On The Case

California is on the verge of a law to punish companies for stalling arbitration fees

(Reuters) - California’s legislature wants to restore some power to workers and consumers who have been forced into mandatory arbitration agreements with corporations. A bill now awaiting action by Governor Gavin Newsom would punish companies that attempt to stall arbitration by refusing to pay the fees required to launch and maintain cases filed by employees and consumers.

As you know, workers and consumers have lost much of their leverage against corporations in the last several years, thanks to U.S. Supreme Court rulings that allow businesses to require them to arbitrate disputes individually. Individual arbitration deprives workers and customers of the power to amass their claims in class actions. And though arbitration proponents have long argued that it offers a streamlined, cost-effective way for aggrieved employees and consumers to go up against big businesses, class action lawyers have long suspected that businesses mandate arbitration not because they want to improve dispute resolution but because they don’t believe workers and consumers will bother to bring individual arbitration cases.

Want more On the Case? Listen to the On the Case podcast.

Last year, we got an indication of what can happen when employees actually exercise their rights and file arbitration claims. The startup plaintiffs firm Keller Lenkner signed up thousands of Uber drivers with wage-and-hour claims against the company. More than 12,000 drivers filed for individual arbitration. Uber was contractually obliged to pay the fees to launch drivers' cases, which meant that Uber was exposed to millions of dollars in fees. But Uber balked at paying fees in all but a handful of those arbitrations. (Uber ultimately set aside at least $146 million on the eve of its initial public offering to resolve drivers’ arbitration claims.)

Keller Lenkner later alleged that Lyft, too, refused to pay the arbitration fees mandated in its arbitration agreements with more than 3,000 drivers who brought individual cases. And Chipotle also faced accusations last year of refusing to pay arbitration fees after forcing thousands of workers to agree to arbitrate disputes. (All of the companies argued that they weren’t shirking obligations but hesitated to pay arbitration fees because they doubted the legitimacy of the claims.)

California lawmakers want to make sure that companies can't engage in gamesmanship over arbitration fees. Earlier this month, over objections from the California Chamber of Commerce, the Securities Industry and Financial Markets Association and several California trade groups, lawmakers passed a bill that imposes stiff penalties when corporations fail to pay the requisite fees. Governor Newsom has until Oct. 13 to decide whether to sign the law.

The bill, which was pushed by state employment and consumer lawyers’ groups, would require companies to pay arbitration fees within 30 days of receiving an invoice. If they don’t submit the requisite fees, they would be deemed to have breached and defaulted on their arbitration agreement. Workers and consumers could then remove their claims to court or could ask courts to compel companies to pay the arbitration fees they owe. Similarly, the bill says that if companies stop paying required fees partway into an arbitration, workers and consumers can move their cases to court or ask a judge to compel the corporation to pay up.

“Justice delayed is justice denied,” the California assembly said in its report on the bill. “This bill provides employees and consumers to get their claim adjudicated in the venue of their choice in a timely manner.”

The California Chamber, which did not respond to my email request for comment, is lobbying for Governor Newsom to veto the law, posting a sample letter yesterday for its allies to send to the governor. The Chamber contends that the law does not make allowances for legitimate withholding of fees or incomplete payment. Not every failure to pay arbitration fees, according to the Chamber, deserves to be treated as a material breach of the arbitration agreement.

Travis Lenkner of Keller Lenkner, whose Uber litigation was discussed in the California Assembly’s report on the bill, said the new bill mostly transforms into law existing precedent on waiver of arbitration clauses, albeit with a firm deadline and stiff penalties. Lenkner emphasized that the bill, if signed into law, will help not just workers and consumers in mass arbitration cases but those with lone arbitrations as well.

Companies, he said, have pledged to judges, including justices of the Supreme Court, that arbitration is fair and cost-effective for everyone involved. “But when they are required to arbitrate, companies sing a different tune,” Lenkner said. “This bill would require companies to participate in the systems they have set up.”