State Net Capitol Journal Spotlight – Growth of 'Sharing Economy' Could Bring Major Regulatory Changes

State Net Capitol Journal Spotlight – Growth of 'Sharing Economy' Could Bring Major Regulatory Changes

Peer-to-peer businesses like the ride-sharing services UberX and Lyft and the vacation-rental websites Airbnb and VRBO have been booming the last few years. But the rapid expansion of those businesses — collectively known as the "sharing economy" — and growing pains that have accompanied it could spur major regulatory realignments in a multitude of industries.

The first foreshock of that potentially seismic shift came last year when California became the first state to regulate ride-sharing services like UberX, Lyft and Sidecar, which allow individuals in need of transportation to connect with drivers of privately owned vehicles-for-hire by using their smartphones. Those regulations, which among other things, require drivers for such companies to undergo criminal background checks and the companies to carry at least $1 million in commercial liability insurance, effectively sanctioned ridesharing as a business in the state.

Sidecar appropriately tweeted its approval.

It's official! Rideshare is a new, official transportation category in CA!

Lately, however, ride-sharing businesses, also known as transportation network companies, or TNCs, haven't had as much to tweet about. The year began with news that an UberX driver in San Francisco, while between paying fares on New Year's Eve, had struck a mother and her two children in a crosswalk, killing one of them, a 6-year-old girl. It later emerged that the driver, Syed Muzzafar, had been arrested 10 years earlier for driving 100 miles per hour into oncoming traffic to pass another car and Uber's driver-screening process had failed to catch that.

The accident and a subsequent lawsuit brought by the parents of Sofia Liu, the young girl who was killed, accusing Uber of wrongful death, negligent hiring and negligence with a motor vehicle, drew a heap of criticism of the company. The New York Times reported that Christopher Dolan, a personal injury attorney representing the Liu family, said that by its very nature Uber distracted its drivers.

"Cabdrivers who are looking for fares are scanning the streets," he said. "Uber drivers looking for fares are looking at their phones."

The same Times piece quoted Trevor Johnson, a director of the San Francisco Cab Drivers Association, which has been losing drivers to Uber, saying Uber poses a threat to public safety that other Internet businesses like eBay and Amazon do not.

"Uber may be the next Amazon, but Amazon doesn't have the same potential capability to leave a trail of bodies in the street," he said.

In an opinion piece on SFGate.com, the online version of the San Francisco Chronicle, Robert Werth, president of the Taxicab, Limousine & Paratransit Association, was even more direct, asserting, "Public safety demands that Uber be more...regulated."

Uber isn't the only peer-to-peer business that has been drawing unfavorable attention recently. Airbnb has come under fire for a variety of alleged transgressions, including failing to pay city transient occupancy taxes as hotels are required to do and reducing the availability of affordable housing in some cities. Slate reported last month that a San Francisco man was suing his landlord for allegedly kicking him out of the rent-controlled apartment he'd occupied for nearly a decade so he could list the apartment on Airbnb, where he stood to make considerably more income. And Steven Jones, editor-in-chief of the San Francisco Bay Guardian, said rent-controlled units were a dwindling commodity in that city.

"Any of those precious few units going to visiting tourists rather than permanent residents certainly adds to the housing crisis here," he said.

Airbnb has also made headlines on the opposite coast, where New York Attorney General Eric Schneiderman is going after the company's rental "hosts" for violating a 2010 state law barring the rental of an apartment for less than 30 days unless a permanent resident of the apartment is present. Schneiderman has subpoenaed the company demanding that it turn over information about thousands of New York City residents who have listed their residences on the company's Web site.

The surge both in criticism of peer-to-peer businesses and attention from regulators coincides with the sharing economy's tremendous growth. The Economist reported last year that Airbnb offered "250,000 rooms in 30,000 cities in 192 countries." And the company, founded in 2008, was recently valued at $2.5 billion. Uber, founded in 2009, has been valued at between $3.5 billion and $4 billion. Presumably it's a lot easier to avoid criticism when you're a scrappy Internet startup providing cash-strapped consumers with a valuable service for less than when you're big enough to cause major disruptions of entrenched industries like hotels and taxi cabs.

