Teen Safety, Uber’s Protests, and the Democratic Process

Uber this week emailed San Francisco users of Uber Teen (a service that transports kids ages 13-17) both to announce that it is suspending that service in California, and to blame new California Public Utilities Commission rules for that closure.  Uber claims CPUC made “new and onerous changes” which left the company “no choice” except to suspend service.  I emphatically disagree.  The problem, such as it is, is of Uber’s own creation — and Uber had and has a viable path forward.

Narrowly: Nothing forces Uber to suspend service.  Uber could comply with the CPUC’s requirement and continue service by implementing reasonable driver registration precautions, in fact the same precautions that competitor HopSkipDrive has used for years.  The words “no choice” have literal meaning, and that’s just not the situation here.  The real issue is that Uber disagrees with CPUC’s requirement that it check driver fingerprints, arguing that its background checks suffice.  But that disagreement does not compel Uber to discontinue service.  Many people and companies disagree with many laws and regulations.  The normal process is to submit comments in a legislative or rulemaking process,  to sue if you think the rule is so broken that (say) it’s unconstitutional, to invoke political remedies such as replacing whoever imposed the rule, and ultimately to honor the democratic process by complying.  Win some, lose some, and hope to win more than you lose.  In contrast, Uber’s approach is a threat: Either the regulation goes Uber’s way, or Uber will cease service.

Broadly: Uber suggests that CPUC’s regulation is ill-advised.  To evaluate, start with the rationale according to CPUC:

When an adult is being tasked to provide a service to a minor, the adult is placed in a position of trust, responsibility, and control over California’s most vulnerable citizenry—children. Not conducting a fingerprint-based background check to identify adults with disqualifying arrests or criminal records would place the unaccompanied minor in a potentially dangerous, if not life-threatening situation. That is why California Assembly Bill 506 … requir[es] that administrators, employees, or regular volunteers of youth service organizations undergo a background check that includes fingerprinting.

In response, Uber claims that its background checks work well and are sufficient.  Who’s right?  Consider the broader context.  Uber’s background checks rightly deny accounts to drivers with bad driving records, prior ejections from Uber’s platform, or no documentation establishing right to work.  But if a driver can’t pass those checks, the standard strategy is to “borrow” an account from someone who can.  Many people tolerate a certain amount of this for ordinary  adult rides.  As the CPUC explains above, the stakes are higher when transporting minors unaccompanied.  In that special context, higher standards are no surprise.

If fingerprinting drivers were massively costly, it might nonetheless be an unwise investment — a cost exceeding plausible benefits.  For all its protestations to CPUC and to users, Uber never quite explains why it’s (supposedly) so difficult to do what CPUC specifies.  If I had to implement CPUC’s requirement, I’d collect driver fingerprints through smartphones or at the inspection centers that check drivers’ vehicles.  This sounds like software plus business operations — some work, but proportional to the business opportunity of the Uber Teen service.  It feels particularly reasonable because fingerprint security is increasingly common.  While an employee at Microsoft, I had to present my fingerprint to my phone’s Authenticator app to activate two-factor authentication to access company resources.  CPUC similarly seeks fingerprint security for drivers transporting unaccompanied minors.  Why should a minor’s safety get less protection than a company’s secrets?

In a filing before the CPUC, Uber argued that higher registration requirements for Uber Teen drivers would reduce the number of drivers, hence increasing prices to passengers.  But if Uber Teen rides pay drivers materially more than regular rides, drivers have corresponding incentive to get registered.  The only sustainable price gap is the result of the time or difficulty of registration, but by all indications that’s minimal.  If a driver’s registration burden is small, as it should be, the price gap should also be small.  Supply and demand.

The most charitable reading of Uber’s message to users is that Uber would like to comply with CPUC’s requirements, but had too little time.  Yet here too, Uber’s position is in tension with the facts.  Uber had long known CPUC took a dim view of its service to teens, including correspondence with CPUC staff as early as January 5, 2024.  On March 14, 2024, Uber filed a motion seeking approval of its service for teens.  CPUC’s rulemaking was published on October 30, 2024, giving Uber a further 30 days to come into compliance.  And Uber says it intends to continue service for teens until December 23, 2024.  That marks 353 days since Uber was on notice of the disagreement, and 54 days between CPUC’s rulemaking and Uber’s scheduled withdrawal of service.  If Uber had used those 54 days effectively, not to mention those 353, there’s every indication it could have met CPUC’s requirements.  If Uber needed additional time, it could have explained how long and why.  Nothing about CPUC’s approach or timetable compelled Uber to withdraw its service for teens.

