The Sharing Economy: Can the Law Keep Pace with Innovation?

In a way the future of the sharing economy, the array of high-tech firms revolutionizing the way Americans take vacations, commute, and contract for personal services, may turn on a legal precedent about vegetables and farm labor. Consider Uber Technologies Inc., the pioneering ride-hailing firm. The company has a policy of treating its drivers as independent contractors rather than employees. That has saved it a ton of money, but has also brought lawsuits from the drivers, who say they’ve been short-changed. In their legal arsenal is a landmark 1989 decision by the California Supreme Court, S. G. Borello & Sons, Inc. v. Department of Industrial Relations, which gave migrant farm workers hired to harvest a crop of cucumbers rights as employees.

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Professors Rabia Belt and Nora Freeman Engstrom, JD ’02, with Bryan Casey, JD ’18

But it isn’t the only legal issue cropping up. While sharing economy companies are changing the lives and lifestyles of millions, judges, legislators, and regulators are struggling to decide the rules by which they should operate.

One challenge is that many of these startups don’t see themselves as traditional companies, but as technology “platforms” where independent buyers and sellers come to transact business—exchanging services, selling their wares, renting out their homes. And this new business model has had widespread effects on a number of legal fronts, including tort liability, municipal regulation, discrimination, and privacy.

Who ought to be liable if a driver for a ride-hailing firm runs over a pedestrian? Or a room-sharing host attacks a guest? And studies have shown significant evidence of discrimination among ride-sharing and room-sharing companies. So who is responsible when minorities or the disabled are denied access to the new services?

These are just a few of the questions that legal academics and lawyers in the field are tackling as the new economy comes of age.

New technology has long challenged the legal system, defying existing structures. If Google, for example, had limited itself early on with a cautious view of traditional copyright law, its founders might still be back in graduate school.

Phil Malone, professor of law and director of the Juelsgaard Intellectual Property and Innovation Clinic, says the mindset of many entrepreneurs is this: “‘Why should we have to kill or delay our great idea that would improve life for many people just because [to borrow from Dickens] ‘the law is an ass’? Their view is the classic ‘better to seek forgiveness than ask for permission.’”

“That’s what makes companies like Uber and Airbnb so interesting,” Malone says. “They just went out and did it. They established facts on the ground. Regulators looked around, surprised, and rushed in after the fact to try to figure out what happened and what to do about it.”

As these companies mature, vulnerabilities in their strategies are beginning to appear.

The challenge for policymakers, Malone and other experts say, is to establish rules and regulations that work without chilling really good ideas. The challenge for the companies is to acknowledge the interests that regulators have in protecting the public, and not appear to be above the law.

Steve Siger, JD ’08, a former regulatory counsel at Uber who is now a lawyer at Thumbtack, a professional services marketplace, says the legal terrain has moved further than some people might think. Firms, like Uber and Airbnb, after all, have become household names worth billions.

“As little as two or three years ago, there was an open question whether ride-sharing and home-sharing would exist or should have a right to exist,” Siger says. “I think the discussion has moved on at this point. Everyone now agrees the companies are here to stay. The business model is here to stay. How we regulate them is now the question.”

“There is the litigation, attempting to apply existing rules to these new industries, which is a backward-looking approach,” he adds. “I think the more interesting question is a forward-looking one: ‘What is the right answer and what should the rules be?’”

A Taking Economy?

Signs of hard-edge capitalism in the sharing economy—so-called because it helps people leverage their personal resources, for example, leasing a spare bedroom to make spare cash—have raised questions about whether the name fairly describes what is really going on.

“The sharing economy seems poised to do a great deal of taking—extracting more and more value from participants while continuing to enjoy the veneer of a disruptive, socially minded enterprise,” according to an article forthcoming in the Columbia Law Review titled “The Taking Economy.” Co-author Ryan Calo, a professor at the University of Washington law school who is an affiliate scholar at Stanford Law’s Center for Internet and Society, says sharing economy companies are accumulating vast troves of data information about consumers with little oversight and are positioned to leverage the power in problematic ways.

