United States: The Shared Economy

Last Updated: August 29 2017
Article by Barry Leigh Weissman and David E. Cannella

INTRODUCTION

Before discussing how and whether the shared economy should be regulated and litigation involving the shared economy, it is important to first define what we mean by the "shared economy". Shared economy is an economic model in which consumers grant each other access to their underutilized assets. When people are asked to name a shared economy or peer-to-peer company the most popular responses are Uber and Airbnb and, in the insurance industry, the new company Lemonade. However, are these really shared economy entities? Could it be that they actually are just the result of the advances in information technology? Without the advances in computer technology the shared economy would not exist. In fact, Uber defines itself not as a peer-to-peer or shared economy but as a "... technology company that has developed an app that connects users (riders) with third party transportation providers." See About Uber, Uber (last visited April 25, 2017). Basically, these business are optimizing the resources which the consumer can use for services that are already available. Another term that is becoming popular to define these types of services is collaborative consumption, that is the sharing of goods and services through the use of the increases in computer technology via the use of apps and the internet. Juho Hamari et al., The Sharing Economy: Why people Participate in Collaborative Consumption, 67 J. Assoc. Inf. Sci. Technol. 2047-2059 (2016). In this article, we will use the term collaborative consumption ("CC") since we believe it to be not only more appropriate, but also because it encompasses peer-to-peer and shared economy.

REGULATION

Since we are talking about innovative methods of providing services, the question becomes, how and whether these methodologies should be regulated. For instance, the traditional methods of regulation can be divided into at least two (2) major segments, commercial and individual consumers. However, CC blurs the lines between these two (2) segments. Is the Uber driver the same as a commercial taxi driver and therefore must comply with the same regulations as a commercial taxi driver? Is the passenger a "commercial passenger" as the individual would be in a taxi and protected by the same existing laws that protects a "commercial passenger" in a taxi? Should the individual who rents a room or their whole house through Airbnb be regulated and pay the same taxes as those imposed upon a hotel and conform to the rules regulating the traditional hospitality industry? And is the individual who stays at the Airbnb rental protected by the same regulations and laws as someone staying at a hotel? The answers to these questions are still not clear and vary by jurisdiction. What is clear is that CC is raising issues of what rules apply to these transactions and how existing rules should or could be applied.

SELF-REGULATION

An increasingly popular notion is that the most effective form of regulation of CC is self-regulation. Urs Gasser, The Sharing Economy: Disruptive Effects on Regulation and Paths Forward, Swiss Re Institute (June 6, 2016). The rationale behind self-regulation is based upon the same theories used for the regulation of professions, such as the legal profession. Ray Brescia, How to Regulate the Sharing Economy? Look to the Law Governing Lawyers, The Huffington Post (Feb. 10, 2016, updated Feb. 10, 2017). The basic theories for self-regulation fall into the following:

  • The CC entities have the real incentives to self-regulate, since their success is based upon consumer trust, and consumers will not use their services if they are not satisfied. In fact, 64% of consumers surveyed by PWC for its April 2015 Consumer Intelligence Series, pwc.com/CISsharing, stated self-regulation is more important than government regulation. In addition, 69% stated they would not "trust sharing economy companies" unless the company was recommended by someone they actually trusted. Bottom line is that CC entities essentially profit by aiding in the transaction between the seller and buyer, and thus have the motivation to self-regulate. A lack of consumer trust can obstruct transactions, directly reducing the success of the platform or app."
  • In order to continually improve the technology necessary to provide their products or services, enormous amounts of data must be readily available. This data is more easily accessible by the CC entities than by the regulators;
  • Because the CC entities are driven by technology they are in the position to be able to quickly remove individuals that are not conforming to the requirements of the CC entity. Additionally, they can better regulate tax payments and monitor compliance with laws and regulations.

Urs Gasser, The Sharing Economy: Disruptive Effects on Regulation and Paths Forward, Swiss Re Institute (June 6, 2016).

APPLYING EXISTING REGULATIONS

However, the regulatory authorities must continue to protect their constituents with the existing laws and regulations. Therefore, it is important that CC entities ensure they are not only engaging in self-regulation but also are working closely with the existing regulators to warrant they are in compliance with existing rules. This means it is also incumbent upon the regulators to think out of the box when necessary and not be viewed as hostile to technology and innovation. We are living in a quickly changing world and regulators must be willing to innovate and adapt.

It has been observed by legal scholar Orly Lobel that those regulators and CC entities willing to work closely together and offer more flexible regulatory approaches will be most likely to address problems created by the CC economy and simultaneously encourage the growth of the CC economy.

LITIGATION

As is often the case in emerging industries, the litigation involving CC preceded changes in regulations, some of which were modified after the fact in response to litigation outcomes. The types of cases and issues raised in such litigation is far too broad to be fully addressed or covered here. Instead, an overview of personal injury claims, regulatory litigation and unfair competition claims against transportation network companies ("TNCs") provides insight as to how courts apply well-settled principles of law to emerging technology. In such cases, the best known TNC, Uber Technologies, Inc. ("Uber"), consistently asserts that it is a "software company," not a transportation company, because, inter alia, it does not own vehicles or employ drivers. See, e.g. Greater Houston Transp. Co v. Uber Technologies, Inc. and Lyft, Inc., 2015 WL 1034254, (S.D. Tx. Mar. 10, 2015).

