Regulatory Bumps

On October 20, 2010, Uber received its first cease-and-desist order. That was just five months after the launch of a modest operation in San Francisco. Remember that Uber managed only 427 rides in the month before the order, in September 2010.

There were three issues under discussion. The first was whether Uber was a technology company or a transport company. While transportation is heavily regulated by local or state authorities, digital services tend to be lightly regulated, typically at a federal (national) or even supranational level (as with the European Union). They also tend to benefit from privileges and exemptions defined at the early stage of development of the internet to promote innovation and foster the growth of the digital economy.

Uber tried to build on legislation and case-law from both sides of the Atlantic that exempted digital platforms from liability. In the United States, Section 230 of the

Communications Decency Act of 1996 provides immunity from liability for providers and users of an “interactive computer service” who publish information provided by others. Such immunity was originally designed for internet service providers (ISPs) and then extended to search engines and social network platforms. In the landmark case Tiffany v. eBay, the platform was considered non-liable for the sale of counterfeit items by third parties using the platform.10 In the European Union, the E-Commerce Directive11 provides protection against restrictions to the provision of so-called information society services by Member States, and even an exemption of liability for content they host. The Court of Justice of the European Union (CJEU) decided in favor of eBay, exempting it from liability for counterfeited items sold through the platform.12

The second question was whether Uber was providing a transportation service or whether it was merely a digital intermediary facilitating the contracting of services provided by a third party. For Kalanick, the answer was clear. Like all of his previous companies, Uber was based on the platform model. Uber did not own cars or employ drivers; it was only a platform that mediated between drivers and riders. For taxi drivers and public authorities, the situation was not that clear.

The third question was whether Uber was offering taxi services or other types of transport services. Taxi services were regulated by local authorities, in this case the San Francisco Metro Transit Authority. Drivers required a license (medallion) capped in number (around 1, 500 for the whole city) that allowed them to pick up passengers if hailed on the street. Regulated tariffs would apply, and they would be displayed by a certified meter. Black car services were regulated at a state level by the Public Utilities Commission of California. While there was no defined cap on the number of service providers, black cabs had to be pre-arranged and were not allowed to pick up passengers on the street. No price regulation existed for these services.

Uber blurred the distinction between taxicabs and prearranged services, not only in San Francisco, but all around the world. The prohibition on picking up riders on the street was no longer relevant, as the app made it possible to seamlessly prearrange the service with the touch of the screen of a smartphone. Smartphones could also be used as taxi meters. Black cars and later non-professional drivers coordinated by Uber became direct competitors for taxi services. The blurring lines between taxicabs and black car services explain why the first cease-and-desist order was jointly submitted by the San Francisco Metro Transit Authority and the Public Utilities Commission of California.

After years of operations all around the world, the same questions have been raised as Uber has started activities in a new country. Contradictory rulings have been adopted by public administrations and courts. Sometimes the platform business model is not understood. This was the case, for instance, with the England Employment Tribunal, which stated that “The notion that Uber in London is a mosaic of 30,000 small businesses linked by a common “platform” is to our minds faintly ridiculous.”15 However, as the dust settles, some clarity has emerged.

As for the first question - whether Uber provides a communications/digital service - the debate is pretty much solved. Authorities on both sides of the Atlantic have ruled that Uber is not merely a technology company that is exempted from the rules governing transport. This was the position of the PUC in California back in 2013: “Specifically, we reject the argument that [Transport Network Companies] are simply providers of IP-enabled services and therefore exempt from our jurisdiction. We find this argument to be factually and legally flawed and, therefore, do not accept that the method by which information is communicated, or the transportation service arranged, changes the underlying nature of the transportation service being offered.”14 In the EU, the Court of Justice decided in the same direction in 2017: “it must be classified not as ‘an information society service’ [...], but as ‘a service in the field of transport’.”15

As for the second question - whether platforms are intermediating in the provision of services or providing under their own name and liability of the transportation service -there are different answers. State rules in the US do not provide a clear-cut answer to this question. Uber continues to provide an intermediation service, so passengers directly contract with drivers. The debate has been focused on the legal classification of the relationship between Uber and the drivers. It has been said that drivers are under an employment relationship with Uber. Uber has countered by arguing that drivers are self-contractors who provide services to passengers in their own name, only contracting with Uber an intermediation service to connect with passengers.

