Photo: AP

Days after Uber began selling stock, the National Labor Relations Board’s top lawyer gave the company a huge gift. In an advice memo, the general counsel’s office determined that Uber’s drivers are independent contractors, not employees. If drivers are legally determined to be employees, it would throw Uber’s entire business model into question by giving drivers, among other rights, the ability to collectively bargain for pay and working conditions.

While the memo itself is not a court ruling with legal authority, it’s yet another influential voice weighing in on a vitally important legal distinction for Uber and other gig economy companies like it.

But a ruling in the company’s favor would paradoxically expose the ride-hailing giant to a separate legal challenge, one that has gotten far less attention. It poses an even greater existential threat not only to Uber, but most if not all the gig economy businesses: price fixing.

“Uber is effectively trying to have it both ways,” says Sanjukta Paul, a law professor at Wayne State University who has been writing about the gig economy’s vulnerability to price fixing regulation for several years. “They’re setting a price for a product they say they don’t sell.”

Advertisement

This legal argument is deceptively simple, but to understand it requires laying a lot of groundwork, not just to understand the argument itself but why the American legal system has largely stopped paying attention to these kinds of antitrust concerns. It’s also important to break down why price-fixing is central to the employee/contractor distinction on which so many companies depend in the first place.

A warning upfront: this stuff gets confusing, sometimes intentionally so on the parts of companies that want to muddle the distinctions between workers and contractors, customers versus vendors, and other distinctions very important in the legal realm but rarely of interest to ordinary people. But understanding all this is key to grasping the nature of work in the internet age and how the law lags woefully behind.

Advertisement

Nearly all the important distinctions in American labor law were determined before the internet. As such, one of the most important differences in American labor law is between who is and isn’t an employee. All workers are equal under the eyes of the American court system, you see, it’s just that some are more equal than others. Among other perks, American labor law grants a number of protections to workers who are “officially” employees, including—but hardly limited to—the right to organize and collectively bargain.

Advertisement

However, independent contractors, who can have limited liability corporations or other incorporated entities in their own right, do not have many of those rights, including the right to collectively bargain.

But if ride-hailing drivers are “independent contractors” and not “employees,” and thus they are all “different corporations” for the purpose of this legal argument, that brings up a big problem.

Advertisement

This is because we have a different label for when different corporations get together and determine the cost for their services. We call it price fixing. And price fixing, under the Sherman Antitrust Act, is illegal.

In other words, by labeling drivers independent contractors, it prevents them from getting together and determining how much they should charge for their services, in the same way that every locksmith can’t get together and agree to a minimum price for getting you into your apartment when you lost your keys.

Advertisement

This is precisely the argument business groups have used to block independent contractors from unionizing, and it is a bit of evil genius on the part of companies like Uber. By declaring its drivers not “employees,” but “independent contractors,” it not only doesn’t feel any obligation whatsoever to guarantee its workers things like a minimum salary or benefits, but at the same time can completely deny them the right to unionize.

In Seattle, the employee/contractor issue has been the crux of a legal battle whether for-hire vehicle drivers are allowed to organize. In 2015, the city passed a law that would have allowed one union to represent all of Seattle’s 9,000 ride-hail drivers. The U.S. Chamber of Commerce sued the City of Seattle to prevent the law from being enacted.

Advertisement

Here’s Reuters’ explanation of the Chamber of Commerce’s legal argument:

The chamber argued that by allowing drivers to bargain over their pay, which is based on fares received from passengers, the city would permit them to essentially fix prices in violation of federal antitrust law.

Advertisement

The case is still ongoing, but it’s worth thinking through the implications of the Chamber of Commerce’s—and by extension Uber’s—argument.

Advertisement

Uber has furthermore argued in legal filings that drivers are, in fact, their customers, because Uber sells drivers an exchange service to help them in turn find their customers, the riders.

