Feb 7, 2019

Uber's mandatory arbitration clause ruled invalid, drivers may pursue application to certify class action, appeal court holds

Heller v. Uber Technologies Inc., 2019 ONCA 1 (CanLII)

February 7, 2019

A motion judge erred in staying class action proceedings brought against the ride-sharing company Uber by its drivers for breach by Uber of the province's employment standards legislation, the Ontario Court of Appeal held. The contract between the drivers and Uber contained a clause requiring disputes to be resolved through arbitration in the Netherlands, and a lower court judge had stayed the class action on the basis of that clause. In the Court of Appeal's view, however, the arbitration clause amounted to an illegal contracting-out of the employment standards legislation, on the basis that it deprived drivers of their statutory right to pursue a complaint with the Ministry of Labour. Further, the arbitration clause was unconscionable at common law, notably because it was inserted into the agreement by Uber in order to take advantage of drivers' inferior bargaining position. Barring any successful appeal to the Supreme Court of Canada, the matter is set to return to the lower court judge for consideration of the application to certify the class action.

The Facts:

An Uber driver in Ontario commenced a class action on behalf of all Uber drivers in the province, seeking $400 million in damages and a declaration that Uber drivers are employees who are entitled to benefits, such as minimum wages and overtime pay, under the Ontario Employment Standards Act, 2000 (ESA).

The ESA sets out minimum standards for employees in Ontario. Section 5(1) states that any agreement or waiver that purports to contract out of an employment standard is void. The ESA defines an "employment standard" as "a requirement or prohibition under this Act that applies to an employer for the benefit of an employee." Under s.96(1), a person alleging that the ESA has been violated may make a complaint to the Ministry of Labour, which complaint is then investigated by an employment standards officer. Although civil proceedings may also be brought to enforce the ESA, an individual may not concurrently pursue both a civil proceeding in the courts and a complaint to the Ministry.

Uber carries on a global business, characterizing itself as a vendor of "lead generation services" in the form of software applications for GPS-enabled smartphones, which it sells to transportation providers. Uber Technologies Inc., Uber Canada, Inc., Uber B.V., Rasier Operations B.V., and Uber Portier B.V., are part of a group of companies that have come to be known collectively and individually as Uber. Uber Technologies Inc. is incorporated under the laws of Delaware and does not operate in Canada. Uber B.V., which exploits the intellectual property associated with the Uber apps internationally, is incorporated under the laws of the Netherlands with offices located in Amsterdam, as is Rasier Operations B.V. which licenses the apps. Uber Canada, Inc. is incorporated under the laws of Canada and provides marketing and administrative support to Uber B.V. for the Uber apps in Canada, but has no contractual relationship with the users of the Uber apps.

Under its business model, Uber, which does not own vehicles, licenses a "driver app" to drivers, who download the app and use it to open an account with Uber to become a driver. In turn, consumers request and accept rides from drivers using the rider app, through which they pay and rate the driver's performance. In exchange for providing the app, Uber charges the driver a fee. A similar business model is used for restaurant food delivery through the UberEATS app, which connects customers, restaurants, and drivers providing delivery services for restaurants.

Uber has been in operation in Ontario since February 8, 2012. Drivers in Ontario create an internet account and enter into a contractual relationship with Uber B.V. and Rasier Operations B.V. and/or Uber Portier B.V. Under the Service Agreement, a driver is granted a licence to use the driver app and obtain the carriage service, agrees to pay a service fee and acknowledges that the agreement creates a legal and direct business relationship but that the parties are not in an employment relationship. To accept the licensing agreement, which is approximately 14 pages in length, the drivers click a hyperlink on the screen of the app stating "I agree," twice. When the Uber companies periodically revise their agreements with drivers, the drivers are required to consider and agree to the revised terms in order to continue accessing the driver app. Service agreements are governed by the law of the Netherlands, where Uber's legal team is located, and contain an arbitration clause, stating in part:

