr., 595 F.3d 115, 125 (2d Cir. 2010); Large v. Conseco Finance Servicing Corp., 292 F.3d 49 (1st Cir. 2002).

The Appellate Court similarly rejected the driver’s argument that a cost-splitting provision would deter potential litigants from seeking to vindicate their statutory rights, concluding that doing so would conflict with the Massachusetts Supreme Judicial Court’s case-by-case approach, which looks not at the contract in the abstract nor at other potential litigants but at the individual claimant.

Lastly, the driver’s argument that the TOS agreement’s provision allowing the rideshare company to modify its terms upon notice and acceptance was substantively unconscionable was rejected because the provision is not unilateral as the driver claims, and requires the rideshare company to provide notice to its users, that must be accepted by its drivers.

Thus, the First Circuit concluded that the arbitration clause was not substantively unconscionable and was thus enforceable.  Accordingly, the trial court’s order granting the rideshare company’s motion to dismiss the driver’s putative class action complaint and ordering arbitration of the driver’s claims in his individual capacity was affirmed.

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Christopher P. Hahn practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Insurance Recovery and Advisory groups. Prior to joining Maurice Wutscher LLP, he served under the General Counsel at the Florida Office of Financial Regulation. He also obtained extensive experience litigating property insurance claims through all phases of discovery, motion practice and other pre-trial activities. Christopher obtained his Bachelor of Science degree in Business Administration from the University of Southern California, followed by his Juris Doctorate degree from the University of Miami School of Law. He is also a graduate of the University of Miami’s Masters of Business Administration program, completing his degree with an emphasis on finance and mergers and acquisitions.

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