Any Uber complaint about too little time to comply is further undermined by CPUC’s 2016 guidance and Uber’s reply.  In particular, CPUC specifically put Uber on notice that it would need an additional approval to launch service for minors, and Uber promised to discuss with CPUC before launching any such service.  So any new urgency is of Uber’s creation.

Enlisting users in its fight against CPUC

Nothing could be more fundamental to the Democratic process than informed constituents making their views heard.  And the CPUC did solicit comments, though for whatever reason none were received.

But what Uber envisions now is something quite different than informed public comments.  Instead, Uber provides its users with, at most, a portion of the information they would need to evaluate the disagreement.  Consider: Uber’s email to users claims “new rules requiring significant changes to Teen accounts” but doesn’t say a word about what those rules are or what changes would be required.  (In fact by all indications the changes are only to driver verifications, not to user accounts.)  While CPUC posted a detailed rulemaking with discussion of rationale and alternatives, Uber doesn’t mention any such document available — not a link, not even the title of the proceeding.  Uber’s email asks users to “let the CPUC know” “if teen rides are important to your family”, but the question before CPUC isn’t whether teen rides are important, but rather what verifications are appropriate to provide sufficient safety for those rides.

When Uber delivers user comments to CPUC, will it deliver them all?  Or just those that support its position?  There’s reason to suspect shenanigans: In 2015, Uber delivered 8 boxes of supposed user petitions to regulators in St. Louis, but the boxes turned out to contain only water bottles.

Uber’s attempt to turn users against CPUC is reminiscent of the company’s infamous 2015 “De Blasio mode” which mobilized users against proposed New York regulations.  There, as here, Uber treated users like pawns in an astroturf operation — giving users incomplete information designed to prompt an immediate forceful response.  Uber plainly hopes to flood CPUC with complaints about regulation supposedly causing suspension of Uber Teen.  But users might have second thoughts if they knew the full picture.  Users surely value the low prices Uber emphasizes, but for transporting unaccompanied minors, safety is bound to be a priority too.  Ultimately Uber gave users no way to judge whether its protections are sufficient or whether CPUC’s requirements would actually be useful.  With the limited context Uber provides, what can a user usefully tell CPUC?  At a minimum, Uber should have linked to the CPUC rules at issue, should have summarized what it saw as most objectionable, and should have offered a specific alternative.  A better approach, to give users a full sense of the debate, would have summarized the rationale CPUC offered for its approach, fairly and evenhandedly, so users would be closer to deciding for themselves.  Predictably, Uber did none of this.

These days, Uber seeks to portray itself as kinder and gentler, supposedly reformed from its scandalous peak of 2015-2017.  Uber now sponsors NPR.  Chief Legal Officer Tony West is Kamala Harris’s brother-in-law and campaign advisor.  But has the leopard really changed its stripes?  Tellingly, Uber’s terms of service still require users with disputes to file arbitrations (not lawsuits) before an arbiter Uber chooses, and ban users from filing class actions so a single set of lawyers can efficiently pursue the claim for everyone affected.  Suppose Uber gets its way and returns to transporting unaccompanied minors without the fingerprints CPUC requires.  If something terrible happens — a kidnapping, assault, or worse — Uber’s terms says passengers cannot even sue.  This episode smacks of the Uber of a decade ago.  I’ve added it to Uberscandals.org in lobbyingregulators, and safety.

From the Digital to the Physical: Federal Limitations on Regulating Online Marketplaces with Abbey Stemler

Edelman, Benjamin, and Abbey Stemler. “From the Digital to the Physical: Federal Limitations on Regulating Online Marketplaces.” Harvard Journal on Legislation, Volume 56, Number 1, pp. 141-198.