Except as otherwise set forth in this Agreement, this Agreement shall be exclusively governed by and construed in accordance with the laws of The Netherlands, excluding its rules on the conflict of laws. … Any dispute, conflict or controversy[,] howsoever arising out of or broadly in connection with or relating to this Agreement, including those relating to its validity, its construction or its enforceability, shall be first mandatorily submitted to mediation proceedings under the International Chamber of Commerce Mediation Rules ("ICC Mediation Rules"). If such a dispute has not been settled within sixty (60) days after a request for mediation has been submitted under such ICC Mediation Rules, such dispute can be referred to and shall be exclusively and finally resolved by arbitration under the Rules of Arbitration of the International Chamber of Commerce ("ICC Arbitration Rules") …. The place of the arbitration shall be Amsterdam, The Netherlands.

Under the Ontario International Commercial Arbitration Act, 2017 (ICAA), and the Ontario Arbitration Act, 1991 (AA), where a matter is required to be arbitrated under an arbitration agreement, and a party brings court proceedings in respect of that matter, the court must stay the proceedings in favour of arbitration.

David Heller entered an agreement with Rasier Operations B.V. on June 7, 2016 and another agreement with Uber Portier B.V. on December 15, 2016, and worked as a restaurant delivery driver using Uber apps, earning approximately $400 to $600 a week for a 40- to 50-hour workweek.

On January 19, 2017, Heller commenced a class action against Uber on behalf of Uber drivers in Ontario, seeking, among other things, a declaration that Uber drivers are denied benefits under the ESA and an award of $400 million in damages for the class. However, before the class action was certified by the courts – a requisite step in proceeding to a trial on the merits – Uber moved for an order staying Heller's proposed class action in favour of arbitration in the Netherlands. In a judgment dated January 30, 2018, 2018 ONSC 718 (CanLII), reported in Lancaster's Employment Standards Law, July 12, 2018, eAlert No. 116, Justice Paul Perell of the Ontario Superior Court granted Uber's motion and stayed the class action proceeding. He noted that it was well-established that courts are required to enforce arbitration agreements, in the absence of legislative language indicating a contrary intention, and that the ESA does not restrict the ability of parties to agree to resolve disputes through arbitration. Perell also rejected Heller's argument that the arbitration clause was unconscionable, notably because most potential disputes between Uber and its drivers could be resolved through "readily available" mechanisms in Ontario, with only the more substantial disputes requiring arbitration in the Netherlands.

Perell took the view that ICAA, rather than the AA, applied to the dispute, as it was both international and commercial. However, he remarked that nothing significant turned on that point, as it would have been appropriate to grant a stay under either of the arbitration statutes.

Heller appealed the Superior Court's decision to the Ontario Court of Appeal.

The Arguments:

Heller argued that Perell's decision that the parties were required to arbitrate the drivers' claims was incorrect and should be reversed. In his submission, the arbitration clause curtailed the right of employees under the ESA to pursue a complaint through the Ministry of Labour, and was therefore void on the basis that it was an attempt to contract out of the ESA. Heller also contended that the arbitration clause was unconscionable, noting that on the facts of this case there was both inequality of bargaining power and a high degree of unfairness, notably because Uber had abused its vastly superior bargaining power. Further, Perell's comment that many disputes could be resolved through procedures in Ontario was unsubstantiated, in light of Uber's overall control over the dispute resolution process, which meant that, ultimately, a driver who was unhappy with a result at the local stage would have no recourse other than to pursue arbitration in the Netherlands. Heller also maintained that Perell's conclusion that the relationship between the parties was commercial, and therefore that the ICAA applied to the dispute between the parties, was misconceived.

Uber argued that Justice Perell's decision to stay the class action in favour of arbitration was correct and ought not to be disturbed. The principle that courts ought to give effect to arbitration agreements was firmly established, it asserted, and nothing in the ESA suggested that the legislature had intended to preclude an agreement between an employer and an employee to resolve disputes under the legislation through arbitration. Uber also argued that the right to make a complaint to the Ministry of Labour was not a requirement that applied to an employer, and was therefore not an employment standard under the ESA. Accordingly, to the extent that the arbitration clause could be characterized as an attempt to contract out of that right, it did not fall foul of s.5(1). In any event, Uber submitted, the validity of the arbitration clause was, itself, a matter for the arbitrator, and not the courts. Regarding unconscionability, the company maintained that Justice Perell had identified the correct test, and there was no reason to interfere with his conclusion that the arbitration clause was not unconscionable. Uber also contended that the purpose of the arbitration clause was to ensure uniform results in disputes across its global operations, that the ICAA applied to the relationship between the parties, and that in any event the analysis would be the same whether the AA or the ICAA applied.