Businesses that have lived by the old rules have been hardly welcoming to the upstarts. Taxi companies and labor unions greeted Uber with protests and violence after it launched service in Europe. In France, its CEO was arrested and jailed for operating an illegal business and cars and tires were burned in the streets.

The tensions have culminated in a case before the European Court of Justice. The central question: Is Uber a transport company, subject to regulations dating back to the 1960s, or an “information society service,” protected under an EU law that limits regulations that infringe on the “freedom to provide services.”

“Existing EU laws are a clumsy fit for Uber,” wrote Claire Chapla, JD ’16, in an analysis of the case for the Transatlantic Technology Law Forum, a joint initiative of SLS and the University of Vienna School of Law.

Chapla, a clerk on the Tenth Circuit Court of Appeals, suggests the EU create a new regulatory category in the vein of a California licensing law that requires transportation network companies to have at least $1 million in insurance, mandatory vehicle inspections and driver training programs, “zero tolerance” drug and alcohol policies, and criminal background checks. The court is expected to resolve what Bloomberg calls “Uber’s identity crisis” as early as this spring.

Legal Instruments

The sharing economy does have some powerful legal tools at its disposal. Under Section 230 of the Communications Decency Act (CDA) of 1996, ISPs (internet service providers) and other “interactive computer service providers” are immunized from liability for user-generated content. The law protects Facebook over scandalous postings on its social network and Amazon from suits over negative reviews.

Online marketplaces are also taking advantage of the law: eBay Inc., one of the pioneers of the sharing economy, has used Section 230 to protect itself against lawsuits arising from products sold on its platform that are allegedly defective or infringe patents and other intellectual property.

The expanding sharing economy is testing the boundaries of Section 230, says Spencer Jones, eBay’s legal counsel for litigation and asset protection.

“We are a platform bringing people together ‘virtually’ to the sharing economy. Companies like Uber and Airbnb are bringing people together in the physical universe,” Jones, JD ’07, observes. “It has taken the sharing economy to a whole new level. And there is additional risk and exposure: Is this what Congress intended to cover with its CDA immunity?”

Airbnb and HomeAway, a vacation-home marketplace, tried to use Section 230 to block portions of a home-sharing ordinance in San Francisco. In 2014, the city enacted a measure permitting residents to rent out their homes so long as they registered and paid a fee. Compliance was poor, however, so the rules were changed, making the platforms liable if they did business with unregistered homeowners. Airbnb and HomeAway sued in 2016 alleging that the requirement that they verify the status of listing renters violated Section 230.

U.S. District Judge James Donato, JD ’88, ruled against the companies, however, denying a motion for an injunction against the ordinance last fall. Donato noted that the ordinance penalizes Airbnb, not for advertising an unregistered unit, but for booking one and collecting a fee. By holding the company liable for its own conduct, rather than third-party content, he reasoned, the ordinance did not violate Section 230. The two sides announced they had reached a settlement earlier this May.

 

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Sara Peters, JD ’08, in her office in San Francisco

The Disabled

The National Federation of the Blind of California filed a lawsuit in federal court in San Francisco in 2014 alleging that drivers for Uber denied access to individuals with service animals in violation of the Americans with Disabilities Act (ADA) and California state disability access laws. The complaint cited dozens of instances where blind customers had summoned rides only to have drivers pull away when they noticed the customers had service animals.

Initially, the company argued that it was not a “public accommodation,” and so was not covered under the law. Ultimately, it agreed to a settlement, which became effective in January 2017. Terms call for improved driver education, stricter driver removal policies, improved customer service and complaint processes, monitoring and reporting, and testing.

“This service can be a really valuable asset in the transportation tool chest that blind people have at their disposal. But we need to make sure it works for everybody,” says Michael Nunez, a San Francisco lawyer who helped represent the plaintiffs in the case. Nunez, JD ’11, is himself blind and uses a service animal.