The response from those industries has understandably been feisty. Mark Gruberg of the United Taxicab Workers of San Francisco called ride-sharing services "an existential threat" to his industry, according to the Los Angeles Times.

"It's hard to see how the taxi industry with its rules and regulations and responsibilities can compete with a service that has none of those requirements," he said.

The industry has also responded with action. Taxi drivers and owners in Chicago, for example, filed a lawsuit last month seeking to shut down ride-sharing services there. And there were reports earlier this year of Paris cabbies slashing the tires and smashing the windows of cars booked through Uber.

The response of regulators — who tend to share the perspective of the industries they regulate as a result of dealing almost exclusively with them year after year, a phenomenon political scientists call "regulatory capture" — has generally been to avoid disrupting the status quo by blocking peer-to-peer business from entering the market. In fact California's PUC initially did exactly that in 2012, just a year before adopting the regulations authorizing the operation of ride-sharing businesses in the state.

Perhaps it should come as no surprise that the PUC's reversal was apparently due in large part to the effective mobilization of the ride-sharing community through social networking sites like Twitter and Facebook. Shortly after the PUC's action, Lyft posted on its blog: "Today the California Public Utilities Commission (CPUC) made history with a unanimous, groundbreaking vote to authorize peer-to-peer transportation in the State of California. More than 300 community members showed up to have their voices heard, and together helped ensure an exciting path forward for our movement."

The future direction of regulation of the sharing economy, however, remains uncertain, particularly in the near term. California's PUC plans to hold a workshop this year to hear from all parties impacted by its TNC regulations. One issue that's likely to come up is insurance, with cab drivers and some auto insurers contending the personal auto insurance policies ride-sharing companies require their drivers to have don't cover commercial use of their vehicles.

"They're allowing them to get away with an insurance that doesn't exist," Barry Korengold, president of the San Francisco Cab Drivers Association, told SFGate.com last month. "There is no personal insurance policy that's going to cover you while you're using your car for passengers."

SFGate's Ellen Huet also pointed out that the $1 million in liability insurance the PUC regulations require ride-sharing companies to carry doesn't actually cover their drivers' cars, only individuals injured or property damaged by their drivers when they are at fault, and — as brought to light by the Uber New Year's Eve accident — possibly only when the drivers are actually carrying paying passengers. As for the commercial insurance option, the former driver for Lyft featured in Huet's story was quoted a price of $8,000 per year by Geico, nearly eight times the rate of his personal insurance policy with the company.

Uber says its policy will cover damage to Uberx vehicles caused by uninsured or underinsured drivers, and it will also reimburse collision costs incurred by UberX drivers whose personal collision policy is deemed not to apply. But coverage appears to vary among TNCs, and whether that coverage should apply to drivers who are between fares remains a point of contention. The CPUC regulations don't spell that out. But at the moment it's not clear if the CPUC intends to make any changes to its rules based on what comes out of the workshop or if cities will step in with additional regulations of their own.

There is also considerable regulatory uncertainty right now with regard to Airbnb. The company, which has generally resisted any effort to regulate its business, recently agreed to work with city officials in New York and San Francisco on a regulatory framework for its hosts to begin collecting occupancy taxes.

Time.com contributor Verne Kopytoff said the fact that companies like Airbnb were choosing to stop fighting the system and try shaping it to their liking instead was a sign "the sharing economy is starting to grow up."

But Airbnb is still swinging away at New York AG Schneiderman's subpoena. In a statement the company said: "We always want to work with governments to make the Airbnb community stronger, but at this point, this demand is unreasonably broad and we will fight it with everything we've got." And that stance could threaten any deal on occupancy taxes.

