Antitrust Claims: The Next Battleground For Gig Employers

Harry here.  I’m in Seattle this week so a little slow to reply to e-mails but will try and catch up over the weekend.  So if you’re waiting for a response, hang tight.

This week, RSG contributor John Ince takes a look at the big antitrust case Uber is involved with and what it could mean for drivers.  Enjoy and let us know what you think in the comments below.

In this week's round up, John Ince covers Uber's antitrust woes and also analyzes why Uber might be so intent on acquiring billions in cash.

Antitrust Claims: The Next Battleground For Gig Employers

Sum and Substance:  In January, one disgruntled passenger decided to take a stand against Uber founder Travis Kalanick by filing a complaint in the Southern District of New York.

The complaint describes Kalanick as the “proud architect” of a pricing system designed to encourage illicit price-fixing among Uber drivers at the expense of their passengers. Because Uber currently classifies its drivers as independent contractors, the complaint stresses that they should be forced to compete with each other for passengers by charging lower rates. Instead, the surge pricing algorithm sets uniformly higher prices for all drivers in the same area at the same time.

In response, attorneys representing Mr. Kalanick responded that the pricing arrangement between Uber and its drivers is comparable to legal efforts by a manufacturer to control prices charged by distributors. 

U.S. District Judge Jed Rakoff recently denied Kalanick’s motion to dismiss the suit. In his decision, Judge Rakoff held that that plaintiffs reasonably argued that Uber drivers participated in a conspiracy to raise prices, and that the resulting economic benefit to Uber drivers could give rise to a common motive to conspire. 

In his decision, Judge Rakoff noted that antitrust law distinguishes between vertical and horizontal price restraints. Horizontal restraints are created by agreement between competitors, like the individual Uber drivers in this case. The lawsuit claims that Uber drivers created a horizontal conspiracy when they agreed to Uber’s pricing terms with an awareness that other drivers would agree to the same terms.

On the other hand, vertical restraints are created by agreement between entities at different levels of distribution, like agreements between Uber and each of its drivers. Importantly, the law treats horizontal and vertical restraints differently. Horizontal restraints are presumed illegal whereas vertical restraints are only considered illegal when their effect is to unreasonably restrain trade.

In this case, Judge Rakoff determined that the plaintiff adequately pled both horizontal and vertical conspiracies. In coming to this decision, Judge Rakoff noted that “the advancement of technological means for the orchestration of large-scale price-fixing conspiracies need not leave antitrust law behind.” 

Ultimately, Judge Rakoff’s decision may be an early warning sign to gig economy employers. Even if companies like Uber are able to defend or settle suits challenging workers’ employment status, antitrust law could pose an even greater challenge to companies that control prices for those workers.

My Take:  Uber’s legal defense team is engaged in a gargantuan game of Whack-a-Mole.  Just as they have seemingly settled two pesky lawsuits over the employment status of drivers by offering settlement, another lawsuit pops up in New York City that undercuts Uber’s position in the two previous cases.

The new suit alleges that Uber violates anti-trust law by engaging in price fixing.  The new lawsuit is potentially more serious for the company and especially its CEO Travis Kalanick, because he’s the defendant and could potentially face jail time if convicted.  Adding drama to the action is another fraud allegation from the plaintiff saying that Uber hired a private investigator to dig up dirt on the plaintiff , using deceptive means and misrepresenting himself.  The judge in the case, a no-nonsense guy, has allowed all of this to proceed to trial over Uber and Kalanick’s lawyers objections.

Uber’s Antitrust Problem

Sum and Substance: When the ride sharing service Uber settled a pair of class action lawsuits with its California and Massachusetts drivers last month, many saw it as the beginning of the end of Uber’s regulatory problems. In fact, the $100 million settlement’s provision that Uber may continue to classify its drivers as independent contractors signals that the company’s legal problems are far from over. That’s because the real regulatory threat facing Uber may not be from labor standards, but rather from antitrust law. 

Uber still faces lawsuits on the classification of drivers in other states, as well as separate, ongoing litigation with the National Labor Relations Board. Amid wider scrutiny of the “gig economy” and of growing market concentration and profitability in a variety of emerging sectors, Uber could be facing a grave threat to its profitability or even its existence. 

The immediate threat takes the form of an antitrust class action lawsuit against its co-founder and CEO, Travis Kalanick, which will be litigated in the Manhattan courtroom of Federal District Judge Jed Rakoff starting on November 1. At issue is Uber’s mobile app, through which customers order on-demand car rides, and which customer Spencer Meyer alleges amounts to a price-fixing conspiracy. The question is whether independent Uber drivers using the app, all charging the same price and implementing “surge pricing” at the same time, are violating the Sherman Antitrust Act’s prohibition against any “combination … or conspiracy … in restraint of trade.” 

The lawsuit puts Uber and other companies in the online economy on a collision course with antitrust law. It also raises fundamental questions about how American companies treat their workers. It’s not surprising that tech companies can make a great deal of money by skirting employment, antitrust, and even anti-discrimination laws. But do we want them to?

Meyer’s complaint against Uber states outright that the company’s business model amounts to a conspiracy to fix prices and take a cut of the profits. The suit does not question the company’s practice of determining and coordinating the price of app-ordered car rides, but rather takes aim at surge pricing specifically as the most favorable grounds for a challenge.

At issue is whether Uber is what’s known as a “two-sided platform” and whether, as such, it engages in horizontal or vertical collusion. If the answer is vertical collusion, Uber’s fate will hinge on whether its surge pricing ultimately benefits or harms consumers. 

