Harrison (Buzz) Frahn
Thomas M. Cramer
Priya Sundaresan (Summer Associate)
Simpson Thacher & Bartlett LLP
On June 20, 2019, Judge Edward M. Chen of the Northern District of California in Diva Limousine, Ltd. v. Uber Technologies Inc. issued an order containing four primary holdings: (1) granting without prejudice Uber’s motion to dismiss for lack of subject matter jurisdiction; (2) granting Uber’s motion to dismiss Diva’s claim under California’s Unfair Practices Act; (3) granting in part and denying in part Uber’s motion to dismiss Diva’s claim under California’s Unfair Competition Law; and (4) denying without prejudice Diva’s motion for partial summary judgment on its Unfair Competition Law claim. Significantly, the court recognized the competitive advantage that Uber derives from classifying drivers as independent contractors and commented that this classification undermines the spirit, if not the letter, of the California Labor Code.
Plaintiff Diva Limousine (“Diva”) is a licensed provider of ground transportation services in California. Diva Limousine, Ltd. v. Uber Techs., Inc., No. 18-CV-05546-EMC, 2019 WL 2548459, at *1 (N.D. Cal. June 20, 2019). Defendant Uber Technologies Inc. and its subsidiaries (“Uber”) provide transportation services using a mobile application. Id. On September 10, 2018, Diva brought this putative class action on behalf of providers of pre-arranged ground transportation. Id. Diva alleges that Uber undermined competition and caused harm to Diva by misclassifying Uber’s drivers as independent contractors. Id. Diva alleges that doing so allows Uber to offer low prices, improperly undercutting competitors. Id. Diva asserts one cause of action under the California Unfair Competition Law (“UCL”) regarding Uber’s alleged misclassification of drivers and a second cause of action under the California Unfair Practices Act (“UPA”) regarding Uber’s loss-leader pricing. Id. at *2.
Diva asserts that it has been harmed by Uber’s practices. Id. Since Uber began operating in Los Angeles, Diva alleges that it has “lost corporate and retail client business, and has been compelled by Uber’s lower prices not to raise its own rates in line with expenses.” Id. Diva also claims that it has received fewer referrals from out-of-state affiliates, who typically refer clients looking to book transportation in California to Diva and receive a fee or commission in return. Id.
Shortly after Diva filed its complaint, on October 5, 2018, Diva filed for partial summary judgment on the issue of whether Uber drivers are properly classified as independent contractors under California law. Uber requested that Diva’s partial summary judgment motion be “held in abeyance subject to a further scheduling order” or “denied without prejudice as premature.” Diva, 2019 WL 2548459, at *2. In January 2019, Uber moved to dismiss Diva’s original complaint. Id. Diva responded by filing its First Amended Complaint, which Uber again moved to dismiss. Id. On June 20, 2019, the court issued its decision on the parties’ pending motions.
The Court Grants Without Prejudice Uber’s Motion to Dismiss for Lack of Subject Matter Jurisdiction, Allowing Diva to Amend its Complaint to Establish Minimal Diversity
The court first addressed Uber’s motion to dismiss under Rules 12(b)(1) and 12(b)(6). Id. at *2–4. Diva claimed that the court had subject matter jurisdiction over the suit through the Class Action Fairness Act (“CAFA”). Id. at *3. CAFA requires that the parties satisfy a requirement of minimal diversity, which exists where any member of a class of plaintiffs is a citizen of a State different from any defendant. 28 U.S.C. § 1332(d)(2)(A). Because Uber is headquartered in San Francisco, the California plaintiffs are not diverse from Uber. Diva, 2019 WL 2548459, at *3. Recognizing this, Diva submitted a declaration providing a list of out-of-state companies with which it had affiliate relationships, arguing that those companies are diverse from Uber. Id. The court acknowledged that “[t]hese facts, if considered, would establish minimal diversity because they demonstrate that multiple members of the putative classes are citizens of states different from Uber.” Id. However, the court concluded that since the facts were not included in the complaint, Uber’s 12(b)(1) motion should be granted without prejudice, and granted Diva leave to amend its complaint within 30 days to include new facts establishing minimal diversity. Id. at *4.