PERSONAL INJURY CLAIMS

One of the first cases involving a personal injury claim against Uber was the case of Mazaheri v. Doe and Uber Technologies, Inc., 2014 WL 2155049 (W.D. Okla. May 22, 2014), appeal dismissed (10th Cir. 14-6189) (Nov. 20, 2014). In Mazaheri, a passenger assaulted by an Uber driver filed suit against Uber for respondeat superior liability and negligent, hiring, supervision and retention. Mazaheri, 2014 WL 2155049 at *1. Uber moved to dismiss the case on grounds that it was not the employer of the unidentified driver, who was sued as "John Doe," and even it was the employer, the assault was outside the scope of the driver's employment. Mazaheri, 2014 WL 2155049, at *2.

In its motion to dismiss, Uber is described as "a software technology company that provides a smartphone application software ("Uber App") that matches passengers looking for a car service with car service company drivers looking for passengers." Mazaheri, 2014 WL 2155049 at *1.

Uber explained in its motion papers:

Uber provides the technology, through its [Uber App] that allows these passengers and drivers to make a "match" based on their location. Uber is similar to opentable.com and the Opentable smartphone application, which matches diners looking for a meal and restaurants with open reservations looking for diners. Just as a diner assaulted by a waiter would have no basis to hold Opentable liable for the waiter's conduct, Plaintiff has no grounds to hold Uber liable for any alleged tortious conduct.

Mazaheri, Defendant Uber Technologies, Inc.'s Motion to Dismiss and Supporting Brief, (Doc. 8).

Although the Mazaheri court acknowledged the parties' disagreement as to whether John Doe was an Uber employee, it declined to decide the issue of employment. Instead, the court dismissed the complaint because the alleged assault did not state a claim for respondeat superior liability as assault and battery is not fairly and naturally incident to the Uber's business. Mazaheri, 2014 WL 2155049 at *2. The court also found that the plaintiff failed to state a claim for negligent hiring, supervision and retention because Plaintiff failed to set forth any allegations that Uber had any prior knowledge of the driver's propensity to commit an assault. Mazaheri, 2014 WL 2155049, at *3.

The United States District Court for the District of Columbia reached a different result in Search v. Uber Technologies, Inc. 128 F.Supp.3d 222 (D.D.C. 2015). In Search, the passenger was stabbed by an Uber driver following an altercation with the driver. Search, 128 F.Supp.3d at 231. In the Search court, the passenger alleged sufficient facts to support claims that Uber was the employer of the driver and that the driver's actions were incident to his employment with Uber. Search, 128 F.Supp.3d at 231.

The Search court found that the passenger alleged sufficient facts to establish an employee/employer relationship based on the application of the five-factor test for employee-employer relationships that examines (1) involvement in the selection and engagement of the employee; (2) payment of wages; (3) power to discharge; (4) power to control the employee's conduct; and (5) whether the employee's work is part of the regular business of the employer. Search, 128 F.Supp.3d at 231. The court reasoned that the passenger's amended complaint set forth facts illustrating Uber's involvement in the selection process of new drivers (by way of its screening procedures); payment of wages (by paying drivers weekly rather than permitting them to collect payment or tips directly from passengers); and termination of employees (by enjoying broad latitude to terminate employees who fail to comply with the company's standards). Search, 128 F.Supp.3d, at 232.

The Search court dismissed the negligent hiring claim, notwithstanding the passenger's reliance on statements made on the Uber website that its "three step screening" process for background checks "has set a new standard" and is "often more rigorous than what is required to become a taxi driver." Search, 128 F.Supp.3d at 230. The court found that the passenger's claim that the hire must have been negligent because the assault occurred to be "res ipsa loquitur-style logic [that] falls short of the threshold required to survive a Rule 12(b)(6) motion." Search, 128 F.Supp.3d at 230.

LITIGATION INVOLVING REGULATIONS

TNC litigation has involved the application of previously existing regulations and challenges to regulation enacted to accommodate TNCs. In Nevada Transportation Authority v. Uber Technologies, Inc., 2014 WL 9887215 (D. Nev. 2014) (Trial Order), the Nevada Transportation Authority ("NTA") sought to enforce then-existing common carrier regulations, enacted decades before the emergence of TNCs, against Uber. The Second Judicial District for the State of Nevada found that a preliminary injunction was justified because "Uber holds itself out to the public as willing to transport by vehicle any passenger to employ the Uber smartphone application without adhering to the regulations contained within NRS Chapter 706," which define "common motor carrier" and "taxicab." Nevada Transportation Authority, 2014 WL 9887215 at *3. This order, which effectively banned TNCs in Nevada, was rendered moot a few months later by the enactment of legislation by the Nevada Legislature authorizing TNCs to operate in the state. Tracey Lien, Uber Gets Big Win in Nevada as Legislature Oks Bill Authorizing Service, LA Times (May 27, 2015).

