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Uber drivers dealt setback in background-check lawsuit

Court finds drivers are subject to arbitration clauses in a ruling that may have bearing on a costly suit over employee classification.

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Uber drivers have had several disagreements with the ride-hailing company.

James Martin/CNET

Uber won a courtroom victory on Wednesday when an appeals court ruled that drivers are subject to individual arbitration in a lawsuit over background checks, a ruling that might help the ride-hailing company fend off another costly class action lawsuit filed by its drivers.

While the Ninth US Circuit Court of Appeals found that agreements signed by two former drivers for the service over background checks "clearly and unmistakably" require legal disputes be settled by a private arbiter, the reasoning may be applied to another class action lawsuit filed by drivers over the company's employment classifications. Uber agreed to settle that lawsuit earlier this year -- an agreement that was rejected by a federal judge last month.

Arbitration is a method frequently used by companies for resolving legal conflicts outside of the court system. However, critics say that binding arbitration clauses give corporations an unfair advantage over employees and consumers who do not have the resources to challenge companies individually.

"This decision is not good for the class," Shannon Liss-Riordan, a lawyer representing drivers in the expenses lawsuit, said in a statement. "The Ninth Circuit's decision endorsed Uber's attempt to use its arbitration agreement to avoid a systemic challenge to its classification of drivers as employees through a global class action."

Uber lawyer Theodore Boutrous applauded the decision. "Arbitration is a fair, speedy and less costly alternative to class action litigation," he said in a statement.

Uber reached a proposed settlement in the classification lawsuit in April, a development that appeared to end a threat to the foundation of Uber's business model. The company has grown dramatically in the past six years by providing a smartphone app that sidesteps taxicabs and provides a connection between people who want a ride and de facto cab drivers who pilot their own vehicles. But their classification as independent contractors upset drivers, because it meant the company would not be responsible for all sorts of costs, including Social Security, health insurance, paid sick days and overtime.

Under the terms of the proposal, Uber would no longer be able to terminate drivers at will and would have created appeals panels for drivers who feel they have been terminated unjustly. Uber would also make clear to riders that tips are not included in Uber's fares, and drivers will be permitted to post signs reflecting that arrangement.

A proposed settlement that would have paid $100 million to roughly 385,000 Uber drivers in California and Massachusetts was rejected last month by US District Court Judge Edward Chen as unfair, inadequate and unreasonable.