This is a weird argument for a lot of reasons, but it accords with the company’s contention that it’s a platform—not a transportation service. By this logic, Uber’s product would not be the actual transportation of the person from A to B, but the use of this app to facilitate it.

Advertisement

Therefore, the price of Uber’s services would not be the $35 or whatever you pay for the ride, but Uber’s cut, the $8.75 (25 percent) the company takes for itself.

Advertisement

When Paul walked me through this argument, this was the point I had my “aha” moment. In practice, the company sets the price for more than its own services. Uber determines the price for the ride itself, which it contends is a transaction between two separate entities.

In other words, there’s an argument to be made that Uber is doing the very price-fixing it says drivers can’t do; and the price it fixes is for a service it contends it doesn’t sell.

Advertisement

Presumably, Uber would argue in a court-like setting that’s perfectly fine, because it’s a single firm, whereas independent contractors are a collection of thousands of firms. But, Paul argues this is a distinction without a difference. The price, after all, is still being fixed.

When Jalopnik asked Uber if it has any comment on the potential legal challenge of price-fixing, an Uber spokesperson did not answer the question and instead sent the following statement: “Riders want a reliable and affordable way to get from A to B. Drivers want dependable earnings. Our pricing is designed to meet the needs of riders and drivers — so Uber can be the first choice for both.” Throughout Uber’s history, drivers have repeatedly claimed they find Uber’s payouts misleading and unpredictable.

Advertisement

To be fair, this is tricky—and shifting—legal territory. What we’re talking about here is different than what most people think about when they picture traditional price fixing or other cartel behavior, like a bunch of mob bosses or Fortune 500 executives gathering in a smoky back room.

Advertisement

In that popular conception, firms are engaged in what’s called horizontal coordination, akin to if Uber and Lyft set ride prices together. That is still very much illegal today.

But vertical coordination, where a single firm or supplier sets prices for everyone it contracts with and re-sells their product or service—like if Ford controlled the exact price of every F-150 at all of its dealers—has a complicated legal history. For much of the 20th century, the courts did not look kindly on so-called vertical coordination. The rough idea was that if you wanted to coordinate prices, you had to run your business as a single firm, requiring workers to become employees and get the accompanying rights.

Advertisement

It was a way of enforcing some degree of fairness in the labor market. You want to tell other people what to do when they work, including what prices to charge? Fine, make them your employees so they get rights of their own.

But starting in the 1970s and continuing through the 1990s, the Supreme Court gradually loosened rules around vertical coordination rights. The first major decision came in 1977 in Continental Television, Inc. v. GTE Sylvania, Inc. when the Supreme Court started to use the so-called “Rule of Reason.” No longer was vertical coordination in itself illegal, but courts now weighed in as to whether or not it was anti-competitive. If not, then they had no problem with it. This ruling was cemented and broadened in 1997 under State Oil Co. v. Khan, which overruled a 1968 case finding vertical price fixing illegal.

Advertisement

Thanks to the Supreme Court allowing more and more vertical coordination, large businesses had the law’s tacit blessing to control smaller actors, even ones outside their firm. The onus was now on the plaintiff not only to prove there was vertical price-fixing, but that it was promoting anti-competitive behavior. So, say, a fast food corporation could roll out a national value menu—even though most McDonald’s restaurants around the country are independently owned and operated—without obviously violating federal law.

Uber and other app economy businesses took it a step further. For one, the price-setting is happening digitally via an algorithm Uber controls. But, more importantly, they also changed the very nature of employment which broke some long-held assumptions of why more vertical coordination is permissible.

Advertisement

Even fast food value menus are, according to Paul, a hazy area in the law and one nobody, least of which the corporations themselves, want to test in court (although in Europe there have been antitrust cases about this very issue). But some of the fuzziness there is due to how much control Burger King actually has over the prices franchises charge for a Whopper. There’s no such fuzziness with Uber, which quite clearly determines prices that independent contractors must charge.

