Will the Recent Uber Appeal Decision Disrupt Arbitration Clause Certainty in Direct Selling Companies’ Agreements with Canadian Independent Salespeople?

25 février 2019 | Margaret Sims, Eamonn J. Flaherty

( Disponible en anglais seulement )

The January 2, 2019 decision of the Ontario Court of Appeal in Heller v. Uber Technologies Inc., (“Uber Appeal Decision”) has increased the risk that arbitration clauses may be found to be invalid in the face of a potential class action claim.  Direct selling companies that rely on such clauses in their contracts with independent salespeople should take notice.

In a 2018 decision of Justice Perell in Heller v. Uber Technologies Inc., a class action brought by a driver against Uber was stayed based on an arbitration clause.  The class action plaintiff appealed and the Court of Appeal allowed the appeal, the result of which is that the class action can proceed to the certification phase. While it can be expected that Uber will seek leave to appeal the decision to the Supreme Court of Canada, Uber has not yet done so; the deadline for Uber to do so is in early March, 2019.

Of broader interest is that in allowing the appeal, the Ontario Court of Appeal has called into question the enforceability of arbitration clauses in Canada where violations of the employment standards legislation are alleged, and has potentially opened the door for class actions by independent salespeople.  In Canada, class action waivers have been effected by way of arbitration clauses, which may or may not include an explicit class action waiver.

However, before a direct selling company assumes that their particular arbitration clause will be unenforceable in the face of an unproven class action allegation (that their independent salespeople are employees, as opposed to independent contractors), it should be noted that the facts at issue in the Uber Appeal Decision were a key foundation of the decision, and most direct selling companies will face less risk.  Simply put, the context for most direct selling companies will not be the Uber situation, which factually put Uber on the more extreme end of the arbitration clause spectrum.  The basic facts in the Uber Appeal Decision are as follows.

  • At issue in the decision was whether Heller entered into a Driver services agreement and an UberEATS services agreement by clicking on “Yes, I Agree” to the agreements when he first logged in to the Driver App.
  • Each agreement contained an arbitration clause (the “Arbitration Clause”) which established an arbitration process before the International Chamber of Commerce (“ICC”) in the Netherlands based on the laws of the Netherlands.
  • If a driver wanted to pursue a dispute with Uber, the driver was required to pay up-front ICC fees and costs of approximately US$14,500. These fees do not cover counsel fees, travel or other expenses related to participating in the arbitration.
  • This was contrasted with the evidence that, as an UberEATS driver, Heller earned approximately $400 to $600 per week (or about $20,800-$31,200 per year) based on 40 to 50 hours of work delivering food for UberEATS driving his own vehicle, before taxes and expenses.

In the Uber Appeal Decision, the panel confirmed that, under section 7 of the Arbitration Act [1], arbitration agreements must be enforced and stays granted, unless there is legislation restricting recourse to arbitration. Despite this baseline finding, for the purpose of whether the class action should be stayed, the Arbitration Clause was found to be invalid because:

(i) the Arbitration Clause amounted to an illegal contracting out of the Employment Standards Act, 2000, S.O. 2000, c. 41; and

(iii) the Arbitration Clause is unconscionable.

As a consequence, the stay of the drivers’ class action was set aside and the class action will proceed to the next phase, which is a motion for certification.  It is noted that the Uber Appeal Decision does not decide that Uber drivers are employees, but simply finds that the class action is not stayed in favour of arbitration in the Netherlands, as required by the Uber drivers’ agreement.  The issue of whether Uber drivers are employees is an issue for determination in the class action itself.

The takeaway from the Uber Appeal Decision is that to increase the likelihood of an arbitration clause being effective and any class action being stayed in favour of the arbitration, direct selling companies will want to evaluate their arbitration clause and consider whether updating the clause is prudent.  The following aspects of the direct seller’s arbitration clause and the surrounding circumstances warrant consideration:

  • Location

Ideally, the arbitration clause provides that the arbitration be held in the province where the independent salesperson operates his or her direct selling business or, at a minimum, in Canada, but it may be enough that the arbitration is in a somewhat proximate U.S. state (as opposed to farther afield, as was the case in the Uber Appeal Decision).  While not the ideal, arbitration in Utah or Arizona, for example, will likely be found to be significantly less onerous than the Netherlands, as was required under the Uber Arbitration Clause.

