In Mohamed v. Uber Technologies, Inc., the US District Court for the Northern District of California denied Uber Technologies' motions to compel arbitration after finding the delegation and arbitration clauses contained in its contracts to be procedurally and substantively unconscionable (No. C-14-5200 EMC, (N.D. Cal. June 9, 2015)).

Plaintiffs Abdul Kadir Mohamed and Ronald Gilette brought putative class action claims against Uber Technologies alleging various statutory violations. Uber filed a motion to compel all of Gilette and Mohamed's claims to individual arbitration pursuant to the terms of its 2013 and 2014 contracts, respectively. Although the court found that both plaintiffs assented to the terms of the contracts at issue, the court denied both motions to compel arbitration because:

The delegation clauses contained in the 2013 and 2014 contracts, purportedly delegated threshold issues concerning the validity of the arbitration provisions to an arbitrator. The court explained that the first, and often final step, in determining the validity and enforceability of a delegation clause is to decide whether the language of the delegation clause, read in context with other relevant contract provisions, unambiguously calls for the arbitration of gateway issues such as arbitrability. The language of the clause must be clear and unmistakable, and the delegation must not be revocable under state contract defenses such as fraud, duress, or unconscionability.

Uber argued that the language of the contracts was "clear and unmistakable" because the Court could easily resolve any putative conflicts or ambiguities by resorting to standard rules of contract interpretation." That the court should have to turn to rules of construction at all, however, made clear that the contract language in question was at least somewhat ambiguous or could be open to two or more reasonable constructions. The court stated that the "clear and unmistakable" test means that the parties' intent to delegate threshold issues must be undeniably apparent from the text of the contract, without resort to subtle interpretive aids. Since that standard was not met, the Court was unable to enforce the delegation clauses.

The Northern District of California next examined whether the delegation clauses and actual arbitration provisions in the 2013 and 2014 contracts were enforceable. The court explained that even if a delegation clause is "clear and unmistakable," the court must still decline to enforce the clause if the delegation clause itself is unconscionable or otherwise unenforceable under the FAA. Unconscionability requires a showing of both procedural and substantive unconscionability, "balanced on a sliding scale." The more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.

Procedural unconscionability focuses on "oppression" and "surprise." The "oppression" element is nearly always satisfied if the contract is one of adhesion. The Court examined the delegation and arbitration clauses in the 2013 Agreement, which contained an opt-out clause. The court concluded that both the delegation and arbitration clause in the 2013 Agreement was largely illusory. The opt-out clause was deemed to be "highly inconspicuous" due to the delegation clause being buried in the contract and not in any way set off from the small and densely packed text surrounding it. Additionally, the onerous procedure a driver had to undertake in order to opt-out rendered the clauses essentially meaningless. The "surprise" element of procedural unconscionability was also satisfied, as the delegation clause in the 2013 Agreement was essentially hidden in the prolix printed form drafted by Uber.

Substantive unconscionability arises when a provision is overly harsh, unduly oppressive, so one-sided as to shock the conscience, or unfairly one-sided. Under California law, any clause in an employment agreement that would impose "substantial forum fees" on an employee in her attempt to vindicate her unwaivable statutory rights is contrary to public policy, and therefore substantively unconscionable. When an "employer imposes mandatory arbitration as a condition of employment, the arbitration agreement or arbitration process cannot generally require the employee to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court." As plaintiffs made a sufficient showing that they would be subject to hefty fees of a type they would not face in court if they were forced to arbitrate, the delegation and arbitration clauses were held to be substantively unconscionable.

The Court's "oppression" analysis for the 2014 Agreement's delegation clause differed from that of the 2013 Agreement's clause in that the former provided a reasonable means of opting out and the clause was conspicuously present in the contract. It failed, however, to mention any significant disadvantages that this particular arbitration agreement had compared to litigation. In Gentry v. Superior Court, 42 Cal. 4th 443, 165 P.3d 556 (2007), the Supreme Court held that failure to bring these specific substantively unconscionable or otherwise unfavorable features of the arbitration clause to plaintiff's attention in connection with the opt-out clause rendered the entire arbitration provision at least somewhat procedurally unconscionable.

Here, the Northern District of California held that the first portion of the Gentry test is met because the 2014 agreement failed to notify drivers of a specific drawback presented by the delegation clause, specifically that drivers may be required to pay considerable forum fees to arbitrate arbitrability. The second part of the Gentry test was also met since Uber drivers could reasonably assume that Uber prefers arbitration, and the ability to opt-out of the delegation clause was not sufficiently meaningful to eliminate all oppression from the contract.

Therefore, after finding the delegation and arbitration clauses contained in its contracts to be both procedurally and substantively unconscionable, the Northern District of California denied Uber's motions to compel arbitration.