In Illinois Transportation Trade Association v. City of Chicago, 839 F.3d 594 (7th Cir. 2016), the City of Chicago appealed the trial court's refusal to dismiss an equal protection challenge by traditional taxicab operators and owners ("taxi plaintiffs") to an ordinance passed to accommodate TNCs. The taxi plaintiffs claimed that they were subject to much more stringent regulation than the TNCs, which violated taxi plaintiffs' equal protection rights.

In rejecting the equal protection claim, the Seventh Circuit reasoned that there was no equal protection violation because TNCs operate under a different business model than the taxi plaintiffs. For example, the court noted that "you can't hail an Uber vehicle on the street; you must use a smartphone to summon the car." Illinois Transportation, 839 F.3d at 596. The court found that "there are enough differences between taxis service and [TNC] to justify different regulatory schemes, and the existence of such justification dissolves the plaintiffs' equal protection claim." Illinois Transportation, 839 F.3d at 598. Writing for the Court, Judge Posner likened comparing TNCs and the taxicab plaintiffs to comparing "dogs and cats."

He continued:

Suppose the district judge happened to think dogs and cats interchangeable, and on that ground ruled that requiring dogs but not cats to be licensed (the law in Chicago) was a violation of equal protection. The proper response would be that she is entitled to her opinion but not entitled to impose it when the market perceives, and as we noted earlier has reasonable and nondiscriminatory grounds for perceiving, a rational difference between the competing animals that she does not perceive. Her belief that taxis and [TNCs] are interchangeable is similarly not shared by the entire relevant consumer market.

Illinois Transportation, 839 F.3d at 598-99.

UNFAIR COMPETITION CLAIMS

In Yellow Group LLC v. Uber Technologies, Inc., 2014 WL 3396055 (N.D. Ill. 2014), plaintiffs consisting of taxi medallion owners and taxi cab companies brought claims against Uber for unfairly misrepresenting certain features of its service and for encouraging taxi drivers to breach their agreements with them. Uber moved to dismiss the claim for false advertising for lack of standing because the plaintiffs and Uber were not in direct completion in the same business. The Court dismissed the medallion owners claims because medallion owners do not receive revenue from fares. The court allowed the claims by the taxi cab companies to continue because they plausibly alleged that diversion of riders harms the economic value of their business.

In Greater Houston Transportation Company v. Uber Technologies, Inc., 155 F.Supp.3d 670 (S.D. Tex. 2015) taxicab permit-holders brought claims alleging unfair competition under the Lanham Act and unfair completion under Texas law against Uber and Lyft, Inc. ("Lyft"). Uber and Lyft moved to dismiss the claims.

The Greater Houston court found that Uber's advertising statements regarding the superiority of its service as "safest ride on the road" and "background checks you can trust" were nonactionable puffery. Greater Houston Transportation, 155 F.Supp.3d at 683. However, the court found that the statement "Unlike the taxi industry, our background checking process and standards are consistent across the United States and often more rigorous than what is required to become a taxi driver" applies objective indicia to suggest that Uber has a superior background check process to those of the taxi companies. 155 F.Supp.3d at 686. Accordingly, the court held that the taxi cab permit-holders stated claims under the Lanham Act. 155 F.Supp.3d at 686.

OTHER TYPES OF LITIGATION

In addition to the samples above, Uber has been required to defend wage and hour claims brought by drivers who claim that Uber misclassifies them as independent contractors instead of employees, see, e.g., In re Uber Technologies, Inc. Wage and Hour Employment Practices, 158 F.Supp. 3d 1372 (J.P.M.L. 2016), and claims by potential riders brought under the Americans with Disabilities Act ("ADA"), National Federation of the Blind of California v. Uber Technologies, Inc., 103 F.Supp.3d 1073 (N.D. Cal. 2016). Uber recently settled two California wage and hour class actions California drivers for the sum of $100 million. Tracey Lien, Uber Will Pay Up to $100 Million to Settle Suits with Drivers Seeking Employee Status, LA Times (April 21, 2016). Claims by disabled riders under the ADA continue.

Such claims undoubtedly will involve the determination of whether the courts should view Uber as merely a technology company that provides a software application or by the standards of the underlying actual service provided when the application is accessed.

This article first appeared in Westlaw's Secondary Source Analytical Content, Emerging Areas of Practice Series in June 2017.

ABOUT THE AUTHORS

David E. Cannella is a shareholder in Carlton Fields' Orlando office. As a business civil trial attorney, he has tried jury and non-jury business litigation cases to verdict as lead trial counsel in state and federal court.

Barry Leigh Weissman is a shareholder in Carlton Fields' Los Angeles office. He represents insurance and reinsurance companies in regulatory and transactional matters as well as in all forms of dispute resolution including arbitration, litigation, and mediation in state and federal courts on bad faith, complex litigation, and multidistrict matters.

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