Uber and Lyft May Not Compel Arbitration of Claims Brought by State

​Uber and Lyft may not compel arbitration of claims brought against them in civil enforcement actions by the state of California and by the Labor Commissioner through the Division of Labor Standards Enforcement, a California appeals court recently ruled.

The state and the Labor Commissioner are not parties to the arbitration agreements Uber and Lyft entered into with their drivers. Furthermore, neither the provisions of the Federal Arbitration Act (FAA) nor the doctrine of equitable estoppel supports compelling arbitration in this case, the court said.

In May 2020, the state filed a lawsuit, alleging Uber and Lyft violated California's Unfair Competition Law (UCL) by misclassifying their California ride-share and delivery drivers as independent contractors rather than employees, thus depriving them of wages and benefits associated with employee status. The state claims that the misclassification harms workers, competitors and the public. The state seeks injunctive relief, civil penalties and restitution under the UCL.

In August 2020, the Labor Commissioner filed separate actions against Uber and Lyft, pursuant to her enforcement authority under the Labor Code. The Labor Commissioner alleges Uber and Lyft have misclassified drivers as independent contractors and have thus violated certain Labor Code provisions and wage orders. The Labor Commissioner seeks injunctive relief, civil penalties payable to the state, and unpaid wages and other amounts alleged to be due to Uber's and Lyft's drivers, such as unreimbursed business expenses.

The state's and the Labor Commissioner's actions were consolidated.

Uber and Lyft filed motions to compel arbitration in the state's action. They also filed similar motions in the Labor Commissioner's actions. Uber and Lyft sought to require arbitration of those actions to the extent they seek remedies that Uber and Lyft characterize as "driver-specific" or "individualized" relief, such as restitution under the UCL and unpaid wages under the Labor Code.

Uber and Lyft's motions did not seek to compel arbitration of the state's and the Labor Commissioner's requests for civil penalties and injunctive relief, but they nonetheless asked the court to stay those portions of the actions pending completion of any driver arbitrations.

In their motions, Uber and Lyft relied on arbitration agreements they entered into with drivers. The agreements require drivers to arbitrate on an individual basis most disputes arising from their relationship with Uber or Lyft.

The trial court denied Uber's and Lyft's motions, and the companies appealed.

State and Labor Commissioner Not Bound by Arbitration Agreements

The appeals court first noted that the state and the Labor Commissioner are not parties to the arbitration agreements Uber and Lyft entered into with their drivers. Therefore, the companies may not compel arbitration pursuant to those agreements. Furthermore, neither the provisions of the FAA nor the doctrine of equitable estoppel supports compelling arbitration in this case, as the companies argued, the court said.

While the FAA embodies a strong federal policy in favor of enforcing parties' agreements to arbitrate, that policy is founded on the parties' consent, and there is no policy in favor of requiring arbitration of disputes the parties have not agreed to arbitrate, the court emphasized. Here because the state and the Labor Commissioner are not parties to the agreements, they clearly have not consented to arbitrate their claims, the court said.

Under the doctrine of equitable estoppel, a party who has not signed an arbitration agreement may be estopped—or legally prevented—from refusing to arbitrate when they assert claims that are dependent on or inextricably intertwined with the underlying contractual obligations of the agreement containing the arbitration clause. The focus is on the nature of the claims asserted, the court said.

The appeals court ruled that the trial court correctly concluded equitable estoppel does not apply here because the state's and the Labor Commissioner's claims are not founded on Uber's and Lyft's contracts with their drivers. Instead, the state and the Labor Commissioner are seeking to enforce the UCL and the Labor Code and are not seeking to enforce or take advantage of any portion of Uber's and Lyft's contracts with their drivers.

Indeed, the appeals court noted, the state and the Labor Commissioner take the position that those contracts violate California law requiring Lyft and Uber to classify their drivers as employees.

In re Uber Technologies Wage and Hour Cases, Calif. Ct. App., No. A166355 (Sept. 28, 2023).

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.