The company claims that it does not fix prices, because drivers are free to compete by offering prices lower than those posted by Uber. But in the litigation’s early phase, Judge Rakoff effectively rejected that argument on the grounds that the app doesn’t provide any mechanism to do that—in effect, drivers would have to hand cash back to customers, and there’s no way to advertise such an offer via the app in advance of a ride.

My Take:  This is a very intelligent article that goes into great detail over the legal arguments. The outcome in this lawsuit will hinge on the finer points, which, while complex, are not all that difficult to understand.

Here’s the gist of it: there are two types of collusion, horizontal and vertical. Uber’s drivers appear on the surface to be horizontal. Horizontal collusion is illegal per se. Vertical collusion can still be illegal but the plaintiff must prove it restrains trade and hurts the consumer. Do surge prices hurt the consumer? Have you asked any Uber passenger who got surge shock?  Of course they do.

From my reading it appears clear this is horizontal collusion.  It’s also pretty clear that prices are being fixed. Judge Rakoff has signaled that he intends to give these arguments a full hearing.  The nub of the problem for Uber is that it maintains all drivers are independent contractors.  To acknowledge otherwise would threaten their business model, by potentially making Uber liable for all kinds of driver reimbursements for things like insurance, car maintenance, mileage and the like.

With the number of drivers Uber has on the road, the potential costs would be staggering – clearly threatening its business model. But if Uber’s drivers are independent contractors, it means that they in effect collude to fix prices. Whoops… Uber is suddenly caught in a semantic trap.  They can’t have it both ways.  If drivers are independent contractors, they’re all violating anti-trust laws when they agree to charge surge prices. If they’re not independent contractors, they’re entitled to reimbursements.  Either way this is tough for Uber.  Good thing they’ve got that $6 billion in the bank.  They may need it to dig themselves out of these legal holes.

Why Uber Keeps Raising Billions

Sum and Substance: It feels like almost every other week there is a new headline about Uber raising more money. “Uber Closes $1.6 Billion in Financing.’’ “Uber Turns to Saudi Arabia for $3.5 Billion Cash Infusion.’’ Last week, we got this one: “Uber to Raise Up to $2 Billion in Leveraged-Loan Market.’’ 

If you add up all the money Uber has raised since it started in 2009 — the idea was born when its founders became annoyed that they could not get a cab in Paris — the ride-hailing app company is on its way to amassing a colossal $15 billion. That’s real cash, not some funny-money, paper-based valuation. (That figure is $68 billion.) It has done all this while still managing to remain a private company, and its chief executive, Travis Kalanick, has insisted that a public offering is not coming soon. “I’m going to make sure it happens as late as possible,” he has repeatedly said. 

Consider this: When Amazon went public in 1997, it raised $54 million and was valued at $438 million. So what exactly is Uber doing with all that money? And what does it say about Uber — and the financial markets — that the company has turned most recently to selling the equivalent of junk bonds? Yes, Uber has to finance an all-out war to gain market share in China and India. But there is more to it than that: Uber’s money-grab is seemingly part of an unspoken strategy to mark its territory.

My Take:  Andrew Ross Sorkin is one of the world’s most astute financial journalists, and he’s got an interesting theory about why Uber keeps going back to the well for cash, even when they’ve reportedly got $6 billion available.  His theory is that Uber is marking its ground – they’re staking out their territory to scare away other potential competitors.  As long as below market prices prevail, cash is the key strategic asset.  It determines staying power in a war of attrition with Lyft and other potential rivals. Sidecar already learned this lesson the hard way.

But wait, there’s another rival out there that has a unique competitive strategy.  Juno hopes to steal drivers away from Uber in New York City by treating drivers better and offering them 50% of the equity in their company.  Tune in to next week’s roundup for an update on Juno.

(Chicago) City Council Passes Controversial But Watered-Down Rideshare Ordinance

Sum and Substance: After much political wrangling and many different revisions, a much-debated new rideshare ordinance was approved Wednesday by the City Council, 36-12. 

The most contentious point, a requirement that drivers be fingerprinted, did not make it into the measure. Instead, a task force will study the issue for six months then present its findings.

Like much of the debate leading up to the vote, the Council meeting was not without political spectacle, as Mayor Rahm Emanuel at one point threatened to adjourn the meeting after Ald. Scott Waguespack attempted to delay the vote. Ald. Anthony Beale, who led the charge for tighter regulation, voted for the measure—which was significantly diluted from when it was originally proposed. A previous iteration would have required at least five percent of rideshare fleets offer disability services before it was watered down. Under the new ordinance, Uber and Lyft will have one year to develop and instate a plan that hits that requirement.

The rideshare giants had previously threatened to pull out of the city if the Council went through with the vote. While both companies no longer operate in Austin, TX due to municipal laws, it seems unlikely that they would pull out of Chicago, the third largest city in the country with nearly three million people. Despite Uber having billions in cash on hand, such a move would likely have a real impact the company’s bottom line.

The move to pull out of Austin has been criticized for allowing competition to creep in while at the same time not generating much public outcry. Meanwhile, the American Federation of State, County and Municipal Employees—which represents the taxi industry—is very clear about its displeasure.

My Take: Score one for Uber and Lyft here.  They essentially got what they want after making threats of leaving Chicago. Fortunately for everybody they didn’t have to pull an Austin here.  Unfortunately for everybody, this is just a temporary victory.  The fingerprinting issue will be back on the table after the study is completed in six months.

Readers, what do you think of this week’s round up?

-John @ RSG