Are Uber and Lyft Marketplaces or Transportation Companies?
Uber and Lyft have maintained from the start that they’re exempt from AB5 because they’re not transportation companies, merely purveyors of the software that drivers and passengers use to arrange rides.
Uber does not offer consumers transportation services, it merely offers “to connect passengers with drivers using a personal vehicle.” All services are offered by the driver, and the driver is responsible for all the costs of offering said services.
If Uber drivers work for Uber, then Uber must possess a transportation permit. Until it offers transportation as a service, it is a price-fixing platform, not an employer. This gig relationship argument spans into several industries, other than gig driving.
The question of whether a platform is a marketplace for a service or a service is a matter outlined by the Terms of Service provided to users. An entrepreneur must be free to build a marketplace to aggregate services, including ride-hailing, as long she does not interfere with the way vendors price and deliver their services to consumers. If I want to call myself a marketplace, without having to offer a service itself, I should be able to do so.
For example, if I were to build a babysitting matching service, the government cannot force me to offer services I wish not to offer (the service to babysit), but it can force me to offer matching services for babysitters in compliance with antitrust law. If a babysitter wants to offer her services independently, who is the government to prevent her from doing so? This is the main flaw behind enforcing laws such as California’s AB5.
“Uber simply would not be a viable business entity without its drivers” is a flawed argument. “Craigslist simply would not be a viable business entity without people offering various services” is just as seemingly viable, so what?
The government must accept Uber’s argument that it is a platform and that it doesn’t want to offer transportation services, but it also must ensure that Uber does not exert financial control over drivers in self-interest to hide their take rake.
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 the price for each trip serviced by individual drivers. Of course, “entrepreneurial independence” requires each independent driver to offer prices independently of Uber.
This is a fact: Uber drivers are not currently employees, so then they must be independent businesses, and hence Uber setting the terms on which they transact with customers, including fixing the prices charged to customers, constitutes a violation of the Sherman Act’s ban on restraints of trade.
In 1951 antitrust case United States v. Richfield Oil Co. the court ruled unequivocally for the government on the grounds that Richfield Oil Co. exercised de facto control over “independent business men,” in contravention of the antitrust laws, even though they were not employees of the company. This has become the basis for delineation between the realm of labor and antitrust: if subordinate entities are “independent business men” and not employees, it is illegal to exercise control. The United States Supreme Court affirmed the same basic principle against coercion of non-employees by vertical supply contract in the 1964 case Simpson v. Union Oil Co. of California.
Uber Technologies has been a subject of several private antitrust legal cases in the United States and elsewhere. The main argument behind litigation rests with the fact that Uber does not actually provide services to consumers directly, instead, drivers are independent contractors and not employees who work for consumers.
Antitrust law generally holds that price-setting activities are permissible within business firms, but bars them beyond firm boundaries. The antitrust law’s firm exemption strictly applies to entities that a platform has 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. Spencer Meyer had recently asked a Manhattan federal judge to overturn an arbitration win for Uber, arguing that the arbitrator only ruled in Uber’s favor because he was scared.
Why is this important? Take rake. Setting prices for independent service providers is a mechanism that protects Uber’s high take rake (up to 40%) from the cheaper competition. This difference is evident to those of us building e-commerce marketplaces — most people are oblivious to this flaw.
Antitrust law is breached when marketplaces impose rate agreements or price parity agreements on vendors in order to hide excessive rakes. The gig economy is notorious for this. Out of the Big Five, Amazon is probably the only one that genuinely breaks antitrust law with Amazon Home Services platform. Amazon is not hiring anyone on the Amazon Home Services platform either, but merely price-fixes services for local pros.
Online labor platforms like Uber, Lyft, Handy, Amazon Home Services, DoorDash, and Instacart have perfected a process where workers deal bilaterally with gigs whose employers (consumers) 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.”
In their scheme, Uber exercises financial control over independent parties who work for themselves, this is very different than Uber exercising financial control over independent contractors who work for Uber.