The Court of Justice of the European Union made a clearer analysis in the Elite Taxi/ Uber judgment.16 The Court confirmed that transport platforms are intermediaries and not the providers of the underlying transport service. The Court repeatedly differentiated between the non-collective urban transport service and the service offered by Uber. The Court confirmed that “passengers are transported by non-professional drivers using their own vehicle,” while the platform provides a different service, which the Court has repeatedly qualified as “intermediation service.” The Court of Justice of the European Union stated that Uber “is more than an intermediation service consisting of connecting [...] a non-professional driver using his or her own vehicle with a person who wishes to make an urban journey.” Thus, the platform is not limited to the transfer of information between the driver and the passenger. The Court confirmed that “the provider of that intermediation service simultaneously offers urban transport services, which it renders accessible [...] and whose general operation it organizes for the benefit of persons who wish to accept that offer in order to make an urban journey.” The platform allows each individual driver to benefit from coordination and the effects of operating as a network: shorter waiting time, less driving time, consequent cost reduction, etc. This is precisely the added value offered by the platform. The Court concluded by stating that the mediation of platforms in multilateral markets transforms the market by facilitating that a previously fragmented demand functions as a structured network.

In any case, this powerful effect of the service provided by the platform does not mean that the platform is the provider of the transport service. The transport service provider remains the driver and the platform provides an intermediation service. An intermediation service offers great added value since it allows each driver to benefit from the network effects. In this way, the Court of Justice of the European Union has validated this new model of industrial organization carried out by platforms in multilateral markets. It recognizes that transport platforms provide an intermediation service, but not the underlying transport service, which remains the ownership (and responsibility) of each individual provider (in the case of Uber, each driver).

As for the third question - whether there is a difference between taxicabs and platform-mediated services - US authorities have understood that the element that differentiates taxicab services from other transportation services is that taxicabs are hailed on the street, so passengers need protection as they have no information on the identity of the service providers, the conditions of the service to be provided, etc. Transport platforms, by contrast, allow passengers to identify the service provider and be aware of the service conditions (including price) before asking for the service. As a result, the regulatory protections for the taxicab user do not necessarily have to be extended to these different services. The US District Court of the Northern District of California confirmed this approach in a 2017 judgment: “In a street-hail situation, a passenger is (as a general matter) more likely to be in a vulnerable position compared to a passenger who prearranges a ride. That is, in a street-hail situation, the passenger typically has an immediate need for transportation services and therefore, in a more vulnerable position, lacks the assurances that come with a pre-arranged ride. Thus, there is a conceivable basis for a differential approach to regulation, including, e.g., closer regulation of rates and imposition of requirements for taxis.”17 In this way, the debate was closed, at least in California. Other jurisdictions are following a similar path, such as Chicago, Washington DC, and London, where traditional black cab services are differentiated from so-called private hire vehicles.

The largest US states have defined a new category of prearranged transportation services providers, managed by transport platforms and provided by non-professional services: transport network companies (TNCs). TNCs are not taxicab services or black car/ limo services. It is important to underline how the same name recognizes the relevance of the network effect. The California Public Utilities Commission set the example in 2013, defining a TNC as: “an organization [...] that provides prearranged transportation services for compensation using an online-enabled application (app) or platform to connect passengers with drivers using their personal vehicles.” Services are provided by drivers using their personal vehicles. Platforms connect drivers with passengers using an online app. The platform must have a license and meet a series of obligations to ensure safety: the platform has to contract insurance, conduct criminal background checks for each driver, and conduct vehicle inspections before starting operations and then once a year.

TNC regulations have been adopted by a high number of US states, including Illinois, Massachusetts, New York, and Texas, with interesting twists in some jurisdictions. In California, licensed platforms cannot own the vehicles. In New York, licensed platforms cannot mediate taxicab services. In Massachusetts, TNCs are obliged to pay to state authorities $0.20 for each ride. This revenue is then distributed among state and local authorities for infrastructure funding: 10 cents go to municipalities for transport infrastructure funding, 5 cents go to a state transportation fund, and 5 cents go to fund transition to competition for taxis.18

In conclusion, there is growing consensus around the role of transport platforms as intermediaries facilitating the contracting of transport services between drivers and passengers connected by the platform. However, such an intermediation services are not limited to connecting drivers and passengers, as they create network effects that transform the underlying services and creates a new offer of services. Consequently, transport platforms are increasingly subject to regulatory obligations such as licensing (even if not capped in number), safety (drivers and vehicles test, insurance), and even taxes.

 
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