Prop 22 is Legally Flawed

Uber and Lyft “gig economy” marketplaces

To nail down the Proposition 22 in one sentence, Uber, DoorDash, Instacart, and Lyft aim to keep their gig workforce (classified as third party contractors) as independent contractors, but offer them an “Earnings Guarantee” for the services performed as independent contractors subject to the 120% of minimum wage plus 30 cents per mile compensation and some other perks. Obviously, the effort is to remove the effects of AB 5 that aims to force Uber and Lyft to offer transportation services, instead of labor marketplaces.

The reason Proposition 22 is legally flawed is that it aims to legalize price fixing. Uber does not provide transportation services, instead, Uber determines the terms on which independent drivers are allocated to customers and the prices that will be charged to them, including the share earned by the driver. To facilitate the scheme, Uber utilizes dynamic pricing model.

“For the avoidance of doubt: Uber itself does not provide transportation services, and Uber is not a transportation carrier. It is up to the Transportation Provider to offer transportation services, which may be requested through the use of the Application and/or the Service. Uber only acts as an intermediary between you and the Transportation Provider. The provision of the transportation services by the Transportation Provider to you is therefore subject to the agreement (to be) entered into between you and the Transportation Provider. Uber shall never be a party to such agreement.” Source: Uber ToS.

According to Uber, “in the United States, upfront prices are based on the estimated length and duration of the trip. Estimates can vary based on demand patterns and real-world factors like traffic.” Uber holds absolute control over the pricing of all trips, as well as the distribution mechanism of the supply side.

In January of 2020, Uber has released new test feature in select California service areas to enable drivers at the Santa Barbara, Sacramento and Palm Springs airports to set a fair based on a multiple of Uber’s base, time and distance rates for UberX and UberXL trips.

As part of the measure to enable drivers set multiples of the Uber’s base rates in select areas in California, Uber states in its directives to drivers that “it is illegal under state and federal law for anyone, including rideshare drivers, to engage in price fixing. This includes agreeing or coordinating with other drivers (in airport staging lots or elsewhere) on pricing and surge pricing. The law requires that drivers must make decisions about pricing and surge pricing on their own.”

The purpose of price fixing is to coordinate pricing for mutual benefit. Price fixing is an antitrust offense that is considered “per se” unreasonable restraints of trade. The courts have reasoned that price fixing has no legitimate justification and lack any redeeming competitive purpose and should, therefore, be considered unlawful without any further analysis of their reasonableness, economic justification, or other factors.

In California, Uber is a public utility, and operates under the jurisdiction of the California Public Utilities Commission. California Public Utilities Commission regulates public utilities within its jurisdiction, including by setting rates for transportation services provided by Uber’s “partner drivers.” Uber is considered a transportation network company under state law. The California Supreme Court has ruled that the state utilities commission has jurisdiction over its rates and has been studying the ride-hailing company’s rate-setting procedures for the past seven years, but has not acted to regulate those rates or announced any intention to do so. This ruling, in effect, saved Uber from the claim by taxi companies on the grounds of Sherman Act violations.

The California Supreme Court has ruled that the government, not Uber, has the authority to set prices for rides. This ruling, however, does not extend to services such as UberEats that also set prices for independent delivery drivers, but are not under the CA PUC jurisdiction registered as TNC’s. UberEats and DoorDash continue to operate in a direct violation of the Sherman Act because they set rates and service levels for parties outside of their business firm, claiming “benefits” to consumers.

Voters cannot be asked to set pay rates for independent contracts, since either the contractor itself, or the government has the authority to do so. This would be the same thing as asking voters to set rates for power and gas utilities, or taxi cab fares. Prop 22 is a legally flawed proposition and, even if passed, unlikely to become a permanent law.

Uber has been a subject of several antitrust legal cases over the last few years. Antitrust law generally holds that price setting activities are permissible within business firms, but bars them beyond firm boundaries. Uber does not actually provide services to consumers directly, instead, drivers are independent contractors and not employees who work for consumers directly.

In April 2019, National Labor Review Board has stated that drivers providing personal transportation services using app-based ride-share platforms are independent contractors. The reasoning was that “the Uber system afforded drivers significant opportunities for economic gain and, ultimately, entrepreneurial independence.” This reasoning, however, doesn’t take into account the fact that Uber determines price for each trip serviced by individual drivers. Of course, “entrepreneurial independence” requires each independent driver to offer prices independently of Uber, unless the price is fixed by the government authority.

The antitrust law’s firm exemption strictly applies to entities that a platform have a direct control over, such as employees. The core of Uber’s business model is the coordination of consumer prices across drivers as means to deliver upfront fares calculated by an algorithm. Uber has managed to avoid directly litigating this antitrust problem by compelling a consumer (Meyer v. Uber Technologies, Inc.) lawsuit to be moved into arbitration.

Online labor marketplaces like Uber, Lyft, Handy, Amazon Home Services, DoorDash, and Instacart have perfected a process where workers deal bilaterally with gigs whose employers have none of the standard obligations of employers, while the platform operates the entire labor market to its own benefit — what some antitrust experts call a “for-profit hiring hall.”

Uber drivers are not employees, and hence Uber setting the terms on which they transact with customers, including fixing the prices charged to customers, constitutes a violation of the ban on restraints of trade in the Sherman Antitrust Act of 1890.

Laws such as AB 5 are not a viable alternative to the enforcement of the antitrust laws in the United States. Uber, like many other gig economy platforms is a price fixing scheme, and has been for years, around the country, and around the world. It is highly unlikely that Uber and Lyft will ever hire anyone — these products are more likely to utilize “franchise” model as a loophole that allows for price fixing in franchisor-franchisee relationships.

Under the Sherman Act all price fixing is considered inherently illegal. Unfortunately, in the case of Leegin Creative Leather Products Inc. v. PSKS Inc. (2007) the Supreme Court pivoted to state that setting prices in franchisor-franchisee relationships is not inherently bad, as long as the policy meets the “rule of reason.” This is exactly the argument Uber and Lyft have been making when justifying their price fixing activities. Obviously, this loophole is the go-to strategy for gig economy companies before any talk of hiring gig workforce even begins to take place.

By forcing Uber to change their business model from a marketplace to a transportation service, the government actually destroys free market forces and will likely force them to establish local franchises instead. The government must enforce the existing antitrust law with respect to the actual model Uber choose to offer — a marketplace.

Voters, on the other hand, should not be asked to set prices or rates for services that operate under the jurisdiction of the PUC — this is what these government agencies are there for.

This position and the reason why Uber chooses to violate Sherman Act is in on record with the DOJ

Author: Litesand

Antitrust, real estate, e-commerce, fintech, proptech, bigtech

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