Mandatory arbitration clauses are all the rage these days. After all, the Supreme Court itself just endorsed their use in employment contracts to limit workplace class action lawsuits making their way to court. This thinking goes that arbitrators are generally more friendly to business owners in employment disputes and juries are way too risky. So, arbitration clauses are finding their way into just about every legal document a business signs, with the hopes of making future legal expenses a bit more predictable.
But predictable doesn't always mean less. Just take a look at Uber, a company notorious for enforcing arbitration clauses against unhappy drivers, customers, and employees, which is quickly finding out that arbitration doesn't always come cheap. In financial documents released this week ahead of the rideshare company's IPO, Uber revealed more than 60,000 U.S. drivers have filed arbitration demands against the company and it expects to spend at least $600 million resolving that many cases individually.
Pick Your Poison
"Uber kind of picked its poison in that regard," said Nancy Cremins, general counsel at Globalization Partners in Boston, told Bloomberg. "The volume is impossible to deal with from an administrative and legal perspective." Arbitration decisions are confidential and don't set any legal precedent, so they can't be relied upon by future litigants. However, while arbitrating each grievance from an independent contractor driver on its own may prevent drivers from banding together in class actions and gaining a precedential ruling against Uber, it does mean the company must arbitrate every case separately, and that has its own cost.
It's "a death by a thousand cuts," according to Cremins.
A sum like $600 million, to a company valued at almost $84 billion, may seem like a drop in a bucket. And, if it means preserving drivers as independent contractors rather than employees (which remains Uber's entire profitability model), it will probably be worth it in the end. But that doesn't mean this strategy works for all companies or small businesses.
Then again, not all companies or small businesses rack up litigation quite like Uber does, nor do they (or should they) respond to litigation in quite the same way. Rather than imitating a morally and financially questionable startup on its way to a billion dollars in legal expenses, you're better off talking to an experienced contracts attorney to see whether arbitration clauses are right for your small business.