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Consider the plight of Lyft, now required under the proposed decision of California’s Public Utilities Commission(“CPUC”) to comply with a long list of regulatory requirements affecting occasional drivers driving their own cars professionally adorned with a big pink mustache.  The Attorney General of New York, focusing on possible violations of law, has subpoened records for airbnb site users.   Will the emerging chef, who cooks in her own kitchen for paying Feastly guests, soon have to deal with the county health department?

Few would argue that the government does not have a legitimate interest in protecting public health and safety.  Business innovators, however, face a troubling question.  At what point does the price of participating in an open economy in new ways simply become too high?  Current laws are ill-adapted to the decentralized nature of the sharing economy.  The proposed CPUC decision is a good place to begin to understand the shape of things to come.

The CPUC’s Decision

The ruling applies to organizations operating in California that provide prearranged transportation services for compensation using a smartphone app to connect passengers with drivers using their own vehicles — TNCs, for the sake of brevity. The ruling does not apply to limousines.

At the outset, the CPUC specifically rejected three arguments that would have exempted TNCs from regulation.  The first was that this was just carpooling with a technological twist.  The second, closely related, was that these were not enterprises motivated by profit because compensation was donation based.  The third was that TNCs are applications on smartphones, not part of the transportation industry.

Concluding that TNCs are charter-party carriers, subject to public safety regulation, the proposed regulations set out a long list of requirements.  Among them, TNCs must

  • obtain a permit from the Commission
  • comply with extensive reporting requirements, detailing the number of rides requested and accepted by drivers by zip code, average and mean number of miles driven by each driver, and use by individuals with disabilities, among other things
  • require criminal background checks for each driver
  • implement a zero-tolerance policy on drugs and alcohol
  • maintain personal liability insurance of at least $1,000,000 per incident, and
  • implement driver training programs.

Drivers must also provide proof of personal and commercial insurance, and demonstrate that their vehicles have passed a 19-point safety inspection.

What Does This Mean for Other Participants in the Sharing Economy?

sharing_economySome of these issues are easy.  Reckless drivers should not drive cabs.  However, the rest of the ruling is remarkable, not for the things it does, but for the things it does not do.  In rejecting counterarguments based on lack of profit motive, or at least the secondary role of profit, the Commission dispatched any claim that the sharing economy is substantively different from any other sector and should thus be regulated in a different way.  It gave similarly short shrift to arguments based on technological difference.

The Commission’s focus was purely on protection of customers and third parties.  It did not address worker issues.  Although evidence was presented that taxicab drivers have the highest rate of occupational homicide in the U.S., the CPUC did not consider measures to protect drivers, such as requiring bullet-proof partitions or digital security cameras.  Neither did it offer any opinion on the perennial issue of independent contractor versus employee status for drivers, with giant implications for tax, workers’ compensation and anti-discrimination laws.

What Do We Learn From This?

Several things.  First, the case that sharing and commerce are different still needs to be made.  The use of a smartphone app is not enough.  Second, leaving compensation to be determined by the parties and dubbing it a donation is not enough evidence of some motive other than profit.  Moving from the private realm, where Feastly currently operates, and into the public landscape where Lyft and airbnb live, will require dealing with the issue of public regulation.  Further, it seems clear that the first regulatory issue to be dealt with involves the protection of consumers and third-party bystanders.  Further down the list are worker protection, state and federal taxation, intellectual property and securities regulation. The earth moves under our feet, but the future belongs to the nimble.  Some imaginative lawyering could help here.

Episode 6 from Legally Sound | Smart Business

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