Uber shows it’s tough to regulate new businesses with old laws

Theglobeandmail.com
July 16, 2015
By Adrian Myers

I have had some strange Uber trips. I have ridden in SUVs with tinted windows, been offered candy from drivers, and taken a New Year’s Eve trip in a Ford F-150 with a man-moose of a driver blasting Taylor Swift.

That truck may well have been a bulldozer, given Uber’s business strategy of entering cities, growing as quickly as possible, and worrying about the legalities later. A $50-billion (U.S.) valuation suggests that this strategy works.

Uber, Airbnb and other similar companies are successful in large part because they’re able to use technology to exploit a gap between the activities regulations are supposed to capture and the literal meaning of regulatory statutes that were drafted well before the Internet was a glimmer in Al Gore’s eye. In particular, technology allows companies in the “sharing” economy to sell themselves as passive brokers putting willing buyers and sellers together, not as regulated businesses that provide a service.

This is troubling.

Regulations are costly to follow, so if you find a way around them, you can offer cheaper services. But regulations also exist for a reason. Those reasons are better described by American author and social activist Upton Sinclair than by me, but I think we can all agree that unfettered capitalism has been less successful at producing decent working standards, fair wages, and safe products than moderately fettered capitalism.

At the same time, regulations create barriers to entry, and where there are barriers to entry, incumbents realize an economic advantage. New York taxicab medallions haven’t outperformed the S&P 500 because of sensible regulation but because of spiraling consumer demand and medallion supply restrictions.

The relationship between technology and regulation is one of the great policy debates of our time. And, oddly enough, the focus of the debate is the market for taxis and Uber’s effect on it. But building better regulation is hard, and litigation is easy. So, the fight over Uber is being contested in courts across North America. Judges are being asked to put a new technology in old legal categories, something likened by two California judges to trying to jam a square peg into one of two round holes.

This debate recently came to Toronto when the City of Toronto dragged Uber (well, what we’ll call Uber - Uber is actually a bunch of different companies across multiple countries, set up for various tax and legal reasons - but that’s a story for another day) into the Ontario Superior Court of Justice to have it classified as a taxicab or limousine company and subject it to municipal regulations. The unenviable task was given to Justice Dunphy, who found that Uber is neither a taxicab nor a limousine company.

Justice Sean Dunphy’s decision turns on the meaning of the word “accept.” To categorize Uber, Justice Dunphy had to analyze whether Uber “accepts calls in any manner for booking, arranging or providing ... transportation.” If it does, Uber is a limousine company subject to regulation; if it does not, Uber is clear for the time being. If this sounds Clintonian to you, you are right, but the law can be Clintonian at times. Unlike former U.S. president Bill Clinton, however, Justice Dunphy is not afraid to tell us what the meaning of “accepts” is, and “accepting” calls is apparently not something that Uber does. Uber, instead, is a conduit for messages between passengers and drivers; it plays the “merely passive, mechanical role of receiving and relaying electronic messages.”

And, ugh, I hate to say it but this seems kind of wrong to me. In analyzing the concept of “acceptance,” Justice Dunphy found that human “discretion” is the essence of the act of acceptance - acceptance implies judgment.

Uber’s story is that it is an intermediary - but it’s an intermediary that retains the right to cancel customer contracts and has cancelled customer accounts for bad behaviour or low ratings. This is an exercise of discretion - that the discretion is exercised by an algorithm programmed by a human, as opposed to a dispatcher behind a screen with a phone database, is irrelevant. Justice Dunphy’s analysis stops short: it takes Uber’s claim that it is merely a conduit at its face when, I think, a bit more analysis would reveal it to be exercising plenty of discretion, albeit in a very modern way. Judges are the inverse of economists: They can fill old bottles with new wine. It’s hard to be the one to tell the kids to get off the lawn, but in this case, I think the best reading of the law requires it.

That said, there is a good case for Justice Dunphy’s skepticism of old regulations as a matter of judicial policy. Justices should be reticent to enjoin the operation of novel businesses based on ambiguous old laws. The city, for its part, has continued to crack down on Uber drivers (if my pickup truck driver was one of the drivers fined this week, I hope he shook it off). But Justice Dunphy’s decision also puts pressure on the city to regulate - I find it implausible that Toronto would be scrambling to regulate Uber if the court has found in its favour. Airbnb, for example, despite offering to pay New York taxes, has had a devil of a time convincing New York regulators to change laws so that it fits into a tax-paying regulatory category.

The problem of regulating industries being changed by technology is not going to be solved by courts. As Justice Dunphy said, Toronto’s thousands of “consumer/voters ... do not wish to see the competition genie forced back into the bottle now that they have acquired a taste for it.” I do not know what genie tastes like, but Justice Dunphy’s sentiment that decades-old laws aren’t going to be sufficient to regulate new and changed industries is a good one.

And how should our laws deal with technical changes that undermine useful regulations but benefit consumers? Justice Dunphy has this one exactly right.

Such questions are, of course, the stuff of democracy.