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Uber 'Gratuity' Lawsuit Can Move Forward, Federal Judge Rules

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By Mark Wilson, Esq. on September 18, 2014 2:03 PM

Uber is finding itself "disrupted" right into federal court, this time over allegations that it's charging users a 20 percent gratuity but not paying that to employees -- excuse me, partners (because they're not employees and Uber isn't operating a transportation company).

On Wednesday, Judge Edward Chen in San Francisco granted part of Uber's motion to dismiss, but left in place an unfair trade practice claim.

Deceptive Trade Practices

The class action complaint, filed in January, alleges that Uber automatically charges 20 percent gratuity in addition to the fare. Though characterized as "gratuity," the complaint claims that Uber "keeps a substantial portion of this additional charge for itself." The complaint characterizes this practice as unfair and deceptive -- if the charge is mandatory and Uber keeps most of it, it's part of the fare, not a gratuity.

Chen noted at the outset that, when a plaintiff pleads fraud, the complaint is subject to a heightened pleading standard: namely, the circumstances must be pleaded specifically, while malice can be pleaded generally.

Plaintiff Caren Ehret met that standard, said Chen. Ehret noted when and where the fraud happened (September 12, 2012, in Chicago) and what the foundation of the fraudulent statements was (Uber's "gratuity" wasn't a gratuity: It didn't all go to the driver, and thus the fare she paid was not accurate).

Uber countered that California's unfair competition law doesn't apply outside of California, and thus doesn't encompass anything that happened in Chicago. While there is a presumption against the extraterritoriality of California laws, the relevant question is where the unfair or misleading conduct occurred. Ehret said it came from Uber's San Francisco headquarters, where Uber's mobile application and website are maintained.

Nor was Ehret's suit barred by the higher pleading standard of California's Proposition 64, which requires an unfair competition claim to allege an injury that specifically involves the loss of money. Uber claimed that whether or not the 20 percent surcharge is characterized as a gratuity or a part of the fare, Ehret would still have had to pay the 20 percent. Chen disagreed under Ninth Circuit holding that this "benefit of the bargain" defense is permitted only if the misrepresentation wasn't material, where "material" means it didn't affect the consumer's decision to purchase the product. In this case, said Chen, if Ehret had known the 20 percent wouldn't all go to the driver, she might not have taken the service, as "labor practices do matter in making consumer choices." Whether the fee was voluntary was immaterial: the charge was "labeled as something it is not."

No Breach of Contract

Ehret lost only on a breach of contract claim; she didn't respond to this part of Uber's motion -- probably because she wasn't going to win, Chen opined. Ehret personally lost nothing, in a contract sense, just because not all of the 20 percent went to the driver. Even with the loss of this claim, Uber still has problems, especially in light of claims from drivers that they never received any tip money. CEO Travis Kalanick can claim all day long that stodgy analog laws are standing in the way of innovation, but there's nothing "innovative" about the very analog -- and illegal -- practice of taking part of an employee's a partner's tips.

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