The Court Dismisses Diva’s UPA Claim With Prejudice, Refusing to Narrowly Construe UPA Exemptions
The court next considered Uber’s motion to dismiss Diva’s UPA claim. Id. at *4–9. Uber argued that it is exempt from UPA liability under Cal. Bus. & Prof. Code § 17024(1) and § 17024(2), which state that the UPA does not apply (1) “to any service, article or product for which rates are established under the jurisdiction of the Public Utilities Commission of this State (“CPUC”) and sold or furnished by any public utility corporation, or installation and repair services rendered in connection with any services, articles or products,” or (2) “to any service, article or product sold or furnished by a publicly owned public utility and upon which the rates would have been established under the jurisdiction of the Public Utilities Commission of this State if such service, article or product had been sold or furnished by a public utility corporation, or installation and repair services rendered in connection with any services, articles or products.” Id. at *4.
Uber claimed that it was exempt under § 17024(1), since its rates are established under the jurisdiction of the CPUC. Id. at *5. However, Diva argued that the exemption did not apply because the CPUC did not actually set the rates in question. Id. Diva also argued that if rates which simply could have been but were not actually set by the CPUC were encompassed under § 17024(1), then § 17024(2) would say “rates could have been established” and not “rates would have been established.” Id. at 7. The court found no merit in these arguments and instead sided with Uber. It favored a plain text interpretation of the statute, which refers to rates set “under the jurisdiction” of the CPUC. Cal. Bus. & Prof. Code § 17024. The court also cited Hladek v. City of Merced, 69 Cal. App. 3d 585 (1977), for the proposition that “the pivotal issue is whether the Public Utilities Commission would have the jurisdiction to establish the rates for such service if it had been sold or furnished by a privately owned public utility.” Id. at 590 (emphasis added).
Diva made a final attempt to narrow the scope of the § 17024(1) exemption, arguing that it was analogous to the federal “filed rate doctrine,” which “bar[s] challenges under state law and federal antitrust laws to rates set by federal agencies.” Diva, 2019 WL 2548459, at *8 (citing E. & J. Gallo Winery v. Encana Corp., 503 F.3d 1027, 1033 (9th Cir. 2007)). However, the court dismissed this claim, simply stating that there was no support for Diva’s claim that § 17024 must be construed as narrowly as the filed rate doctrine. Id. The court ultimately dismissed Diva’s UPA claim with prejudice. Id. at *9.
The Court Denies Uber’s Motion to Dismiss Under “Unlawful” Prong of UCL, Finding Causal Connection Between Uber’s Alleged Conduct and Diva’s Alleged Injury
The Court also considered Uber’s motion to dismiss Diva’s UCL claim. “The UCL proscribes business practices that are (1) unlawful, (2) unfair, or (3) fraudulent.” Id. (citing Cal. Bus. & Prof. Code § 17200). Diva alleged that Uber’s practice of misclassifying its employees as independent contractors was both “unlawful” and “unfair.” Id. Uber moved to dismiss under both the “unlawful” and “unfair” prongs. Id.
Regarding the “unlawful” prong, Uber argued that Diva lacked standing to bring the claim because there was no causal connection between Uber’s alleged misclassification of drivers and Diva’s injury. Id. at *10. Uber argued that Diva would have suffered the same harm even if Uber had classified its drivers as employees, because Uber’s investor subsidies would have allowed it to continue to price its rides below cost. Id. at *11. Uber asserted that its classification of drivers therefore could not be the sole cause of Diva’s injury. Id.
The court rejected Uber’s argument, finding that the UCL does not require the “unlawful” conduct to be the “sole factor” in causing harm in order to support UCL standing, instead finding that “a ‘substantial factor’ standard of causation would suffice for UCL standing.” Id. (citing Troyk v. Farmers Grp., Inc., 171 Cal. App. 4th 1305, 1350 (2009)). The court then found that “Diva’s allegations [were] sufficient to establish that Uber’s misclassification practices alone have been a substantial factor in causing Diva’s economic harm.” Id. at *12. According to Diva’s estimates, Uber avoids $9.07 in expenses every hour due to its classification of drivers as independent contractors, which allows it to offer below-cost pricing. Id. Thus, the court denied Uber’s motion to dismiss Diva’s claim under the “unlawful” prong of the UCL. Id. at *13.
