Judge Rejects Uber’s $100 Million Driver Pay Settlement

Uber Technologies Inc. may come out ahead by failing to win court approval of a $100 million settlement with drivers.

A San Francisco federal judge rejected the agreement on Thursday, a turn of events that would typically encourage the ride-hailing giant to sweeten the deal with more cash or concessions. In this case though, Uber may walk away from further negotiations because an appeals court has hinted it might overrule a key pretrial ruling in the fight over whether drivers must be treated as employees, the drivers’ lawyer has warned.

While acknowledging the risk for drivers and Uber if the case goes to trial, U.S. District Judge Edward Chen concluded the deal was unfair, partly because it low-balled potential claims under California law. He said he also wasn’t convinced that changing the company’s tipping policy would result in the “substantially increased income” as promised.

If the three-year-old lawsuit collapses, the world’s  most valuable technology startup would escape without significant changes to its business model or financial sacrifice while keeping 385,000 California and Massachusetts drivers classified as independent contractors. While Uber faces driver lawsuits elsewhere, as well as challenges to its pricing and business practices, the California case was seen as the most likely to upend its gig-economy workforce model because of the state’s relatively tough labor laws.

Before the appeals court added a new wrinkle to the California case, the biggest task for drivers’ attorney Shannon Liss-Riordan was to convince Chen that the agreement she reached with the company in April was fair and reasonable. Dozens of drivers and other lawyers claimed the deal would let Uber off the hook too easily.

Liss-Riordan told Chen in a June 17 filing that if the U.S. Court of Appeals overturns a ruling by him that invalidated Uber’s arbitration agreements in a different case, it would eviscerate her class action, reducing it to “a few thousand drivers.” The three-judge panel’s comments and questions at a June 16 hearing showed that it may be poised to overrule Chen, and even that “leaning” may give Uber leverage and dramatically diminish her “ability to negotiate modifications to the agreement,” Liss-Riordan said.

“The settlement, mutually agreed by both sides, was fair and reasonable,” Matt Kallman, a spokesman for Uber, said in an e-mail.”We’re disappointed in this decision and are taking a look at our options.”

A legal scholar who’s been following the case said Uber may now decide it’s better off trying to force the vast majority of drivers covered by the accord into arbitration, where the company can fight them one-on-one.

“This order sends the parties back to the settlement table,” said Charlotte Garden, an associate professor at Seattle University School of Law. “But it seems likely that Uber won’t want to go back to the drawing board.”

The settlement was rejected partly because of a provision that would have valued potential California labor code violations at just $1 million. Liss-Riordan and other lawyers proposed bringing the claims at issue under California’s so called bounty-hunter law. The Private Attorneys General Act, or PAGA, gives employees the right to step into the shoes of the state labor secretary to bring enforcement actions.

Chen noted in his ruling that a California agency concluded that such penalties in the case before him could amount to more than $1 billion, with the settlement providing only 0.1 percent of the “estimated full worth.”

Liss-Riordan appears to “treat the PAGA claim simply as a bargaining chip in obtaining a global settlement for Uber’s benefit, even though the PAGA claim alone is worth more than half of the full verdict value of all claims being released,” Chen wrote.

PAGA claims are routinely settled for a small fraction of their theoretical value, Liss-Riordan said in an e-mail.

“It is possible the parties could reach a revised agreement that satisfies the court’s concerns regarding the PAGA claims,” she said. “But if not, as I’ve said before, I will take the case to trial and fight my hardest for the Uber drivers.”

Uber and Liss-Riordan have been roundly attacked over claims the agreement benefited them at the expense of drivers.

While Liss-Riordan argued that she negotiated the best deal possible and faced a significant risk of recovering nothing for drivers at a trial, she later offered to cut $10 million from her $25 million fee request and earmark that money for drivers.

Uber agreed as part of the April deal to let drivers solicit tips and allot payouts based on the miles they’ve driven. Chen questioned whether a broad provision in the settlement releasing the company from liability for violations of labor laws “hijacked” claims for minimum wage, overtime and workers compensation that drivers are pursuing in other cases.

Liss-Riordan has told the judge that Uber wouldn’t have gone along with the settlement without a guarantee of “global peace.” She said she made a strategic decision to focus on mileage reimbursement and tips claims because they were most likely to succeed if the case went to trial.

Ted Boutrous, a lawyer for Uber, said at a court hearing that “there’s no incentive for Uber to settle” without releases extinguishing all claims stemming from the core dispute over whether the drivers are employees or contractors.

In a separate ruling Thursday, Chen rejected a bid by opponents of the agreement to replace Liss-Riordan as the lawyer for drivers in the class action.

In July Uber sold its Chinese business to competitor Didi Chuxing. The deal put Didi’s value at $35 billion after the acquisition and gave investors in Uber China a 20 percent stake in Didi. As part of the deal Didi invested $1 billion in Uber, valuing Uber at $68 billion.

Uber is the largest private technology startup. Fellow sharing economy company, Airbnb recently filed to raise $850 million at a $30 billion valuation. Chinese smartphone maker Xiaomi Corp., at $46 billion, is the second most highly valued private startup, according to data from research firm CB Insights.

Lyft Inc., the largest U.S. ride-hailing company behind Uber, moved a big step closer to sealing its $27 million deal with drivers that leaves them classified as independent contractors on June 23 when its settlement won preliminary approval from another judge in the same courthouse as Chen.

U.S. District Judge Vince Chhabria in April had rejected an earlier $12.5 million offer, saying it shortchanged drivers because it didn’t properly account for the company’s rapid growth. With Chhabria’s approval, about 163,000 current and former California drivers will be told they can claim their share of the settlement, object to it or opt out, before a final settlement hearing.

The Uber case is O’Connor v. Uber Technologies Inc., 13-cv-03826, U.S. District Court, Northern District of California (San Francisco). The Lyft case is Cotter v. Lyft Inc., 13-cv-04065, U.S. District Court, Northern District of California (San Francisco).