Uber, Independent Contractors, and Travis Kalanick’s Price-Fixing Conspiracy

If you’ve ever taken an Uber, you probably want to pay attention to this lawsuit.  After all, you may make some money off of it.

In December 2015, Connecticut native Spencer Meyer, in a putative class action on behalf of all Uber passengers in the U.S., filed an antitrust lawsuit against Travis Kalanick, CEO and co-founder of the ride-sharing company.  Meyer alleges that Kalanick is the kingpin of a giant price-fixing conspiracy among Uber drivers.  While the claim may seem far-fetched, Judge Jed S. Rakoff of the Southern District of New York recently denied Kalanick’s motion to dismiss.

The reason why this case is possible in the first place is because of Uber drivers’ current status as independent contractors.  While many pending fights in court challenge this classification, Meyer’s case takes Uber’s contractor claim at face value—and turns it against Uber.

As contractors, each driver is a legally distinct entity.  Uber claims it is simply a platform to connect these entities to potential customers and process payments—taking a cut in the process.  But Uber does much more than simply collect a commission.  It algorithmically sets fares and “surge prices” in a way that all drivers have contracted to abide by.  (While Uber’s contract claims that this fare is a “recommended” amount, drivers realistically have no way through the app to offer a lower fare.)

This fact makes up the heart of the complaint: by creating an arrangement where a group of independent entities agree to particular fares set by Uber, Kalanick has created an illegal price-fixing scheme.  Just as antitrust laws prevent independent contractors from collectively bargaining to set prices, they also prohibit Kalanick’s alleged conspiracy, Meyer claims.  Because drivers haven’t chosen to compete with each other and therefore offer lower prices, customers like Meyer have suffered—and he’s seeking damages in the form of the excess fares Uber passengers have paid over time.

The Antitrust Case Against Uber

The federal statute said to be violated here is the famously short Sherman Antitrust Act, which states, “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”  Over time, case law has fleshed out this statute and defined two types of “restraint of trade”: horizontal and vertical.  In this case, Judge Rakoff found that Uber plausibly commits both.

Horizontal restraints of trade.  Horizontal restraints of trade are agreements among competitors that limit the competitive nature of the marketplace.  The most obvious form of this is price fixing: when competing entities within a particular market set a price (or range of prices) with each other, customers lose out.  Such concerted actions are per se illegal.

Meyer argues that drivers have implicitly agreed to abide by Uber’s pricing scheme, which is higher than what customers would be able to negotiate otherwise.  Because charging a lower price might be competitively advantageous to any given driver, leading to a race to the bottom, they have a “common motive” to agree to Uber’s pricing terms in order to maintain inflated prices.  The reason why Meyer sued Kalanick—and not Uber—was because the CEO himself is a driver, and thus is also implicated in this horizontal price-fixing scheme.  (The other, more practical reason was probably to avoid Uber’s arbitration terms in order to bring a class action suit in court.)

While Uber argues that drivers independently chose to agree to Uber’s terms—there are no horizontal agreements between drivers, only vertical agreements between individual drivers and Uber—Judge Rakoff wasn’t convinced.  He cited to a classic Supreme Court case from 1939, Interstate Circuit v. United States, where competing movie distributors were found to have violated antitrust law when they agreed to two theaters’ pricing terms, even though the distributors hadn’t colluded directly with each other.  It was enough that they knew other distributors were likely to agree to the plan too.  Rakoff notes that while this “hub-and-spoke” model of conspiracy features vertical agreements between Uber and each driver, it also contains implicit horizontal agreements between drivers, who—similar to the movie distributors—only agree to abide by Uber’s pricing scheme because they understand that other drivers are agreeing to do so too.  While Uber argues that a horizontal conspiracy between hundreds of thousands of drivers is “wildly implausible,” Rakoff notes that Uber makes this easy by inviting drivers to agree to its terms via the “magic of smartphone technology.”

Furthermore, Meyer alleges that drivers have had chances to cement these collusive agreements not just through the app, but in person too.  He argues that Uber has organized “partner-appreciation” picnics in various cities where drivers could reaffirm their commitments to this price-fixing conspiracy.  More directly, however, Meyer brings up the fact that an UberBlack driver protest in New York City back in September 2014 resulted in a higher fares being reinstituted—a clearer example of a price-fixing agreement among drivers.

Vertical restraints of trade.  Vertical restraints of trade most often exist between different levels of a distribution chain—for example, between a supplier and downstream retailers.  In this case, the vertical agreement would be between Uber drivers and Kalanick (in his role as Uber’s CEO).

While vertical price constraints were also subject to a per se rule, the Supreme Court in the 2007 case Leegin v. PSKS held that they should be judged using a “rule of reason” test—is the restraint of trade unreasonable?  In order to pass this test, a plaintiff has to show that the alleged restraint of trade had actual adverse effects on competition in the relevant market.  The questions become: What is the relevant market? And what are the adverse effects?

Meyer and Uber have different perspectives on the relevant market.  To Meyer, the market is limited to app-generated ride-sharing services: namely, Uber, which has 80% of the market share, and Lyft, which has 20%.  Uber contends that they compete not only with other apps, but also with taxis, cars-for-hire, public transportation, personal vehicles, and walking.  Judge Rakoff ruled that Meyer’s definition is plausible, acknowledging the plaintiff’s arguments that taxis and cars-for-hire require very different forms of payment and scheduling, and also noting Uber’s own statements that they are not competing with taxis.

When it comes to adverse effects within the narrower ride-sharing market, Meyer alleges a decreased output and a limited competitive pool.  He notes that Sidecar, long the third most popular competitor app, was driven out of the market in late 2015.  He further alleges that Uber’s market power has made it difficult for new competitors.  In other words, Uber’s price-fixing tactics have allowed it to build up its brand and dominate the ride-sharing market, thus restraining competition.

All of these alleged facts and ensuing inferences were enough for Judge Rakoff to dismiss Kalanick’s motion to dismiss, meaning the case will go on to discovery.  This does not mean Meyer has an accurate or strong argument—simply a plausible argument.  Rakoff is quick to note that Kalanick’s claims in his defense may well be true, but that is for a fact-finder to decide in the next stages of this case.