Meanwhile, according to LexisNexis State Net's legislative database, Arizona, Colorado and Oklahoma are considering bills (HB 2273, SB 125 and SB 1703, respectively) that would regulate ride-sharing services much as they are now regulated in California. But Seattle is considering limiting the maximum number of vehicles ride-sharing businesses could have available at any one time to 150 per company, which would mean "four out of five UberX drivers would no longer be able to make an income," according to Corey Ownes, Head of Global Public Relations for Uber. And other cities like Minneapolis and Pittsburgh are moving toward bans on peer-to-peer businesses.

Still, some experts say technology-driven sharing will be a big part of our economic future, which is entirely believable given a world where teenagers already seem oblivious to the boundary between the virtual and physical realms and even toddlers know how to operate iPads. Lisa Gansky, author of The Mesh: Why the Future of Business is Sharing, maintains that the sharing economy offers a solution to the problem of providing for the Earth's ever-growing population, maximizing efficiency and minimizing waste. It also provides a way for millions of people to earn a little money. And in the case of ridesharing, at least, it generally seems to offer a better user experience at a lower cost — unless you happen to be using Uber during holidays like New Year's Eve when "surge pricing" is in effect, raising prices by multiples of their normal levels to boost the number of available drivers — than the traditional alternative: taxis.

As David Autor, a professor of economics at Massachusetts Institute of Technology, put it for Bloomberg Businessweek, the taxi industry is "characterized by high prices, low service, and no accountability."

"It was ripe for entry [by startups] because everybody hates it," he said.

According to Larry Downes, an Internet analyst and coauthor of Big Bang Disruption, taxi services are the way they are because they operate in a non-market economy created through rules put in place beginning in the early 20th century by cities and states that decided the costs of eliminating competition were outweighed by the benefits. Those benefits, he wrote in Forbes, included "ensuring that drivers and their vehicles are safe and adequately insured, that passengers are charged reasonable and predictable fares, and that limits are placed to protect drivers and riders alike from having so many vehicles for hire on city streets that no traffic can actually move."

Ride-sharing companies like Uber and Lyft are posing the question of whether those same benefits can be better achieved through technology, innovations like driver and passenger rating systems, and navigation technology that enables potential customers to know exactly how long it will take to get picked up and how much it will cost to get to their destination.

Peer-to-peer startups are asking the same question in numerous other industries, including car rentals (RelayRides), money lending (Prosper and Lending Club), meals (Feastly) and even odd jobs (TaskRabbit). And it doesn't seem as though there's a sector of the economy that couldn't potentially be impacted by them in some way.

"It's a trend we're going to see everywhere," Uday Karmarkar, a technology and strategies professor at UCLA's Anderson School of Management, told the Los Angeles Times.

The prospect of sector after sector of the economy going through the same regulatory upheaval as the taxi and hotel industries is one reason Arun Sundararajan, a professor and NEC Faculty Fellow at New York University's Stern School of Business, proposed on Economix, The New York Times' economic blog, encouraging self-regulation in the peer-to-peer marketplace. Sundararajan, whose research focuses on the impact of digital technologies on business and society, said there is a "misalignment between newer peer-to-peer business models and older regulations" that will "impede economic growth."

"The solution," he said, "is to delegate more regulatory responsibility to the marketplaces and platforms while preserving some government oversight, by creating new self-regulatory organizations like those that have succeeded in other markets and industries," such as real estate (the National Association of Realtors) and medicine (the American Medical Association).

He goes on to say: "As hundreds of new peer-to-peer marketplaces emerge over the coming years, such organizations would ease what would otherwise be a tremendous strain on the government's resources: having to constantly monitor and correct regulatory misalignment across an evolving set of industries."

It sounds like a bold idea, but perhaps that's what the sharing economy calls for.

— Compiled by KOREY CLARK

    Ride-sharing businesses operate in legal gray area in many states

Lyft and UberX, the nation's leading peer-to-peer, ride-sharing services now operate in cities in a combined 21 states, according to their respective websites. UberX service is available in 27 cities in 20 states, as well as the District of Columbia, while Lyft is available in 21 cities in 16 states, along with Washington, D.C. But so far only California has legalized the operation of such businesses statewide.

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