Recently, in a major win for employers and companies that transact business on the internet, the Ninth Circuit upheld the use of arbitration class-action waivers in so-called clickwrap agreements. These types of agreements are commonplace—consumers installing software or signing up for a service are presented with a company’s terms and conditions on their screen, and are required to click “I agree” to proceed.
Like many other modern agreements, clickwrap agreements often include arbitration clauses, including arbitration clauses containing class-action waivers. Such is the case with certain contracts used by Uber Technologies, Inc. (“Uber”), a popular car service that connects customers with drivers through a cell phone application. Recently, former Uber drivers brought suit against Uber concerning the termination of their employment, and the validity of their agreements with Uber was questioned. In Mohamed v. Uber Technologies, Inc., — F.3d —-, Nos. 15-16178, 15-16181, 15-16250, 2016 WL 4651409 (9th Cir. Sept. 7, 2016), the Ninth Circuit held that the drivers’ contracts with Uber were valid, and that the parties were required to resolve their disputes in arbitration.
In Mohamed, two former Uber drivers asserted putative class claims under the federal Fair Credit Reporting Act (FCRA) and various state statutes, alleging that Uber improperly used information contained in their consumer credit reports as a basis for their termination. When the drivers began working as Uber drivers, they entered into certain agreements with Uber that required them to submit to arbitration to resolve disputes with Uber, including whether disputes were arbitrable, and to waive their right to bring disputes as a class action. Although Uber’s agreements allowed the drivers to opt out of these provisions, they failed to do so. Nevertheless, the district court denied Uber’s motion to compel arbitration in each case, holding that the arbitration provisions were unconscionable, and therefore unenforceable, because the provisions were hidden in a “prolix form,” employees felt pressure to not opt out of arbitration and Uber failed to notify drivers of the drawbacks of arbitration.
Under governing California law, unconscionability has both a procedural element and a substantive element. The procedural element focuses on the inequality of bargaining power, while the substantive element focuses on overly harsh and one-sided results. Both elements must be present to support a finding of unconscionability. Focusing on the procedural element, the Ninth Circuit held that the arbitration clause was not unconscionable because drivers had the opportunity to opt out of the arbitration clauses. And, in fact, some drivers did opt out of the arbitration clauses. The court found that, even though the opt-out provision was “buried in the agreement,” it did not change the court’s conclusion because “‘one who signs a contract is bound by its provisions and cannot complain of unfamiliarity with the language of the instrument.’” Mohamed, 2016 WL 4651409 at *6 (quoting Circuit City Stores, Inc. v. Ahmed, 283 F.3d 1198, 1200 (9th Cir. 2002)). The court observed that “the option to opt out meant that Uber drivers were not required ‘to accept a class-action waiver as a condition of employment,’” and thus Uber did not coerce its drivers into waiving their rights in violation of the National Labor Relations Act (NLRA). Mohamed, 2016 WL 4651409 at *6 n.6 (quoting Johnmohammadi v. Bloomingdale’s, Inc., 755 F.3d 1072, 1075 (9th Cir. 2014)). Because the agreements were not procedurally unconscionable, the court declined to address whether the agreements were substantively unconscionable.
The Mohamed decision is important for companies and vendors who use clickwrap agreements, but it is important to understand its potential limitations. First, the opt-out provisions in Uber’s agreements were crucial to the Ninth Circuit’s decision. Second, while the Ninth Circuit focused only on procedural unconscionability, the district court also found substantive unconscionability, mainly because the drivers would have been subject to significant arbitration fees under the agreements. The district court ruled in this manner even though Uber later offered to pay the arbitration fees. In light of Mohamed, companies looking to rely on arbitration class-action waivers in their clickwrap agreements should be sure to review their opt-out and arbitration fee-sharing provisions.