“People in the disability community are excited about the sharing economy,” says Rabia Belt, an assistant professor of law and a legal historian whose scholarship focuses on disability and citizenship. “But people are worried about discrimination and concerned about remedies to that discrimination.”

Owner-occupied residences, she notes, are generally exempt from complying with the ADA, meaning, for example, that people who rent out a room in their home through an online marketplace do not have to ensure it is wheelchair accessible.

Ride-sharing companies’ plans to deploy brand-new fleets of driverless SUVs do hold out some hope for disabled citizens with non-collapsible wheelchairs. (An industry-friendly provision in the ADA has exempted taxi companies from having to serve those customers so long as they operate older vehicles of a certain limited size.)

But whether the new entrants will embrace the opportunity to help this under-served group is far from clear. “The question of how inclusive this future will be for individuals with disabilities remains an open one,” wrote Bryan Casey, JD ’18, in an essay about autonomous vehicles and the ADA, which was published in December in the online edition of the Stanford Law Review.

Liability Concerns

Another legal battleground has been whether sharing economy companies are liable if their workers hurt someone on the job.

Employers may be held vicariously liable for the torts of employees, as long as the tort is committed within the scope of employment, notes Nora Freeman Engstrom, JD ’02, professor of law and associate dean for curriculum. But, if the tort is committed by an independent contractor, the business is typically off the hook. For companies like Uber that straddle the categories, the analysis is trickier, Engstrom says.

In 2015, Uber was sued in U.S. district court in San Francisco by two women who alleged they were sexually assaulted by Uber drivers in separate incidents. The company moved to dismiss, arguing there was no employment relationship between the company and the drivers and, even if there was, the company was relieved of liability because sexual assault is outside the scope of an employee’s duties.

“Uber wants to have it both ways,” says Sara Peters, JD ’08, a San Francisco personal injury lawyer who represents another Uber customer, suing the company for assault. “The company advises women that taking an Uber is a better option than riding with a stranger or driving drunk. In court, the company is saying these drivers are strangers.”

U.S. District Judge Susan Illston, JD ’73, denied Uber’s bid to dismiss the case, saying “plaintiffs have alleged sufficient facts to claim plausibly that an employment relationship exists” and that “foreseeability and policy rationales weigh in favor of allowing the complaint to move forward on the scope of employment question.”

“Assaults of this nature are exactly why customers would expect taxi companies to perform background checks of their drivers,” Illston wrote. “Holding Uber liable could also forward the underlying policy goals of respondeat superior, including prevention of future injuries and assurance of compensation to victims.” Court records indicate the case was settled before trial.

Anti-Competition

Uber is also facing charges that its business practices are anti-competitive. A lawsuit seeking class action status in federal court in New York alleges that by setting fares for drivers, it is engaged in illegal price-fixing in violation of Section 1 of the Sherman Antitrust Act.

“The issue is whether Uber has a right to set the drivers’ prices given that it denies that they are employees,” says Doug Melamed, a professor of the practice of law and an antitrust expert. “It will probably turn on whether Uber has created a new product or whether, instead, it has taken drivers who would otherwise compete and has orchestrated a price-fixing agreement among them.” His judgment: Uber likely prevails.

Some of the fiercest battles in the sharing economy have been over the legal status of workers. Most are classified as independent contractors, meaning companies do not have to pay them benefits such as health insurance, workers’ compensation, and overtime.

Critics say despite flexible work hours and new income opportunities, the sharing economy is contributing to a trend toward workers in low-paying jobs. A survey last year by the Pew Research Center found that sharing economy workers tend to be poorer and are more likely to be minorities than the population at large. The New York Times picked up on the study in a recent editorial titled “The Gig Economy’s False Promise.”

Uber, Lyft, food-delivery companies DoorDash and GrubHub, and Handy, an on-demand house-cleaning and home-repair services firm, are just a few of the companies that have been sued by workers alleging they have been misclassified and mistreated.

