Uber’s Antitrust Problem

Uber’s Antitrust Problem

Uber recently settled one lawsuit, but its drivers remain contractors and several court challenges loom—including one that puts the ride-sharing service in the crosshairs of antitrust law.

May 11, 2016

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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.”

AP Photo/Julio Cortez

Smart phones displaying Uber car availability in New York, November 21, 2014. 

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? Some argue that the Uber conundrum calls for the creation of a third “independent worker” category of employment that gives it the control it needs to make its business model work, while safeguarding the flexibility its drivers prize. If courts and policymakers agree, it would effectively carve out a tech-sector exception to the regulatory principles governing the economy since the New Deal and the Gilded Age.

 

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.

The question of whether Uber is a “two-sided platform” is important because it defines Uber’s role in the market for on-demand car rides. To be considered “two-sided,” a company must sit between final customers and upstream goods- or service-providers, operating as the unique seller to customers and as the unique buyer to producers. If the courts find that all that Uber does is provide a convenient app to independent drivers, then it would be no more involved in the ride-sharing market than, say, car manufacturers, and by implication would be no more responsible for the industry’s anti-competitive practices.

Most major tech-sector players structure themselves as two-sided platforms. Amazon, for example, buys books, household goods, and original programming to stream, and sells them to customers via its website and mobile app. Google, Facebook, and Apple are all two-sided platforms as well: They connect customers with app suppliers via “app stores” and the like, and the programmers of those software programs tailor their products to be sold on particular platforms.

The last famous antitrust case in the the tech sector was in the 1990s against Microsoft, which was sued on the grounds that its Windows operating system amounted to a platform monopoly with dominant market share for operating systems in desktop computers. The Justice Department alleged that by bundling Internet Explorer with Windows on basically every new PC, Microsoft was abusing its control over nearly all end-users to favor its own web-browsing software (Explorer) over that of its then-chief competitor, Netscape. That case forced Microsoft to make Windows compatible with other upstream web browsers, and to make its business software package Microsoft Office compatible with Apple's operating system—a key reason for Apple's renaissance over the last two decades.

On the surface, the notion that Uber is a two-sided platform when it comes to its on-demand app-based taxi service may seem self-evident. After all, customers use the app to contact an Uber driver; Uber sets the price and charges the customer, and the driver's ultimate payment comes from Uber, according to rates Uber sets (including surge pricing). To the lay observer, Uber is buying something from drivers—rides—and selling them to customers.

But Uber's own position is that it is not a two-sided platform. In its motion to dismiss Meyer’s antitrust suit, Kalanick’s lawyers wrote that “Uber is not a transportation company and does not employ drivers to directly provide transportation services” and that “[d]rivers using the App are independent firms that are in competition with one another for riders.” In fact, Kalanick's lawyers contend that Uber is an upstream supplier that licenses an app to downstream drivers, who then use it to make contact with their own customers—suggesting that if anything, the drivers are the platform for the app.

Some economists argue that Uber and comparable companies belong to a class by themselves. Economists Seth Harris and Alan Krueger have proposed that Congress create a “third category” of employment under labor law built around independent workers. Harris and Krueger argue that Uber’s market structure is triangular, with customers, drivers, and the company itself each occupying separate nodes. Uber's own lingo describes its workers as “driver-partners,” an apparent bid to avoid labeling them employees. In fact, the “driver-partner” construct cleverly allows Uber to tie workers closely to the company when it’s convenient, and to hold them at arm’s length in the context of employment law.

The problem, though, is that if the court (and, eventually, antitrust regulators) don't buy that the drivers are completely independent and Uber itself is not a player in the market for on-demand car trips, then that “we're not a platform” stance will end up doing the company’s case a whole lot more harm than good. The reason is that if Uber isn't a two-sided platform, then it can't claim its business model is built on vertical collusion.

 

If Uber is indeed engaged in some form of collusion in the market for on-demand car rides, the courts will need to determine whether price fixing by its drivers amounts to what’s known as a “vertical” or a “horizontal” conspiracy. Horizontal conspiracies are agreements between competitors not to underbid one another to keep prices high. A horizontal conspiracy fits the stereotype of an anti-competitive practice: a proverbial smoke-filled room in which chummy pseudo-competitors conspire against consumers.

