When people sign up to drive for Uber and Lyft, they must agree to submit all their disputes with the companies to arbitration. But when the government is a party to a civil enforcement action against the ride-share companies, a California appellate court has ruled that similar arbitration agreements are not valid.

In May 2020, California’s Attorney General and three City Attorneys from Los Angeles, San Francisco, and San Diego (the People) sued Uber and Lyft. In a separate action, the State Labor Commissioner through the Division of Labor Standards Enforcement (DLSE) filed a separate action against the rideshare companies for “misclassifying their ride-share and delivery drivers as independent contractors rather than employees.” Independent contractors are not entitled to the same wages and benefits that employees receive. Their cases were coordinated into the current case called Uber Technologies Wage and Hour Cases.

The People and DLSE relied on two legal principles to support their suits. First, they cite sections of California’s Business and Professions Code that permit injunctive relief on behalf of those who are injured by unfair competition; allow government officials to pursue actions that violate governmental ordinances; and allow civil penalties. Second, they refer to a section of the State Labor Code that specifically permits governmental actions for “injunctive relief to prevent the continued misclassification of employees as independent contractors.”

The State Labor Code provision came about after Proposition 22 approved the classification of drivers as independent contractors in November 2020. The California Supreme Court has still to review the validity of the measure.

When the government’s suits were filed, Uber and Lyft filed motions to compel arbitration for what they termed “driver-specific” or “individualized relief.” They asked the court to stay decisions about civil penalties and injunctions until arbitration was completed. They relied on comparisons with the arbitration agreements they have with drivers.

Trial court Judge Ethan P. Schulman of the Superior Court of California, City and County of San Francisco, denied their motions in September 2022, and on September 28 of this year, a unanimous three-justice panel of Division Four of the First District Court of Appeal affirmed the denial of mandatory arbitration and to stay all actions by the Labor Commissioner.

The opinion, authored by Court of Appeal Justice Jon B. Streeter, begins by agreeing that “Both the federal government and California have strong public policies in favor of arbitration as an expeditious and cost-effective way of resolving disputes.” However, in this case, he quickly made it clear that these policies do not apply to suits by the People and the Labor Commission because they are not parties to the arbitration agreements signed by Lyft, Uber, and their drivers. The government parties simply never agreed to arbitration.

In addition, the government did not agree that the People and the Labor Commission are “mere proxies” for the drivers. Rather, they are acting in accord with statutes that give them authority to bring civil enforcement actions. Streeter cites several precedents to support this conclusion, including losing suits by Instacart, Waffle House, and Viking River. These cases stand for the proposition that “arbitration is a matter of consent and a party cannot be compelled to arbitrate absent a contractual basis for concluding the party agreed to do so.”

Streeter was also not persuaded by arguments by Uber and Lyft that tried to distinguish the cited cases from the present one because those cases involved federal, not state, government authorities. Neither did the court agree that claims belong only to drivers because they are the ones who would benefit from any granted relief. He also affirmed the trial court’s ruling that equitable estoppel did not apply. This is a legal principle that can permit administrative law judges to stop government departments from taking any actions that might be unfair to a client.

In support of his denial of the equitable estoppel argument, the opinion said, “We also agree with the trial court that equitable estoppel said that “under California law, as our Supreme Court has stated, “it is clear ‘that neither the doctrine of estoppel nor any other equitable principle may be invoked against a governmental body where it would operate to defeat the effective operation of a policy adopted to protect the public.”

The People and the Labor Commission were doing their job of protecting the public. They were not acting as surrogates of the drivers. They get their authority from the state. And the state wants Uber and Lyft to start obeying the law.