Misclassification is a secondary problem in gig economy because one could argue that AB5 effectively requires every service provider who advertises on any platform, such as Craigslist, to be hired by that platform. Of course, Craigslist cannot be required to hire genuine users, but users genuinely rely on the platform for business. This is a dilemma — is there a difference between Uber and Craigslist? From an e-commerce perspective, both are e-commerce platforms, one is raked, and another is not. The existence of a take rake is not a differentiation.
Service providers in gig economy schemes are independent contractors or businesses that are responsible for their equipment, time, costs of doing business, and any other contingencies small business owners typically take into account when pricing to perform their services.
In Uber-like models, service providers give up entirely negotiation power and, instead, are handed a 15 percent, a 20 percent, and sometimes a 40 percent referral fee or a take rake for the privilege. The revenue from these fees is aggressively turned into ads by networks to gain more attention from the demand side.
Service providers who choose to participate in Uber-like models are not innocent, instead, these small businesses are direct participants of the price-fixing methodology. Each participant is looking to gain more business while having to avoid paying upfront advertising and marketing costs or having to compete for consumers directly. Quitting a dominant price-fixing network for any service provider almost always means losing a lot of “free business” without having to pay upfront costs.
The basic premise behind open and free markets is an ability for service providers to negotiate prices and levels of service individually with consumers, without collusion. This means that Uber drivers must compete with one another, and also keep an individual holding that prevents service providers from offering services too cheap. As soon as this basic concept fails, the free-market experience fails as well.
Outsiders often consider a “new law” as a solution to the Uber problem, but for all marketplaces, the law is the same it has always been — the Sherman Act. The Sherman Act approach has a national scale, AB5 is local and highly questionable. This paper written by Marshall Steinbaum is probably the best explanation of this issue from an economic and legal perspective
My product, HomeOpenly, operates to break similar collusion agreements in real estate. HomeOpenly is a genuine marketplace for real estate professionals. We cannot be required to hire real estate agents if we simply offer match results for consumers with savings offers from local agents. Our product has a zero rake and we don’t set rates for agents or control performance of their services.
However, HomeOpenly service would not exist without real estate agents signing up, user feedback, or an ability to monitor and improve quality of service providers. As a marketplace, we can freely impose quality standards on service providers as a way to maintain and improve experience for all marketplace users. Any Internet platform delivers content for a living, be that as it may, content of pricing, service availability, and e-commerce.
To deliver a service of aggregating local offers for X services is very different from actually offering a service X locally.
A legitimate breach of antitrust law must be the cause of action against a gig platform. Uber, Lyft, DoorDash will continue to argue that they operate as Internet platforms, and their argument rests on the fact that a government cannot require a platform to hire their users, otherwise, it will need to start requiring Craigslist to hire car mechanics, babysitters, and dog walkers.
Obviously, from the government’s perspective AB5 works — if a company is forced to hire “Dashers” problem is solved — they become part of the DoorDash and the company can set rates for their services, the government begins to collect taxes. This approach does not resolve the fact that companies like Uber and DoorDash have been violating the Sherman Act for close to a decade, nor does this solve the global problem Uber has created around the world. AB5 prevents entrepreneurs from building new and improved impartial marketplaces for the fear that successful platforms would be required to hire users.
It is important to recognize the fact that “Dashers” are just as guilty as DoorDash and Uber drivers are just as guilty as Uber. Every price-fixing agreement has two parties to it, the gig economy is just a very “unfair” price-fixing agreement where “Dashers” and Uber drivers are getting the short end of the stick, but it is still a price-fixing agreement, nonetheless.
To defend Uber driver is legally wrong because the defense is aimed at someone who breaks the antitrust law. When a restaurant enters into a price parity agreement with DoorDash, they are guilty as well — consumers end up paying for this in the long run.
This is why Meyer had filed his case as a consumer against Uber, and Davitashvili as a consumer against food delivery services. Uber drivers, “Dashers,” and restaurant owners have no case in court because they are all part of the antitrust problem.
How will Uber get out of this is an impossible question, but for those of us building the next generation Open Marketplaces the more important question is — how long will it take for the DOJ and FTC to go after price-fixing over the Internet? Too many marketplaces on the Internet, in one way or another, employ price fixing or price parity clauses as means to hide their excessive take rakes.
