On The Case

Calif. judge upholds state law penalizing companies for stalling on arbitration fees

(Reuters) - The delivery company Postmates has failed again in its unrelenting effort to avoid arbitration with thousands of couriers who claim they were misclassified and underpaid. On Tuesday, U.S. District Judge Philip Gutierrez of Los Angeles denied Postmates’ motion to strike down a 2020 California law penalizing companies that balk at paying requisite fees when employees or consumers demand arbitration. Judge Gutierrez ruled, on a matter of first impression, that the state law, known as SB 707, is not preempted by the Federal Arbitration Act and does not violate the Contracts Clause of the U.S. or California constitutions.

The judge ordered Postmates, under SB 707, to pay the fees and costs of arbitration for about 10,000 couriers who filed arbitration demands last February. He also granted a motion by couriers’ counsel at Keller Lenkner to compel arbitration of claims by more than 4,000 additional Postmates delivery workers.

Postmates lawyer Theane Evangelis of Gibson, Dunn & Crutcher did not respond to a request for comment. Evangelis has previously told me that the company believes arbitration is “a fair and efficient way to resolve disputes, and stands ready and willing to defend legitimate arbitration demands,” but that couriers have breached their contract by asserting claims en masse.

Travis Lenkner of Keller Lenkner said in an email that Postmates has still not paid millions of dollars in fees to the American Arbitration Association but that his clients will now return to AAA with Judge Gutierrez’s order in hand. (The judge previously denied Postmates’ motion for a temporary restraining order to block 10,000 arbitrations, 2020 WL 1908302.) Postmates, he said, will eventually have to pay Keller Lenkner’s lodestar fees and costs, as ordered by Judge Gutierrez, regardless of the outcome of the couriers’ arbitration claims.

Postmates, as I’ve been reporting for more than a year, has tried just about every imaginable tactic to squelch its couriers’ mass arbitration campaign. In late 2019, facing an initial wave of about 5,000 demands for arbitration, Postmates proposed a class action settlement that purported to resolve couriers’ wage-and-hour demands. (A California state judge later denied preliminary approval of that proposed class settlement, although Postmates and class counsel can attempt to revive it.) Postmates refused to pay AAA fees for the couriers in the first wave of arbitration demands, arguing, among other things, that couriers’ counsel from Keller Lenkner had signed up unvetted clients; had improperly filed cookie cutter demands at AAA; and had subverted the class waiver in drivers’ contracts by demanding arbitration for thousands of couriers at a time.

Keller Lenkner successfully moved (414 F.Supp.3d 1246) in federal court in Oakland to compel arbitration of those first demands, although U.S. District Judge Saundra Brown Armstrong stopped short of ordering Postmates to pay millions of dollars in AAA arbitration fees. Postmates appealed to the 9th U.S. Circuit Court of Appeals, arguing primarily that the drivers’ mass arbitration campaign violated the class action waiver in their contract. The appeals court held in September (823 Fed.Appx. 535) that it’s up to an AAA arbitrator to decide whether drivers breached the contract.

Last February, when Keller Lenkner filed a second wave of demands for more than 10,000 couriers, Postmates sued in Los Angeles federal court to enjoin the cases. That many-tentacled litigation resulted in Tuesday’s ruling by Judge Gutierrez on the legitimacy of SB 707.

The law, which was passed in response to the refusal of companies like Postmates to pay arbitration fees when confronted with thousands of demands, requires the fees to be paid within 30 days of their imposition by an arbitration service. If the company refuses to pay after that deadline, SB 707 allows employees or consumers to assert their claims in court, where plaintiffs’ lawyers can seek sanctions; or seek to compel arbitration, with the company paying plaintiffs’ reasonable fees and costs when arbitration takes place.

Postmates argued in a motion for judgment on the pleadings that SB 707 undermines arbitration because state lawmakers’ true motive was to discourage companies from imposing arbitration on workers and consumers. “The statute is a blatant attack on arbitration agreements in California,” the company argued. “It effectuates the legislature’s hostility to arbitration agreements by rewriting them to target and disadvantage the drafting party.”

But Judge Gutierrez said SB 707 actually promotes arbitration, rather than disfavoring or obstructing it. “Instead of nullifying arbitration agreements, the law ensures a speedy resolution under their terms by preventing parties such as Postmates from holding hostage employees’ or consumers’ validly arbitrable claims,” the judge wrote.

The Federal Arbitration Act, he said, cannot be read to pre-empt state laws that promote arbitration. And SB 707, Judge Gutierrez said, does not offend constitutional protection of contracts because it simply does not impair Postmates’ contractual relationship with its couriers. The law, he said, only imposes additional remedies on companies that fail to comply with their own contracts.

It’s a good bet that Postmates will appeal the ruling to the 9th Circuit. In the meantime, Keller Lenkner is reveling in the win. “Postmates claimed that California law enforcing arbitration agreements against their drafters somehow undermines arbitration,” Lenkner said in an email. “No. In reality, the law punishes arbitration hypocrites like Postmates, which has spent nearly two years fleeing from the agreement it drafted and forced our clients to sign.”