Paul described this less as Uber doing something completely unprecedented and more of pushing legal boundaries further than anyone else to the point where it begs some questions. “They just have more chutzpah,” she summarized. “They’ve pushed their luck to a level that actually drew consumer complaints.”

Advertisement

In 2015, Spencer Meyer, an Uber rider from Connecticut, sued Uber co-founder and then-CEO Travis Kalanick alleging the company fixed prices in violation of the Sherman Antitrust Act. And now, we finally get to the simple part of the argument.

The suit’s logic was very straightforward. Uber fixes the price for the service other companies provide. This is price fixing.

Advertisement

But the courts never ruled on the issue because of another, separate structural issue with American labor law: arbitration agreements.

Uber’s terms of service, like those of countless other companies, waive both customers’ and drivers’ rights to jury trials or class action lawsuits, instead directing litigation to arbitration instead (Meyer’s lawyer even made the very creative argument that an iPhone keyboard automatically popping up over the hyperlink to the terms of service prevented it from being legally binding, but the judge didn’t buy it). Uber has amassed more than 60,000 arbitration cases to handle, although it’s currently working on a settlement for a “large majority” of them for a total bill of around $150 million.

Advertisement

In his final ruling upholding the motion for arbitration, Judge Jed S. Rakoff did not hide his scorn for such duplicitous tactics hidden within lengthy terms of service agreements:

This being the law, this judge must enforce it -even if it is based on nothing but factual and legal fictions.

Advertisement

Meyer’s attorney in the case did not respond to calls and emails.

I know the confusion is probably mounting with all the contradictory legal arguments, but here’s even more confusing stuff. Last year, a Massachusetts appeals court ruled that very same arbitration agreement is in fact not enforceable. The courts, obviously, are still working this out.

Advertisement

But as long as these arbitration agreements have at least the veil of enforceability, it will be harder for riders to challenge Uber on price-fixing. Drivers have a better shot than riders do. Remember how the courts are now using the “Rule of Reason” on vertical coordination cases and plaintiffs have to prove anti-competitive behavior? Uber’s juicing of both sides of the supply-demand model with heavy incentives means drivers have a better case for harm, since Uber is using investor money to make cab rides artificially cheap, effectively capping a driver’s potential earnings.

But the onus isn’t completely on drivers to sue Uber. The Federal Trade Commission could. And here is where we get to the biggest failure of it all.

Advertisement

Over the last several decades, the FTC and the federal courts have cultivated a business-friendly environment thanks to a revolving door of regulators bouncing back and forth between government and the private sector. The current FTC chairman, Joseph Simons, appointed by President Donald Trump and a Republican who formerly worked for a prominent law firm defending businesses in antitrust cases and getting mergers approved, talks a big game about reining in tech companies particularly around privacy issues. But in September, he named Gail Levin as the new Deputy Director of the Bureau of Competition. Prior to that, Levin’s title was Director, U.S. Competition for—wait for it—Uber.

Advertisement

Regardless of whether the FTC has the willingness to bring a case against Uber, the courts are similarly aligning in favor with big business, particularly the Supreme Court’s rightward shift, which would presume less willingness to act on antitrust matters.

There are potential solutions to this gigantic mess that appears increasingly untenable. Paul’s preferred solution is two-fold. First, she advocates for the courts to clamp down on vertical price-fixing to some extent. Second, and perhaps more importantly, she thinks the courts should allow for small businesses to, in limited cases, coordinate among each other in ways not currently allowed by antitrust law. So, drivers could organize regardless of their distinction as employees or contractors.

Advertisement

But these solutions would fundamentally require government agencies tasked with overseeing these companies and the courts that rule on legal challenges to do their jobs protecting American workers from exploitation, along with adapting to a rapidly changing definition of what it means to work and for whom one labors.

So far, they haven’t done that.

Or, as Paul put it, “antitrust agencies seem very happy to rescue these companies from the rock and a hard place they find themselves in.”