AP Photo/John Duricka

During the Reagan administration, under the influence of The Antitrust Paradox, a book by legal scholar Robert Bork, pictured here, all vertical collusion was considered beneficial to consumers, and thus released from antitrust scrutiny.

From a legal perspective, horizontal collusion cases tend to be straightforward. Under current jurisprudence, horizontal collusion is “per-se” illegal under the Sherman Act, meaning that it is prohibited regardless of its real-world effect. Once a court decides that horizontal collusion is taking place, it prohibits the behavior and assesses civil or criminal penalties on the parties to the conspiracy.

Vertical price-fixing cases, by contrast, are more ambiguous. Under some circumstances, it's legal for a supplier to contract with one or more buyers to sell intermediate goods at a fixed price. For instance, a group of downstream companies might not be able to buy a needed product unless they can collectively guarantee its manufacturer a high enough volume and sale price to ensure profitability. But in other cases, vertical price fixing crosses the line. An example might be a downstream company that tries to drive its competitor out of business by conspiring with a shared upstream supplier to jack up the price for other purchasers.

Courts have differed over how to interpret vertical price-fixing. During the Reagan administration, under the influence of Robert Bork's book The Antitrust Paradox, all vertical collusion was considered beneficial to consumers, and thus released from antitrust scrutiny. More recently, vertical collusion has been subject to what’s known as the “Rule of Reason,” meaning that it’s been assessed based on its real-world impact. The sole measure of real-world impact has typically been what’s known in economic parlance as “consumer surplus,” as opposed to market competition. Thus, even if a vertical price-fixing conspiracy harms a downstream competitor, if the ultimate outcome is better for consumers, the vertical price-fixing is permissible.

 

The Uber case will hinge in part on the legal precedent set by United States v. Apple, Inc. the so-called “Apple e-books” case, decided against Apple in 2013. In that case, a group of publishers fought back against Amazon's dominance of the market for e-books by joining with Apple to launch a rival e-books platform. A federal district court ruled that in that case, Apple was party to a horizontal conspiracy among publishers to keep prices and profit margins high. The court never ruled directly on whether the presence of a second e-book platform in the market helped or harmed consumers, but evidence presented in the case made clear that the presence of the second platform drove up e-book prices.

The Apple case was heard in the same federal district court where the Uber case is pending. That means that if the facts are held to be materially the same, the Apple ruling about horizontal collusion is binding, and the question of whether or not Uber benefits consumers is moot: Its collusion with drivers is per-se illegal.

But what happens if the court determines Uber and its drivers are engaged in a vertical conspiracy? This is where the question of surge pricing as the specific target of the lawsuit comes into play.

If Uber is found to be a two-sided platform, setting the stage for a finding of vertical (not horizontal) collusion, then Uber's effect on the welfare of consumers in the market for on-demand car rides becomes the deciding issue in the case. If the lawsuit challenged Uber's entire business model, then Uber would have a strong defense at this point, because its rides are generally cheaper than traditional taxi trips, making a textbook case for improved consumer welfare.

But the lawsuit is about surge pricing: Uber’s practice of charging consumers more than they would pay traditional taxis in times of peak demand. What matters there is the elasticity of driver supply when there's a surge. Consumers may be paying more, but are they getting their rides more quickly and efficiently than they would from a fixed supply of traditional taxis? On that question, the verdict is still out: The sole extant study of the matter does find a supply response, but the study was conducted by a researcher on Uber's payroll.

Moreover, the study doesn't ask the relevant question: How much shorter are wait times during price surges, and how do they compare to waits for traditional taxis? Instead, the Uber-funded study focuses on whether drivers spend more time logged into the system during surges. The whole reason surge pricing is controversial is because anecdotal evidence suggests consumers are paying higher prices, but the availability of rides doesn't change much—thus reducing consumer surplus.