Abstract:

Online marketplaces have transformed how we shop, travel, and interact with the world. Yet, their unique innovations also present a panoply of challenges for communities and states. Surprisingly, federal laws are chief among those challenges despite the fact that online marketplaces facilitate transactions traditionally regulated at the local level. In this paper, we survey the federal laws that frame the situation, especially §230 of the Communications Decency Act (CDA), a 1996 law largely meant to protect online platforms from defamation lawsuits. The CDA has been stretched beyond recognition to prevent all manner of prudent regulation. We offer specific suggestions to correct this misinterpretation to assure that state and local governments can appropriately respond to the digital activities that impact physical realities.

Informal introduction:

Perhaps the most beloved twenty-six words in tech law, §230 of the Communications Decency Act of 1996 has been heralded as a “masterpiece” and the “law that gave us the modern Internet.” It was originally designed to protect online companies from defamation claims for third-party speech (think message boards and AOL chat rooms), but over the years §230 has been used to protect online firms from all kinds of regulation—including civil rights and consumer protection laws. As a result, it is now the first line of defense for online marketplaces seeking to avoid state and local regulation.

In our new working paper, Abbey Stemler and I challenge existing interpretations of §230 and highlight how it and other federal laws interfere with state and local government’s ability to regulate online marketplaces—particularly those that dramatically shape our physical realties, such as Uber and Airbnb. §230 is sacred to many, but as Congress considers revising §230 and Courts continually reassess its interpretation, we hope our paper will encourage a richer discussion about the duties of online marketplaces.

Assessing Airbnb’s Prospects in its San Francisco Litigation with Nancy Leong

Last week the Internet buzzed with news of Airbnb’s lawsuit against San Francisco. Dissatisfied with a new ordinance updating and enforcing 2014 regulations of short-term rentals, Airbnb filed suit against the city, arguing that the new ordinance violated both federal law and the federal constitution.

In today’s piece, Nancy Leong and I assess Airbnb’s arguments in its San Francisco complaint — finding some validity but, on the whole, considerable weakness.

Assessing Airbnb’s Prospects in its San Francisco Litigation – Yale Journal of Regulation – Notice & Comment

Spontaneous Deregulation: How to Compete with Platforms That Ignore the Rules

Edelman, Benjamin, and Damien Geradin. “Spontaneous Deregulation: How to Compete with Platforms That Ignore the Rules.” Harvard Business Review 94, no. 4 (April 2016): 80-87.

Many successful platform businesses–think Airbnb, Uber, and YouTube–ignore laws and regulations that appear to preclude their approach. The rule-flouting phenomenon is something we call “spontaneous private deregulation,” and it is not new. Benign or otherwise, spontaneous deregulation is happening increasingly rapidly and in ever more industries. This article surveys incumbents’ vulnerabilities and identifies possible responses.

When Your Competitors Ignore the Law

Last fall I flagged the problem of transportation network companies (Uber and kin) claiming a cost advantage by ignoring legal requirements they considered ill-advised or inconvenient. But the problem stretches well beyond TNCs. Consider Airbnb declining to enforce (or, often, even tell hosts about) the insurance, permitting, tax, zoning, and other requirements they must satisfy in order to operate lawfully. Or Zenefits using selling insurance via staff not trained or certified to do so (and, infamously, helping some staff circumvent state-mandated training requirements). Or Theranos offering a novel form of blood tests without required certification, yielding results that federal regulators found “deficient” and worse. The applicable requirements may be clear — get commercial insurance before driving commercially; be zoned for commercial activities if you want to rent out a room; be trained and licensed to sell insurance if you intend to do so. Yet a growing crop of startups decline to do so, finding it faster and more expedient to seek forgiveness rather than permission. And the approach spreads through competition: once one firm in a sector embraces this method, others have to follow lest they be left behind.

