Why it matters

The arbitration agreement found in the terms of service a user must agree to when downloading the Lyft app operated to foreclose a Fair Credit Reporting Act (FCRA) action filed by an applicant who wanted to be a driver with the ride-sharing company, according to a new decision from a California federal court. Pete Peterson downloaded the Lyft app and agreed to its terms of service on two occasions. When Peterson later applied to be a driver, Lyft hired a third party to obtain a background report that adjudged him ineligible for employment based on the company’s hiring criteria. Lyft did not provide Peterson with a copy of the report or his rights as required by the FCRA. He sued, and the company moved to compel arbitration based on the provision found in the app’s terms of service. The court granted the motion, ruling that Peterson’s FCRA claim was arbitrable pursuant to the terms of service and that the arbitration provision was not unconscionable. While a contract of adhesion, the arbitration provision was not substantively unconscionable just because it waived Peterson’s right to bring a Private Attorneys General Act claim, and Lyft had the right to unilaterally modify it, the court said.

Detailed discussion

In December 2014, Pete Peterson created a Lyft account through the mobile application. He was presented with a screen listing the Lyft terms of service and clicked the “I accept” button. He created a second Lyft account in February 2015, again accepting the terms of service.

Both terms of service contained an arbitration provision that required “any legal disputes or claims arising out of or related to the Agreement” to be submitted to binding arbitration. The provision also prohibited class or collective actions.

Peterson applied to drive for Lyft. The company requested a background screening report from a third party. The report adjudged Peterson ineligible for employment based on Lyft’s hiring criteria, and he was not hired. One year later, Peterson reached out to the company and asked to be reconsidered.

A Lyft representative told him that he should reach out to the background check company to dispute the charges on his profile that made him ineligible for employment. He did so in May 2016 and then filed suit against Lyft, alleging violations of the Fair Credit Reporting Act (FCRA) because he was not provided with a copy of the report and a written description of his rights before his application was denied.

Relying on the arbitration provision in the app’s terms of service, Lyft moved to compel arbitration. Peterson countered that the provision did not encompass his FCRA claim, but U.S. Magistrate Judge Laurel Beeler disagreed.

“Mr. Peterson’s FCRA claim arises out of Lyft’s background checks, and hence the claim is at least loosely related to a ‘legal dispute[] or claim[] arising out of the Agreement’ that the parties agreed to arbitrate,” the court said.

Considering Peterson’s alternative argument, that the arbitration provision was unconscionable, the court reached the same conclusion. While the provision was a contract of adhesion, “this presents a minimal level of procedural unconscionability” at best, the court said.

As for substantive unconscionability, the fact that Lyft had the power to unilaterally modify the contract did not per se make the arbitration provision unconscionable, the court held. Even if the unilateral modification were unconscionable, Peterson did not claim that Lyft acted unreasonably to alter the contract terms, “so this at best presents mild substantive unconscionability,” the court found.

Peterson’s other two challenges to the arbitration provision—that it featured an unconscionable privacy provision and that it waived his right to bring a Private Attorneys General Act (PAGA) claim—also failed to sway Judge Beeler. Under current California and U.S. Court of Appeals for the Ninth Circuit law, privacy provisions like the one at issue do not render the arbitration provision unconscionable, the court said.

The PAGA argument failed because while such a waiver is unenforceable, it does not render an arbitration provision substantively unconscionable, the court explained, and Peterson did not plead a PAGA claim, meaning he lacked standing to challenge a PAGA waiver provision that was not being applied to him.

Not only did the parties enter a binding agreement containing an arbitration provision, but “the arbitration provision is enforceable and not unconscionable,” the court concluded. “The court grants Lyft’s motion to compel arbitration and dismisses this action.”

To read the order in Peterson v. Lyft, Inc., click here.