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Antitrust: Uber’s Uber-Dangerous Legal Threat

Posted on April 26, 2016

Most people are aware that ride-sharing giant Uber Technologies, Inc. is one of the world’s most successful companies formed in the last ten years, evidenced by Uber’s mind-boggling valuation that recently surpassed General Motors and Ford.  However, this success has not come without roadblocks along the way, many of them legal.  Uber built its high valuation on a business model that uses independent contractors, enabling the company to avoid covering driver expenses such as gas and mileage or providing benefits such as health insurance, Social Security, overtime, or sick days.  Uber recently settled two class action lawsuits with its drivers in California and Massachusetts for up to $100 million, with agreements that the drivers will remain classified as independent contractors, not employees.  Uber will pay the drivers $84 million, with an additional $16 million to come if the company goes public and meets certain performance metrics afterward.  On the same day as this settlement, Uber was also hit with an $11.4 million fine by a Pennsylvania regulator for beginning operations in Pennsylvania without being properly licensed.

While independent contractor/employee and local licensure issues will likely continue to trouble Uber, Uber’s most dangerous and even existential legal threat may be found in a class-action lawsuit filed against it late last year in the U.S. District Court for the Southern District of New York.  The problem for Uber is that if its drivers really are independent contractors like it argues, Uber could be breaking a whole different set of laws: the antitrust statutes that protect U.S. consumers from corporate collusion.  In the lawsuit entitled Spencer Meyer v. Travis Kalanick, Plaintiff Spencer Meyer alleges that CEO and co-founder of Uber Travis Kalanick “orchestrated and facilitated an illegal price-fixing conspiracy,” in violation of federal and New York State antitrust laws.  The Complaint states that Uber “has a simple but illegal business plan: to fix prices among competitors and take a cut of the profits.”  The argument goes like this: If all of Uber’s drivers are in fact independent contractors, then Uber is not permitted to secretly conspire with those independent contractors over what to charge customers, which constitutes price-fixing, a basic antitrust violation.  Because Uber’s technology allows all of its independent contractors to set identical prices, the lawsuit reasons that Uber is a price-fixing scheme that must shut down and reimburse its customers for overcharging them.

Uber’s so-called “surge pricing” elevates the cost of a ride according to the demand for drivers.  Drivers cannot opt in or out of a price surge, and they do not bid with each other for the cost of a ride.  Rather, the price is locked into the app.  Basically, if many people are looking to catch an Uber in a given area, the price “surges” upward.  If not, it goes back down.  Using Uber’s secret algorithm, the price of a ride rises or falls until supply matches demand.  The Complaint explains: “If Uber were to become a transportation company and employ drivers, it would be free to compete with other companies using its pricing algorithm.  But Uber has refused to become a transportation company.  Consequently, drivers using the app are independent firms, competing with each other for riders.  They should compete on price . . . .  Instead, they have agreed to Kalanick’s scheme to fix prices among direct competitors using Uber’s pricing algorithm.”

District Court Judge Jed Rakoff recently rejected Uber’s motion to dismiss the Spencer Meyer case and set a trial date for November 2016.  Commentators have noted that Judge Rakoff is a tough draw for Uber, as he has become known as a judge with no qualms about taking on big business interests.  Years ago, Judge Rakoff first gained national attention when he rejected government settlements with big banks on the grounds that they were too lenient.

Uber’s strong and consistent stance that its drivers are independent contractors undoubtedly undermines its legal argument in the antitrust arena.  Last year, for example, Seattle passed an ordinance giving Uber drivers the right to unionize.  Uber argued that its drivers are independent contractors who do not have the right to unionize, further reasoning that allowing them to unionize would constitute . . . wait for it . . . illegal price-fixing.  Price-fixing is, of course, exactly what Uber is trying to argue it is not doing in the Spencer Meyer case out of the other side of its proverbial mouth.  In short, Uber’s chances in the Southern District of New York do not look great.  Stay tuned.

For questions regarding the above, contact the attorneys at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971.

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