The leading economic justification for Uber is that it allocates a scarce good—car rides, especially in periods when they are hard to obtain—to the consumers who value them most. The reason why the “free market” is supposed to be a successful mechanism for allocating scarce resources is that it solves the problem of excess demand—many people lunging for the one available taxi in a rainstorm, say—by increasing the price. Thus, the person who most values staying dry (or who is simply the richest) gets the cab. But using price increases to allocate scarce goods benefits the company, not consumers, and the only justification for vertical collusion under the Sherman Act is improved consumer welfare.

 

An oddity of the Uber lawsuit is that it is leveled against the company’s CEO, Travis Kalanick, and not against Uber itself. One explanation is that the plaintiff is attempting to strategically maneuver around the mandatory arbitration clause contained in Uber's user agreement. Kalanick has himself acted as an Uber driver in several instances—as a publicity stunt for the company. That ties him personally to any collusion among the supposedly independent drivers, making him vulnerable to the accusation that he is a member of a horizontal price-fixing conspiracy.

Imaginechina via AP Images

An oddity of the Uber lawsuit is that it is leveled against the company’s CEO, Travis Kalanick, pictured here, and not against Uber itself.

Whatever the case, Kalanick's lawyers have chosen not to invoke the mandatory arbitration clause—they could have mounted the argument that the lawsuit against him personally was a transparent maneuver around a binding agreement. That they did not may simply reflect their initial underestimation of the case against Kalanick. Or it could reflect a decision not to risk that the court might set aside the mandatory arbitration clause in all of Uber's user agreements.

 

Uber is the biggest and best-known player in the so-called gig economy—the tech-sector version of what David Weil, the administrator of the Department of Labor's Wage and Hours Division, has called the “Fissured Workplace.” In this emerging sphere, labor market functions that were once performed within the walls of one firm and codified in law and custom as “employment” are now stratified to a multitude of contracted labor suppliers. These suppliers compete to lower costs to their clients and exact these savings from workers in the form of lower wages and benefits. Firm-level employment is increasingly stratified, economic research shows, and that stratification is one of the main causes of rising income inequality.

Last year, the Labor Department published guidelines aimed at updating labor law enforcement to reflect this fissured workplace, and to ensure that it does not exclude workers from the benefits and legal protections to which their work entitles them. One outcome of that increased regulatory scrutiny is stepped-up enforcement actions against Uber at the state and federal levels, including the National Labor Relations Board's contention that the independent contractor classification for Uber drivers is an illegal stratagem to avoid driver unionization.

This enhanced scrutiny is what prompted Krueger and Harris to propose that independent workers constitute a “third category” of employment, a plan that would effectively carve Uber and similar “gig economy” firms out of 20th century employment laws. Their idea is to give Uber the control that it needs over its workforce to operate according to its current business model, while preserving drivers' autonomy to work for multiple services during the hours they choose.

The real-world impact, however, would be to solve Uber's regulatory problems at a stroke—giving the company a means to thread the needle between labor and antitrust laws. Harris and Krueger explicitly call on Congress to create “an ‘independent workers exemption’ from any antitrust laws that might infringe upon their efforts to organize and bargain through the imposition, for example, of court injunctions or other judicial remedies.” Such an exemption would gut Meyer's lawsuit and any subsequent enforcement action from the antitrust authorities.

The Uber lawsuit captures the key question facing policymakers struggling to regulate the “gig” and “platform” economies: Are the new behemoths of the tech sector innovators that make the economy more efficient by “disrupting” antiquated business models? Or are they just the trusts of a second Gilded Age, their new-fangled apps the equivalent of the railroad networks that monopolized commerce and access to markets 126 years ago, when the Sherman Act first took effect?

Until now, Uber and its fellow tech giants have managed to mystify policymakers and judges with double-speak regarding their relationship with employees. But in his decision allowing the case to move forward, Judge Rakoff wrote: “The advancement of technological means for the orchestration of large-scale price-fixing conspiracies need not leave antitrust law behind.” Now one court has the chance to decide whether Uber can continue to have it both ways.

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