More than 300,000 Uber Inc. drivers could be dropped from a class-action lawsuit after a federal judge rejected their settlement with the multibillion-dollar transportation software company, a lawyer for the drivers said.
The ruling erased a potential $100 million payout to hundreds of thousands of drivers, including many based in Massachusetts, who argued that Uber improperly treated them as freelancers rather than employees.
In his Thursday decision, US District Judge Edward M. Chen said the settlement was too small compared with possible damages of $1 billion or more at stake in just one of the lawsuit’s many legal claims.
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Uber, a developer of smartphone software that connects drivers-for-hire with passengers, agreed to the settlement in April.
Along with cash payments, the company agreed to give drivers more leeway in the fares they accept and clearer policies for removing them from the network, among other concessions. But the settlement would not have resolved one of the drivers’ chief concerns: that they remain classified as independent contractors, and not as employees of Uber.
The next steps in the case were not immediately clear. One option is for Uber to negotiate a new settlement with drivers. If there isn’t a settlement, the lead lawyer for drivers, Boston-based Shannon Liss-Riordan, said the case could instead go to trial — but with only a fraction of the drivers involved.
That’s because of an arbitration clause in many of Uber’s driver contracts, which binds drivers to private mediation instead of a court case. Chen previously rejected that arbitration policy, but Liss-Riordan said his decision is at risk of being overturned by the US Court of Appeals for that region.
“The writing on the wall is not good,” she said Friday.
In a statement, Uber spokesman Matt Kallman called the rejected agreement “fair and reasonable.”
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“We’re disappointed in this decision and are taking a look at our options,” he said.
Enforcing Uber’s arbitration contracts would probably shrink the case from some 385,000 California and Massachusetts drivers to just 8,000, Liss-Riordan said. The remaining drivers would have to file arbitration claims against Uber one at a time.
Chen acknowledged that outcome in his Thursday ruling, writing that drivers “face a considerable risk” that the class-action pool would be severely reduced.
“Requiring the drivers to arbitrate their claims individually will likely reduce by a substantial degree overall recovery for drivers, as typically only a fraction of individuals pursue arbitration,” Chen wrote.
Liss-Riordan said she would pursue those individual arbitration claims if necessary — more than 1,000 drivers have signed up.
“We’re putting out the word now to drivers that most of them will be left out in the cold, most likely, if we’re not able to reach a revised agreement,” she said.
Chen’s Thursday ruling hinged on a California law called the Private Attorneys General Act, which allows private lawyers to sue companies on behalf of the state government. Verdicts under that law, also known as PAGA, “could theoretically be enormous,” Liss-Riordan said.
The settlement agreement set aside $1 million in payments for the drivers to dismiss claims under that law. But Chen said that was a paltry sum considering potential damages of $1 billion or more under PAGA, 75 percent of which would be paid to the state. The parties treated the law “simply as a bargaining chip in obtaining a global settlement for Uber’s benefit,” he wrote.
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Some Uber drivers had criticized the settlement as inadequate, and Liss-Riordan subsequently offered to reduce her fee by nearly half, to $11 million, and give the difference to drivers.
The AFL-CIO-affiliated National Taxi Workers Alliance, which helped about 200 Uber drivers file objections to the settlement, said Thursday’s ruling would show Uber “that the voices of drivers cannot be silenced or auctioned off.”
“We congratulate every driver that has stood up for their voice to be heard and demanded that no ‘new economy’ be built by trampling on generations-old labor protections,” alliance president Bhairavi Desai said in a statement.
Curt Woodward can be reached at curt.woodward@globe.com. Follow him on Twitter @curtwoodward.