There’s a Law for That: Mobile Ridesharing Services Encounter Legal Troubles

Those who live in parts of cities that lack regular taxi traffic may know about Uber, the car service that will send a well-maintained black car to your location with a quick tap of your mobile touchscreen. Those who live outside of San Francisco may be less familiar with two new mobile based “rideshare” companies: Lyft and SideCar. Unlike Uber, which uses licensed limousine drivers, Lyft and SideCar rely on ordinary car owners. Accordingly, unlike Uber, which charges users a rate commensurate with the luxuriousness of the ride, Lyft and SideCar prompt users to make a “donation” to their drivers in a suggested amount at the end of the ride that more closely resembles an ordinary taxi fare. Although donations are not strictly mandatory, a rating system which allows drivers to evaluate their passengers places a strong incentive on riders to match suggested donations if they hope to use the service in the future.

Rideshare services like SideCar and Lyft have been a welcome development for many San Franciscans, who complain that taxi availability is limited and unreliable. But the newly popular services have faced increasing scrutiny from the California Public Utilities Commission (“CPUC”), which issued several cease and desist letters to rideshare services alleging violations of several California Public Utility Code provisions governing the operation of charter services. (CPUC has since entered operating agreements with Lyft and Uber, but not SideCar.) According to CPUC, such ridesharing services are operating without authority under California Public Utilities Code Section 5371, which states that no charter-party carrier of passengers excepting transit districts, transit authorities, or cities owning and operating local transit systems may operate without first obtaining a certificate that public convenience and necessity require the operation.

However, both Lyft and Sidecar insist that because they operate on a donation basis, their operations fall within a “ridesharing” exception in Section 5353(h) of the Public Utilities Code which, by reference to the California Vehicle Code, exempts “two or more persons traveling by any mode, including, but not limited to, carpooling, vanpooling, buspooling, taxipooling, jitney, and public transit” from Section 5371’s certification requirement. Regulators may quickly counter that the ridesharing exemption “does not apply if the primary purpose for the transportation of those persons is to make a profit.” Although one operator has stated, “I don’t want SideCar to be my job; I want it to offset the cost of having a car in the city,” it strains credulity that such an intention would be construed as anything other than a primarily profit-seeking endeavor.

Evading such classification would be difficult for a number of reasons. First, ventures operating at a net loss (such as those designed to offset expenses) are not rendered altruistic merely because they fail to actually turn a profit. Indeed, characterization of the activity as strategy to offset a major cost of living expense indicates that driving for a rideshare service is not merely a hobby. This is further underscored by rating systems that enable drivers to avoid below-market donors. Second, because suggested “donations” approximate taxi fares for similar rides, it is difficult to argue that “donations” merely compensate the driver for the expense of a particular ride. Although such suggestions are purportedly cheaper than a passenger would pay in a taxi, cab drivers have many business related expenses that rideshare operators do not. Thus, it stands to reason that the profit margin of any given ride is similar to that of a cab driver, even if the absolute cost is lower. Third, while it is undoubtedly true that regulation of taxis and other commercial carriers serves to insulate incumbent businesses from competition, regulation of commercial carriers also furthers the public purpose by ensuring drivers are adequately insured and their vehicles are properly maintained. Thus, it seems exceedingly unlikely that ridesharing services can avoid regulation by merely terming the exchange a “donation.”

Still, as CPUC itself acknowledges, ridesharing services present a novel problem that legislators likely did not anticipate when drafting current law. Moreover, it is not simply hollow messaging to say that ridesharing services benefit consumers: by placing competitive pressure on incumbent operators, rideshare services likely ensure better pricing and wider service. As such, CPUC has indicated a willingness to join the future by beginning a rule making process to institute regulations that fit the new businesses, “[t]he proposal issued is not to stifle innovation and the provision of new services that consumers want, but rather to assess public safety risks, and to ensure that the safety of the public is not compromised.” However, with opposition from cab drivers – who are sometimes treated solicitously by local governments – and an uphill battle under current regulation, it remains to be seen whether ridesharing is truly permitted to flourish.


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