Postmates is learning the hard way that mandatory arbitration clauses go both ways, as an Illinois court has ruled against its attempt to consolidate hundreds of arbitrations into a single proceeding. As a result, the food delivery company is facing millions of dollars in arbitration fees as it is forced to defend each individual arbitration. The ruling concurs with similar rulings made against Postmates in California, where it was also ruled that it cannot consolidate these arbitrations, no matter how costly to itself.
Mandatory arbitration clauses are clauses placed in certain contracts, such as those setting out the terms of employment or the terms of a sale, that forces the parties to settle any legal disputes in private arbitration rather than in the courts. These arbitration clauses have become increasingly popular as a means of keeping lawsuits out of the court system, theoretically reducing legal costs, and reducing the risk of unfavorable information becoming public. Private arbitration has faced criticism because arbitrators are typically for-profit enterprises, and thus may show favoritism to companies that provide them with repeat business.
However, some companies, like Postmates, are realizing that the “mandatory” part of a mandatory arbitration clause applies to both parties, much to their chagrin. In this case, Postmates attempted to classify its delivery drivers as independent contractors rather than employees, resulting in allegations of employee misclassification. When they sued, the mandatory arbitration clauses in their employment contracts kicked in, resulting in the litigation being moved to arbitration.
Under normal circumstances, Postmates could attempt to consolidate the various lawsuits into a single case, but due to the mandatory arbitration clauses in the drivers’ contracts, Postmates must go to arbitration with every single dispute. And unfortunately for them, there is no mechanism under the law to consolidate private arbitrations in the same way that lawsuits can, such as through a class action. Also, under the terms of the arbitration agreement, Postmates is responsible for the full cost of each arbitration, meaning it is now liable for millions of dollars in arbitration fees, regardless of how the arbitrations turn out for them. Thus, even if they ultimately win in every dispute, they are still facing substantial financial losses.
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