The Legal Problem That Could Crash Uber

It's antitrust 101.
Uber faces a new lawsuit that accuses the company of price-fixing.
Uber faces a new lawsuit that accuses the company of price-fixing.

WASHINGTON -- Ride-sharing titan Uber -- which is valued at about $68 billion -- makes a lot of its money by skirting labor laws. And one of its top lobbying allies in the nation's capital may have just undermined its profits.

Uber keeps its costs low by refusing to treat its drivers as employees. Under American labor law, employees are entitled to a minimum wage, overtime pay and have their expenses reimbursed. They can receive unemployment benefits if they get laid off, and have the right to unionize if they want to bargain collectively for better contract terms. The company's drivers aren't eligible for any of this, however, because the company maintains that its drivers are independent contractors -- automotive entrepreneurs running their own businesses who have decided to link their operations with Uber.

Andrew Schmidt, a labor lawyer from Portland, Maine, has brought a new lawsuit on behalf of his client Spencer Meyer that could create a lot of trouble for Uber based on this distinction. Because if Uber's drivers are really independent contractors like the company claims, it could be breaking a whole different set of laws: The antitrust statutes that protect consumers from corporate collusion.

"Uber has a simple but illegal business plan: to fix prices among competitors and take a cut of the profits," the complaint reads.

If all of the company's drivers really are independent contractors, then they aren't allowed to secretly conspire over what to charge their customers, the lawsuit reasons. That would be price fixing, a basic antitrust law violation. Since its technology allows all of these independent contractors to set identical prices, Uber is a price fixing scheme that has to shut down and pay its customers for overcharging them, according to the suit.

Its "surge pricing" elevates the cost of a ride according to the demand for drivers. Drivers can't opt in or out of a price surge and they don't bid with each other for the cost of a ride. The amount is locked into the app. If a lot of people are looking to catch an Uber, the price "surges" upward. If not, it drifts back down. The price rises or falls until supply matches demand, according to Uber's secret algorithm.

"It's classic econ 101," Uber CEO Travis Kalanick is fond of saying. He is worth over $6 billion, according to Forbes.

“Uber’s price fixing is classic anticompetitive behavior.”

- Spencer Meyer's allegation in his lawsuit, which Uber denies

Unfortunately for Kalanick, there are econ 201, 301 and 401 classes. Some economics students even study anti-competitive behavior.

"If Uber were to become a transportation company and employ drivers, it would be free to compete with other companies using its pricing algorithm," the complaint reads. "But Uber has refused to become a transportation company. Consequently, drivers using the app are independent firms, competing with each other for riders. They should compete on price … Instead, they have agreed to Kalanick’s scheme to fix prices among direct competitors using Uber’s pricing algorithm. Uber’s price fixing is classic anticompetitive behavior."

Switching to an employee-driver model would, of course, be costly for the ride-sharing behemoth. On Thursday, the company agreed to pay up to $100 million to settle two class action lawsuits targeting the employment status of its drivers. The settlement allows Uber to continue classifying its drivers as independent contractors, however. It had previously attempted to bar drivers from being able to sue the company collectively, and put new wording into its driver contracts in December in another attempt to curb future drivers from taking action. Lyft, a similar, ride-sharing company, has been sued for $126 million over pay its drivers would have received had they been classified as employees.

Federal Judge Jed Rakoff, of the Southern District of New York, rejected Uber's motion to dismiss the antitrust case this month, setting a trial date for November. Rakoff was a tough draw for Uber -- a few years ago he garnered national attention when he rejected government settlements with big banks on the grounds that they were too lenient.

Uber spokesman Matt Kallman told The Huffington Post that the company disagreed with the decision to let the case proceed.

"These claims are unwarranted and have no basis in fact," he said in a written statement emailed to HuffPost. "In just five years since its founding, Uber has increased competition, lowered prices, and improved service."

And the top corporate lobbying coalition is undermining Uber's argument. In December, Seattle passed an ordinance giving Uber and Lyft drivers the right to unionize. The U.S. Chamber of Commerce, America's preeminent big-business lobby, intervened on behalf of Uber, saying that independent contractors don't have the right to unionize. Although employees of a company are guaranteed this right, the Chamber argued, allowing independent contractors to unionize would constitute illegal price fixing.

"It’s antitrust 101 that independent actors cannot conspire with each other to set prices," The Chamber's chief legal officer, Lily Fu Claffee, said in a January press release.

Sounds familiar.

Zach Carter is a co-host of the HuffPost Politics podcast “So, That Happened.” Subscribe here or listen to the latest episode below:

Clarification: This article has been updated to note that Meyer is a client of Schmidt.

Update: This article has been updated with information about Uber's settlement of two class-action lawsuits.

6 Facts About Uber

Popular in the Community