  • Governing Law

There will be less risk if the arbitration clause sets out that disputes will be decided based on the law in the province where the independent salesperson operates his or her direct selling business.  If the arbitration clause calls for determination under another jurisdiction’s law, then it will be important to provide information on that other jurisdiction’s law to the independent salesperson, as part of entering the contract.

  • Cost of Arbitration

It is important to make sure that the costs of initiating the arbitration are not out of line with the amount of the dispute.  In the Uber Appeal Decision, the high ICC fees which the Uber drivers faced in arbitrating a dispute was a major factor.  Not all arbitration organizations have minimum fees which are as high as the ICC.  The American Arbitration Association fees are significantly lower, for smaller claims, than the ICC’s fees. To get a sense of potential fees, most arbitration centers provide information on their websites to assist with estimating fees.[2]

In addition to considerations of which arbitration organization may be appropriate, direct sellers should consider the number of arbitrators required under their arbitration clause.  Arbitrations where the governing clause mandates for three arbitrators will be significantly more expensive than an arbitration requiring one arbitrator.

  • Independent Legal Advice

As is the case with many contracts, especially standard form contracts, it is best practice to make sure that the independent salesperson’s right to obtain independent legal advice in respect of the agreement is brought to their attention and that there is a real opportunity to do so.

  • Rebutting Presumption that Independent Salespeople are Employees

In the Uber Appeal Decision, the result was heavily based on the presumption that the drivers were employees; this was based on the presumption that the allegations by the drivers in their class action pleadings were true.  Such a presumption can be rebutted.  Rebutting the presumption will be important to have a court exercise its discretionary power to stay any class action proceeding in favour of arbitration.  In contrast to Uber, which exercises a large degree of control over Uber drivers, it will assist if a direct seller company can demonstrate that they exercise limited controls over their independent salespeople.  For many direct seller companies, this will not be difficult as they provide tools to assist their independent salespeople in operating a successful business, but do not control how their independent salespeople run their businesses.

  • Know your Independent Salespeople

Finally, it will assist in overcoming arguments that an arbitration clause should not be enforced if the direct seller can show that the independent salesperson is a business or business person and is not a vulnerable person.  There will be a higher risk that an arbitration clause will not be enforced if the independent salesperson is found to be a vulnerable person; considerations include the person’s ignorance of business, illiteracy, ignorance of the language of the bargain, illness, senility, or disability.

While the Uber Appeal Decision does seem disruptive of arbitration clauses, we highlight that the facts at issue in that case are on the far end of the scale.  The drivers would have had to pay a hefty price to arbitrate in the Netherlands and they earn relatively small sums as drivers.  A finding of unconscionability is unusual. Designing an arbitration process, which does not rise to the egregious facts laid out in Uber, can be accomplished – to seek to preserve recourse to arbitration to resolve disputes between direct seller companies and their independent salespeople on an individual (as opposed to a class action) basis.

We would be pleased to work with you to help you assess the risk that your arbitration clause would not be enforced by the Canadian courts, and to evaluate whether updates to your arbitration clause, independent salesperson policies and procedures/agreement and practices are warranted.

 

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[1] Section 7(1) and 7(2) of the Arbitration Act, 1991, S.O. 1991, Chapter 17, provides:

Stay

7 (1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.  1991, c. 17, s. 7 (1).

Exceptions

(2) However, the court may refuse to stay the proceeding in any of the following cases:
1. A party entered into the arbitration agreement while under a legal incapacity.
2. The arbitration agreement is invalid.
3. The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.
4. The motion was brought with undue delay.
5. The matter is a proper one for default or summary judgment.

[2] For example, see the ICC website at: https://iccwbo.org/dispute-resolution-services/arbitration/costs-and-payments/cost-calculator/ and the American Arbitration Association website at: https://www.adr.org/sites/default/files/International_Arbitration_Fee_Schedule.pdf.