"Uber Spends $100 Million to Save its Business Model, But It May Have Just Doomed It"

So, is Uber just a big price fixing cartel?

From Reuters, April 1, 2016:

Uber made a fateful decision early in the litigation of an antitrust class action against its co-founder and CEO Travis Kalanick. The company believed there was no way the Manhattan federal court complaint – in which customer Spencer Meyer alleged a price-fixing conspiracy among the hundreds of thousands of drivers who independently signed up with the online car service – would survive a motion to dismiss. The case was before U.S. District Judge Jed Rakoff, who has a well-earned reputation for moving his dockets quickly. So Uber elected not to move to invoke the arbitration provision in its terms of service. 

That decision backfired Thursday when Judge Rakoff ruled that the antitrust case can move forward. The judge held that plaintiffs’ lawyers from Andrew Schmidt Law and Harter Secrest & Emery pleaded adequate allegations of both a per se illegal horizontal price-fixing conspiracy among Uber drivers, including Kalanick, and a rule-of-reason vertical conspiracy between Uber and the drivers. In the opinion’s most quotable soundbite, which my Reuters colleague Jon Stempel cited in his report yesterday on the ruling, the judge warned, “The advancement of technological means for the orchestration of large-scale price-fixing conspiracies need not leave antitrust law behind.” 

Uber told me Friday it’s confident that when the company and its lawyers from Boies Schiller & Flexner have a chance to challenge the complaint’s factual premises and to show the judge its economists’ analyses, Rakoff will agree Uber increases competition and lowers prices – exactly what antitrust laws are supposed to encourage. The judge certainly left open that possibility, writing that Uber’s alternative description of reality is “well worth a fact-finder’s consideration.” 

I will admit that as a very occasional Uber customer and somewhat more frequent reporter on antitrust litigation, I thought Kalanick’s motion to dismiss should at the very least have been the end of the horizontal price-fixing claims under the Sherman Act, and probably the vertical conspiracy allegations as well. But I have to give plaintiffs’ lawyers credit for writing a responsethat piqued Judge Rakoff’s curiosity, using Uber’s self-description as something entirely new to persuade the judge to allow them to continue the litigation....MORE

And why this four-week-old story comes back to life, from naked capitalism:

 I’ve written before at this august site about how Uber’s business model is to arbitrage state and federal law and replace a monopoly with a different monopoly. They obviously placed a high value on the arbitrage. How high? About $100 million: 

Uber has survived a major threat to its business model, settling two legal suits brought by drivers who sought to be classified as employees instead of independent contractors. 

The ride-hailing firm will pay up to $100 million to the 385,000 drivers, but their employment status will not change. 

The class actions were brought in California and Massachusetts. Uber, which is valued at up to $70 billion, is on the hook for a $84 million initial payment, and another $16 million if it goes public. 

I’m not seeing much of a reason for Uber to ever go public, so I should amend to say the arbitrage was worth $84 million. And while a judge has to sign off on the settlement, with both sides in agreement on the resolution I can’t see that being a big hurdle. 

This concerned two big employee misclassification lawsuits, which if successful would have turned Uber into just another car service. Now that Uber settled, they don’t have to worry about providing worker’s comp or expenses or overtime or the employer half of Social Security taxes or any other benefit given to a worker on staff. In other words, they got off cheap. 

As Michael Hiltzik points out, this highlights a big problem with class action lawsuits, namely that they’re nearly impossible to get through the courts in this day and age, and even if they do, once the legal team gets their cut they provide nothing of value to the actual litigants: 

The key question left unanswered by the settlement announcement is whether the drivers are receiving enough in return for what they’re giving up. As is often the case with class settlements, the big headline number obscures how little trickles down to the plaintiffs. In this deal, drivers with the most time and mileage recorded with Uber are in line to receive one-time payments up to about $8,000. (Though the typical driver will receive far less from a settlement that averages out to $218 per driver.) 

Nothing fundamental in the balance of income and expenses will change as a result of the deal–drivers will still be on the hook for gas, insurance and wear-and-tear on their vehicles, and Uber will retain the right to set fares and extract fees and commissions of more than 20%. 

There are a few more benefits for drivers in the deal. Uber cannot deactivate drivers at will; they now must show cause and give drivers a chance to shape up before dismissal. Not accepting enough rides cannot be a cause. Driver’s associations can be established to work with management on driver concerns, but this could undermine the efforts underway for drivers to unionize. Finally, drivers can solicit tips from their passengers for the first time. But this WSJ piece gets at a couple reasons why that’s not going to work. The entire appeal of Uber was that it was seamless: you summon a car on the app and the payment is executed there, without having to fish around in your pocket or purse for cash. Riders thought the fare included tips and it’ll be hard to change that behavior. Plus, Uber won’t put a tip tool on the app, meaning drivers will be reduced to begging their clients for cash only, which plenty of people just don’t carry anymore. Yes, rider ratings would be at stake for non-tippers, but so will driver ratings for those that demand tips. 

I guess Lyft allows tips and most people do it, so it’s not impossible. But I also don’t think it’s a huge step forward for drivers when they’re not getting a single benefit afforded an employee. The class action was an imperfect opportunity to help workers, but outside of a small cash payout the drivers really didn’t get much, and Uber kept its model virtually intact. 

However, in an almost cosmic bit of justice, among the other legal actions, union drives, and National Labor Relations Board investigation is a gem of a lawsuit that actually relies on Uber’s boasting that their drivers are independent contractors. The case asserts that Uber’s drivers – including its CEO, Travis Kalanick, who has driven a few times – are engaging in price-fixing collusion. Allison Frankel laid it out earlier this month: 

Uber argued that it’s simply not plausible to claim hundreds of thousands of drivers assented to a price-fixing conspiracy. (Uber does not disclose an actual number of drivers.) According to the company, the most plausible explanation is that each driver made an independent decision to sign up with Uber, not that these strangers conspired with each other and with Uber to inflate charges for customers. In the company’s depiction, it has increased competition by offering customers an alternative to taxis, car services, mass transit and even walking

[…]But the plaintiffs said Uber can’t enjoy the benefits of its disruptive business model without suffering the consequences. Because Uber drivers aren’t traditional employees, but independent contractors who assented to Uber’s anticompetitive terms, they are plausibly co-conspirators under the U.S. Supreme Court’s 1939 ruling in Interstate Circuit v. U.S., according to the plaintiffs....MORE

Recently (working back to Thursday):
California Uber Drivers Partnering With Teamsters Union
How Uber's big settlement may make things worse for its drivers
Uber will pay $100 million to settle the biggest legal threat to its business