The Decision:

In a 30-page decision, a unanimous three-member panel of the Ontario Court of Appeal set aside the stay, holding that the arbitration clause amounted to an illegal contracting-out of an ESA minimum employment standard and, in the alternative, that the agreement was unconscionable.

Justice Ian Nordheimer, with whom Justices Kathryn Feldman and Gladys Pardu agreed, expressed "serious reservations" about Justice Perell's conclusion that the relationship between Uber and its drivers was a commercial one. Nevertheless, he agreed with Perell's assessment that, for the purposes of considering whether or not to grant the stay, nothing significant turned on whether the ICAA or the AA applied to the dispute between the parties.

Nordheimer recalled that, as directed by the Supreme Court of Canada in Machtinger v. HOJ Industries Ltd., 1992 CanLII 102 (SCC), in construing the ESA, courts must favour interpretations that extend its protection over those that do not.

Turning to the question of whether Uber's arbitration clause amounted to an illegal contracting-out of drivers' rights under the ESA, Nordheimer noted that the right to make a complaint to the Ministry of Labour amounted to an employment standard for the purposes of the ESA, as it was a mandatory process that applied to an employer, and operated for the benefit of an employee. Uber's argument that s.96 did not impose a requirement on employers, and that they could therefore derogate from the investigation procedure, relied upon an unduly restrictive reading of the ESA.

Because the right to pursue a Ministry of Labour complaint amounted to an employment standard, the arbitration clause, which precluded the drivers from exercising that right, amounted to an unlawful attempt to contract out of the ESA, Nordheimer held, stating:

Given my conclusion regarding the meaning of "employment standard", it follows that the Arbitration Clause constitutes a contracting out of the ESA. It eliminates the right of the appellant (or any other driver) to make a complaint to the Ministry of Labour regarding the actions of Uber and their possible violation of the requirements of the ESA. In doing so, it deprives the appellant of the right to have an [employment standards officer] investigate his complaint. This is of some importance for, among other reasons, if a complaint is made then the Ministry of Labour bears the burden of investigating the complaint. That burden does not fall on the appellant. Under the Arbitration Clause, of course, the appellant would bear the entire burden of proving his claim.

Further, in the Court's view, for the purposes of determining the validity of the arbitration clause, it was immaterial that, in the event, Heller chose to pursue proceedings in the civil courts rather than a complaint to the Ministry. Exclusion of the option of complaining to the Ministry was sufficient to invalidate the agreement, regardless of Heller's actions. As well, there were good policy reasons to support Heller's decision to pursue a class action, as those proceedings would determine common issues for all class members in an efficient manner.

Nordheimer also noted a number of problems associated with requiring Heller to pursue arbitration in the Netherlands. Any resulting decision would not necessarily be made public, and the substance of the dispute might be determined according to Netherlands law, rather than Ontario law. Neither of these problems arose in the context of a civil proceeding in Ontario.

Having concluded that the arbitration clause was void, Justice Nordheimer then considered whether the clause was also unconscionable. In ruling that it was not, Justice Perell had, in Nordheimer's view, committed a number of palpable and overriding errors warranting the Court of Appeal's intervention. Notably, Perell had found that arbitration in the Netherlands was required only for substantial disputes, while local procedures could be invoked in most cases. However, the evidence revealed that such procedures were controlled entirely by Uber. Accordingly, arbitration in the Netherlands was the only forum available under the contract in which independent dispute resolution was available to drivers.