A first question is how violations should be sanctioned. I’ve long thought that penalties could appropriately be severe. Consider the Pennsylvania Public Utility Commission’s $49 million civil penalty against Uber for its intentional operation in violation of a PUC order. The PUC discussed the purpose of this penalty: “not just to deter Uber, but also [to deter] other entities who may wish to launch … without Commission approval.” Their rationale is compelling: If the legal system requires a permit for Uber’s activity, and if we are to retain that requirement, sizable penalties are required to reestablish the expectation that following the law is indeed compulsory. Now suppose every state and municipality were to impose a penalty comparable in size. Despite Uber’s wealth, the numbers add up — 100 such penalties would take $4.9 billion from Uber’s investors, a sizable share of Uber’s valuation and plausibly more than the company’s cash on hand.

Meanwhile, competitors are compelled to respond. For a typical taxi fleet owner or driver, or anyone else trying to compete with a law-breaking entrant, it’s little answer to hope that regulators may some day impose penalties. (And indeed there’s scant evidence that Pennsylvania’s approach will prevail more broadly.) What to do? Damien Geradin and I offer a menu of suggestions in two recent articles:

Spontaneous Deregulation: How to compete with platforms that ignore the rules – Harvard Business Review

Competing with Platforms that Ignore the Law – HBR Online

Efficiencies and Regulatory Shortcuts: How Should We Regulate Companies like Airbnb and Uber?

Edelman, Benjamin, and Damien Geradin. “Efficiencies and Regulatory Shortcuts: How Should We Regulate Companies like Airbnb and Uber?” Stanford Technology Law Review 19, no. 2 (2016): 293-328.

New software platforms use modern information technology, including full-featured web sites and mobile apps, to allow service providers and consumers to transact with relative ease and increased trust. These platforms provide notable benefits including reducing transaction costs, improving allocation of resources, and creating information and pricing efficiencies. Yet they also raise questions of regulation, including how regulation should adapt to new services and capabilities, and how to correct market failures that may arise. We explore these challenges and suggest an updated regulatory framework that is sufficiently flexible to allow software platforms to operate and deliver their benefits, while ensuring that service providers, users, and third parties are adequately protected from harm that may arise.

Digital Business Models Should Have to Follow the Law, Too

Digital Business Models Should Have to Follow the Law, Too. HBR Online. January 2, 2015.

A timeless maxim suggests that it’s better to ask forgiveness than permission. Nowhere is that more prominent than in the current crop of digital businesses, which tend to skirt laws they find inconvenient. Though these services and their innovative business models win acclaim from consumers and investors, their approach to the law is troubling — both for its implications for civil society and in its contagious influence on other firms in turn pressured to skirt legal requirements.

SaferTaxi: Connecting Taxis and Passengers in South America (teaching materials) with Peter Coles

Coles, Peter, and Benjamin Edelman. “SaferTaxi: Connecting Taxis and Passengers in South America.” Harvard Business School Case 913-041, April 2013. (Revised October 2014.) (educator access at HBP. request a courtesy copy.)

SaferTaxi, a taxi booking service in South America must develop its mobilization strategy; that is, it must attract enough passengers and drivers to make its service worthwhile for all. Drivers hesitate to pay for SaferTaxi’s smartphones and service unless these will deliver passenger bookings—and passengers have no reason to sign up unless drivers are available. Meanwhile, regulators question the permissibility of online taxi booking in light of regulatory requirements, and some existing taxi booking vendors feel threatened by SaferTaxi’s efforts to enter the market. As SaferTaxi attempts to satisfy these diverse constituents, international competition looms. What should SaferTaxi’s founders do next?

Teaching Materials:

SaferTaxi: Connecting Taxis and Passengers in South America – Teaching Note (HBP 913063)

Airbnb (teaching materials) with Michael Luca

Edelman, Benjamin, and Michael Luca. “Airbnb (A).” Harvard Business School Case 912-019, December 2011. (Revised March 2012.) (educator access at HBP. request a courtesy copy.)

After widely-publicized complaints of destructive guests and unreliable hosts, online apartment rental site Airbnb explores mechanisms to facilitate trust between guests and hosts. Flexible online reputation systems can collect and share information with ease, but Airbnb must decide which information guests and hosts should have to provide and how much flexibility each should have in selecting who to do business with. A full-featured system could provide all the information users have been requesting, but would it be too complicated for routine use?

Supplements:

Airbnb (B) – Supplement (HBP 912019)

Teaching Material:

Airbnb (A) and (B) – Teaching Note (HBP 912021)