In California, whether a worker is an employee or a contractor turns on the “right to control” the work including the manner and means in which it is performed. And some courts have sided with the workers under the test, which comes from the same pivotal 1989 California Supreme Court case that pitted a group of migrant farm workers against a major grower in the state. However, others have said the law is badly in need of an update.

“The test the California courts have developed over the 20th century for classifying workers isn’t very helpful in addressing this 21st-century problem,” observed Vince Chhabria, a U.S. district judge in San Francisco, in a case against Lyft, adding that “the jury in this case will be handed a square peg and asked to choose between two round holes.” Under a settlement reached in March, Lyft agreed to pay the workers $27 million, but is allowed to continue to treat them as contractors.

Arbitration

The sharing economy is also hastening a trend toward arbitration. Stephen Kane, JD ’06, has launched an alternative dispute resolution website, www.FairClaims.com, to handle the rush of small claims disputes. Such disputes, a bungled plumbing job or a dirty holiday rental house, have arisen among users of sharing economy platforms. “Arbitration is an important, powerful tool, if done the right way,” Kane says.

The companies are also using arbitration to defuse litigation threats against themselves. Most standard terms of service now require that users agree to resolve any and all disputes in arbitration rather than court. Users who consent are often agreeing to bring claims individually, rather than as class action lawsuits—a mechanism to resolve far-flung disputes that some say has been abused in recent years.

“For a small company, even the filing of a class action, meritorious or not, can be an existential threat,” says Albert Giang, JD ’02, a partner at Boies Schiller Flexner LLP in Los Angeles, who represents Lyft, Airbnb, and other smaller sharing economy firms.

Deborah Hensler, the Judge John W. Ford Professor of Dispute Resolution and associate dean for graduate studies, says forcing consumers to waive judicial rights is not good public policy. But, she adds, the practice is doubtless good for the companies. “If I were a major corporation and had an outside lawyer who didn’t include this in a contract, I think I would probably sue that lawyer,” Hensler says.

Last November, Christopher Cooper, JD ’93, a U.S. district judge in Washington, D.C., dismissed a lawsuit that accused Airbnb of race discrimination—citing a terms of service requirement that all disputes be resolved by an arbitrator. The plaintiff, an African-American, had contacted an Airbnb host about a place to stay for a weekend getaway in Philadelphia and was rejected. When he applied through a separate account, using a pseudonym and a photograph of a white person, the same host was more than happy to accommodate him.

Cooper acknowledges “the widespread and controversial practice of requiring consumers to relinquish their fundamental right to a jury trial—and forgo class actions—as a condition of simply participating in today’s digital economy.” But, he says, “mutual arbitration provisions in electronic contracts—so long as their existence is made reasonably known to consumers—are enforceable, in commercial disputes and discrimination cases alike.”

Uber is hoping an arbitration provision will be its trump card in defending a closely watched class action lawsuit filed in 2013 in San Francisco federal court by 385,000 drivers in California and Massachusetts. The case is considered a bellwether in the battle over whether workers in the sharing economy are employees or contractors.

Lawyers for the drivers claim the arbitration provision restricts their right as employees to engage in collective action in violation of the National Labor Relations Act. Without taking a position on whether the drivers are employees, the National Labor Relations Board has weighed in, calling the issue one of “national significance.” An appeals court has set a hearing for September.

Bill Gould, the Charles A. Beardsley Professor of Law, Emeritus, and a former chairman of the NLRB, says he sympathizes with the workers and believes arbitration clauses that bar class actions are “inconsistent with concerted activity.” In January, the U.S. Supreme Court agreed to consider the issue in an unrelated case. Gould is not optimistic about the workers’ chances.

“I think the many Supreme Court decisions promoting employer-promulgated arbitration have basically snuffed out the rights of employees who are suing businesses,” Gould says. “I would not want to bet the farm on the proposition that the Court will depart from its thus far expressed support for this kind of arbitration.”

Rick Schmitt is an attorney and former staff writer for the Wall Street Journal and Los Angeles Times.