The Court Grants Uber’s Motion to Dismiss Under the “Unfairness” Prong to the Extent that Diva’s Claim is Based On Sherman Act Violations But Denies the Motion to the Extent that Diva’s Claim is Based on Violations of California Labor Laws
Regarding the “unfair” prong, Uber argued that its alleged conduct does not violate antitrust laws. Id. at *9. Diva’s complaint alleged that Uber’s misclassification of drivers “violates the policy or spirit of the antitrust laws and threatens an incipient violation of antitrust law, including but not limited to monopolization and/or attempted monopolization under Section 2 of the Sherman Antitrust Act.” Id. Though the court acknowledged that “[p]redatory pricing can harm competition in the long run,” it found Diva’s allegations lacking. Id. It explained that in order to state a claim for monopolization under Section 2 of the Sherman Act, the plaintiff must prove (1) possession of monopoly power in the relevant market; (2) willful acquisition or maintenance of that power; and (3) causal antitrust injury. Id. (citing SmileCare Dental Grp. v. Delta Dental Plan of California, Inc., 88 F.3d 780, 783 (9th Cir. 1996)). To state a claim for attempted monopolization, the plaintiff must prove (1) specific intent to control prices or destroy competition; (2) predatory or anticompetitive conduct to accomplish the monopolization; (3) dangerous probability of success; and (4) causal antitrust injury. Id. (citing SmileCare Dental, 88 F.3d at 783). The court found that Diva’s allegations—which were limited to its claim that Uber’s conduct “violates the policy or spirit of the antitrust laws”—were conclusory and failed to allege specific facts necessary to satisfy the elements of Sherman Act claim. Id. Thus, the court granted Uber’s motion to dismiss the UCL unfairness claim to the extent the unfairness claim is based on Sherman Act violations. Id. at *10
However, the court went on to say that a UCL unfairness claim could be supported not only by conduct that threatens violation of an antitrust law, but also by conduct that “violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.” Id. at *9 (quoting Cel-Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 186–87 (1999)). The court found that the California Supreme Court had previously condemned worker misclassification as one such form of unfair competition that violates the policy or spirit of antitrust laws. Id. at *10 (citing Dynamex Operations W. v. Superior Court, 4 Cal. 5th 903 (2018)). The court emphasized that the prohibition on worker misclassification is “tethered to [a] legislatively declared policy”—the California Labor Code establishes as California’s policy enforcement of minimum labor standards in order to prevent employers from gaining a competitive advantage through violation of those standards. Cel-Tech, 20 Cal. 4th at 186–87. Consequently, the court denied Uber’s motion to dismiss the UCL unfairness claim to the extent the claim is based on violations of California labor laws. Diva, 2019 WL 2548459, at *10.
The Court Denies Without Prejudice Diva’s Motion for Partial Summary Judgment Due to Concerns About One-Way Intervention
Diva moved for partial summary judgment on the issue of whether Uber drivers are properly classified as independent contractors or employees. Uber contested Diva’s motion, citing the one-way intervention rule. The one-way intervention rule states that the substantive merits of a case cannot be adjudicated until class certification issues are decided. See Magadia v. Wal-Mart Assocs., Inc., 319 F. Supp. 3d 1180, 1186 (N.D. Cal. 2018).
Diva responded by arguing that the one-way intervention rule applies only when the plaintiff seeks a final judgment prior to class certification, while here Diva sought only partial summary judgment. Diva, 2019 WL 2548459, at *13. The court rejected Diva’s argument, stating, “The one-way intervention rule applies in the context of merits rulings, not just final merits judgments.” Id.
Diva also argued that the one-way intervention rule did not apply because its UCL claim seeks relief for a Rule 23(b)(2) class. Id. at *14. In contrast to Rule 23(b)(3) class members, who can opt out of an unfavorable decision, Rule 23(b)(2) class members cannot opt out, thus negating the concerns underlying the one-way intervention rule. Fed. R. Civ. P. 23(c)(2)(A)–(B). The court found this argument to have merit, but ultimately concluded that it would be inappropriate to address Diva’s motion for partial summary judgment at this stage because “the named plaintiffs can still hedge their bets by opting not to seek class certification if they receive an unfavorable pre-certification merits ruling.” Diva, 2019 WL 2548459, at *14. The court therefore denied Diva’s partial summary judgment motion without prejudice, stating that it would be open to hearing Diva’s class certification and partial summary judgment motions on the same schedule. Id.
Judge Chen’s decision shows that the Northern District of California is unlikely to construe exemptions to the UPA in an overly narrow fashion. On the other hand, it also demonstrates that, at the motion to dismiss stage, the court will not confine itself to a narrow interpretation of the “unlawful” or “unfair” prongs of the UCL, and the court’s willingness to find for plaintiffs when defendants’ alleged actions violate the spirit, though not necessarily the letter, of California’s antitrust laws.