California cities sue Uber: Is it destined to become just another taxi service?

On Tuesday, the district attorneys for both Los Angeles and San Francisco filed lawsuits against Uber alleging it misled customers about its background checks. How much regulation can ride-sharing firms absorb before they become simply another taxi or livery service?

The upstart ride-sharing industry hit some bumps in the road this week. On Tuesday, the district attorneys for both Los Angeles and San Francisco filed lawsuits against the $40 billion giant, Uber, alleging a slew of unlawful business practices.

These include: misleading consumers about the nature of their driver background checks, collecting but not turning over airport fees, and using fare calculations that have not been approved by the state of California. 

At the same time, Lyft, a competitor that was also sued for similar violations, agreed to settle for $500,000 in civil penalties, abide by airport regulations, and submit its phone app to the state for verification of accuracy in calculating fares.

Pushback is nothing new to this nascent industry, but the growing force has some questioning how much regulation the new sharing economy model can absorb before these firms become simply another taxi or livery service.

 On the one hand, researchers suggest the industry is simply undergoing a predictable evolution. Research of shared-use mobility services – car-sharing, bike-sharing, ride-sharing – have shown that companies “can continue to maintain their roots in the sharing economy while complying with regulations,” says Susan Shaheen, co-director of the Transportation Sustainability Research Center at the University of California at Berkeley. 

Regulations will be able to find a middle ground for transportation network companies, she says, “to remain distinct from taxi services over time.”

But that middle ground so far appears elusive for the new industry. The California lawsuits come at a moment when Uber faces a number of challenges in the more than 250 cities in which it operates around the globe. The company is also facing a lawsuit in Portland, Ore. Madrid recently issued a cease and desist order on the company, while Delhi and Bangkok banned its operation. Meanwhile, Uber drivers in a number of US cities have begun seeking to unionize to strengthen their demands for better working conditions and pay.

Uber also did not help its cause in November, after an eyebrow-raising Buzzfeed report about a senior executive at a dinner in New York who proposed that the company spend $1 million to hire a team of opposition researchers to “dig up dirt” on media critics. The company subsequently said it does not and will not investigate journalists.

Some critics suggest that these ride-sharing firms are destined to return to the regulatory fold of existing livery services.

Uber is not a ride share company, as it claims to be, says Arthur Goldstein, partner at Davidoff Hutcher & Citron a law firm that represents the Taxicab Service Association.

“They are no different than any other car service company that dispatches drivers to pick up a passenger. Instead of a dispatcher using a two-way radio they use a smart phone,” he notes via e-mail. 

Mr. Goldstein says many car services have drivers that own their own cars just as Uber drivers do. “They are a car service company and should comply with all rules, regulations and local laws just like everyone else does,” he adds. 

In response to a request for comment, Uber spokeswoman Eva Behrend e-mailed the following: “Uber is an integral, safe, and established part of the transportation ecosystem in the Golden State. Uber has met with the District Attorneys to address their concerns regarding airport operations … background checks, and operation of the app. We will continue to engage in discussions with the District Attorneys.”

As an extension of the sharing economy model, Uber is a disruptive business model, points out Jim Gregory, chairman of Tenet Partners, a brand innovation and marketing firm in New York.

“It is a threat to the traditional taxi businesses around the world. The success of Uber in metropolitan communities such as New York City indicates a huge demand for such an innovative business. When consumer demand is combined with the deep pockets of a well-financed start-up, the odds are in favor of the new company to win the battle of the brands,” he says.

However, he points out that while Uber needs to comply with the local, state, and government laws regarding transporting of passengers, “if they are morphed into becoming a traditional taxi company, then they have lost the branding edge that they enjoy now.”  

The jury is out on the future of this particular insurgency, says Jonathan Askin, professor at the Brooklyn Law School in New York.

“It’s embarrassingly easy for an insurgent, unfettered by regulation, to step into any state-supported, quasi-monopolistic or cartel-like industry, to bring a few newfangled tech tricks and tools, to cherry pick customers, and to stomp all over a tired industry that never had much incentive to innovate,” he says via e-mail.

But innovation needs to be balanced with protecting consumers, and not all regulations are created equal, others add.

Some regulations are designed to benefit consumers, such as disability requirements, insurance coverage, and driver background checks, points out Michael Risch, a professor at the Villanova University School of Law. Some regulations, even when applied to taxis as well, “are unnecessary and costly,” he says via e-mail.  

It is difficult to answer what effect enforcing regulations will have on car services, he says. But competition is a good thing, he adds, and better service and modern technology, such as that employed by Uber and Lyft, never go out of style.

On the other hand, Professor Risch says, “New ideas in the sharing economy always seem great if you don’t have to follow the same rules that your competitors do.”

This process is a tricky balancing act, says Jim Fiske, senior vice president at Chubb Personal Insurance in Whitehouse Station, N.J.

“We are all trying to achieve a balance between the entrepreneurial spirit of capitalism and protecting consumers,” he says.