Arbitration Chicken or Egg – Who Determines the Arbitrability of a Claim if the Assertion of Arbitrability is “Wholly Groundless”? by Jonathan R. Marz

Arbitration Chicken or Egg – Who Determines the Arbitrability of a Claim if the Assertion of Arbitrability is “Wholly Groundless”? by Jonathan R. Marz

  By Jonathan Marz, Diepenbrock Elkin Gleason LLP

It is well known that arbitration agreements are highly popular, and frequently given significant deference by courts asked to enforce them. However, courts will not compel parties to arbitrate claims that they did not agree to arbitrate. Thus, disputes frequently arise about whether a claim is or is not within the scope of an arbitration agreement. One way parties try to address that issue is to include “delegation clauses” in their arbitration agreements – a delegation of authority to the arbitrator, away from the courts, to determine a claim’s arbitrability. However, delegation clauses are not enforced blindly, as seen in the recent California First Appellate District case of Smythe v. Uber Technologies, Inc. (Cal. 1st App., Div. 3, June 8, 2018, Case No. A149891).

In Smythe, a dual Uber-Lyft driver sued Uber claiming the company “direct[ed] its drivers and others to create and use fake Lyft accounts to request rides, thereby sending Lyft drivers on wild goose chases to pick up nonexistent passengers.” The plaintiff asserted claims for “unfair business practices and intentional interference with prospective economic damage on behalf of a putative class of Lyft drivers affected by the alleged scheme.” Uber sought to compel arbitration of the matter relying upon a broad arbitration provision the plaintiff agreed to in connection with his work as an Uber driver. The provision required arbitration, “without limitation,” of all disputes “arising out of or relating to your relationship with the Company,” and was “intended to require arbitration of every claim or dispute that can be lawfully arbitrated . . . .”

The trial court refused to order arbitration, finding the plaintiff’s claims were beyond the scope of the arbitration agreement. The appellate court affirmed. Applying federal case law, Smythe notes that if parties do not “clearly and unmistakably” intend to delegate arbitrability decisions to an arbitrator, then the question of arbitrability remains with the courts. However, even if parties do clearly and unmistakably intend to make such a delegation, the “‘court should perform a second, more limited inquiry to determine whether the assertion of arbitrability is ‘wholly groundless.’” The trial and appellate court homed in on the fact that the plaintiff “brought his action in his capacity as a driver for Lyft, not Uber,” and that “the same allegations could just as well be pursued by a Lyft driver who does not drive for Uber.” For these reasons, the appellate court reasoned, there was “no plausible argument” that the claims arose out of or were related to any agreements the plaintiff entered with Uber in order to drive on its platform, and the arbitration agreement was therefore “inapplicable.”

The decision is not likely to lead to a tidal wave of “wholly groundless” objections to arbitration that are deemed meritorious. After all, Smythe, itself, recognizes that such circumstances “are exceptional.” However, the case serves as a cautious reminder that even the broadest arbitration agreements that purport to extend to each and every dispute between their signers may have unintended or unexpected limitations under certain circumstances. If you have questions about the scope and enforceability of arbitration agreements to which you are a party, please contact Jonathan Marz at jmarz@diepenbrock.com or 916.492.5000.