Turning to the test for determining unconscionability, Nordheimer noted that in Titus v. William F. Cooke Enterprises Inc., 2007 ONCA 573 (CanLII), reported in Lancaster's Wrongful Dismissal and Employment Law, October 12, 2007, eAlert No. 198, the Court applied a four-part test incorporating the following requirements: (1) a grossly unfair or improvident transaction; (2) the victim's lack of independent legal advice; (3) an overwhelming imbalance in bargaining power, caused, for example, by ignorance of the business context; and (4) knowingly taking advantage of the victim's vulnerability. While some doubt as to the applicability of the four-part test had arisen as a result of Douez v. Facebook, Inc., 2017 SCC 33 (CanLII), in which a minority of the Supreme Court of Canada applied a two-part test requiring only unfairness and inequality of bargaining power, Nordheimer held that, regardless of which test applied, the arbitration clause was unconscionable.

Applying the more stringent four-step test in Titus, Nordheimer concluded that the arbitration clause represented an unfair bargain, as it required a driver to initiate an expensive process in an overseas jurisdiction, incurring up-front costs on an individual, as opposed to collective, basis. Heller had taken no legal or other appropriate advice and there was significant inequality of bargaining power between the parties. Finally, Uber deployed the clause in order to exploit its drivers' vulnerability:

I believe that it can be safely concluded that Uber chose this Arbitration Clause in order to favour itself and thus take advantage of its drivers, who are clearly vulnerable to the market strength of Uber. It is a reasonable inference that Uber did so knowingly and intentionally. Indeed, Uber appears to admit as much, at least on the point of favouring itself when drafting the Arbitration Clause. Its rationale in support of that favouring, i.e. that it chose this particular arbitration process in order to provide consistency of results, is an unpersuasive one.

Having determined that the arbitration clause was both void under the ESA and unconscionable at common law, the Court of Appeal set aside the stay of the class action. Barring a successful appeal, the case will return to Justice Perell of the Superior Court for consideration of Heller's application to certify the class action.

Comment:

In this decision, a unanimous Ontario Court of Appeal reiterated the principle that an agreement purporting to contract out of the minimum standards in the ESA is void. Justice Nordheimer took the view that the right to pursue the investigation process in the ESA amounts to an employment standard, and that the curtailment of that right in Uber's arbitration clause was therefore invalid.

This decision is consistent with other cases on contracting out of the ESA. For example, in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 (CanLII), reported in Lancaster's Wrongful Dismissal and Employment Law, June 27, 2018, eAlert No. 464, the Court of Appeal invalidated a termination provision in an employment contract because the clause did not oblige the employer to contribute to the employee's benefit plans during the notice period, as required under the ESA, and could also be read to permit the employer to avoid its ESA obligation to pay severance pay.

In contrast to the Ontario Court of Appeal's view that Uber's arbitration clause was unenforceable, in September 2018, the US Ninth Circuit Court of Appeals reached the opposite conclusion about Uber's arbitration clause in O'Connor v. Uber, No. 14-16078 (9th Cr. 2018) (2018 U.S. App. LEXIS 27343). In 2013, a number of drivers launched a class action against Uber, alleging that they had been misclassified as independent contractors and claiming numerous remedies under California's employment standards legislation. The lower court dismissed Uber's argument that the drivers were required to arbitrate their claims, concluding that the arbitration agreement was unconscionable and unenforceable. However, on May 21, 2018, in Epic Systems Corp. v. Lewis, a majority of the United States Supreme Court ruled that, where an employee has signed an agreement providing for the resolution of workplace disputes through individualized arbitration, the employee is precluded from participating in collective or class action law suits against an employer (For a more detailed background discussion of these cases, see Lancaster's Labour Law News, July 11, 2018, eAlert No. 434). Following this ruling, the United States Court of Appeals for the Ninth Circuit issued a decision on September 25, 2018 in a consolidated appeal of various actions against Uber, one of which involved the O'Connor class action. Citing Epic Systems, the Court reversed the class action certification in the O'Connor case, holding that Uber could compel individual arbitration of drivers' claims and the issue of whether the arbitration agreements were unenforceable was for the arbitrator to determine. As a result, US employees' claims against the technology giant will have to be arbitrated on an individual basis, unless the employer accedes to the courts' jurisdiction.