Disrupted Disruptor – Legal Setback Sweepstakes

It seems Uber just can’t catch a break these days. First its license to operate in London was revoked. At issue was apparently that 43 unlicensed drivers were able to take an estimated 14,000 “unauthorized trips” due to a flaw in the Uber app (note that 45,000 licensed Uber drivers are working in London) .


Uber’s service has become an important part of London’s transport infrastructure – and a thorn in the side of established taxi services. [PT]

Photo credit: uber.com


How did the regulatory agency Transport for London (TfL) even learn about this? Uber itself informed the regulator about the mishap. It also told TfL that it has immediately fixed the problem to prevent a recurrence (this is to say, it fixed the software glitch and audited all existing drivers to ascertain their ID). TfL decided that Uber’s license should be revoked anyway, on the grounds that it had “identified a pattern of failures by the company, including several breaches that placed passengers and their safety at risk.”

Since no-one breathed a word about even a single passenger having suffered actual harm, we would guess that this unlicensed driver slip-up failed to produce any victims. In other words, the risk to passenger safety was apparently quite limited. At least Uber is allowed to continue operating in London while it appeals the decision. Should it lose the appeal and be forced to stop offering its services, we suppose the harm inflicted on its 45,000 drivers in London and the mood (and wallets) of its countless customers would be quite substantial.

A few days ago, a German court banned Uber’s service in Germany, seemingly out of the blue. According to the ruling, the ban was imposed because Uber “lacks a necessary license to offer passenger transport services using rental cars”. In Germany Uber operates exclusively with car rental companies and their licensed drivers. This is to say, its German business model was specifically designed to avoid falling prey to license-related trouble.


Left: “Uber must go” it says on the taxi – we are not sure who is supposed to be convinced by this. Right: it seems woke promises of providing e-mobility and energy-efficiency were not enough to mollify the courts.


Uber was forced to adopt this particular model because a previous court ruling had determined that a “driver gig economy” consisting of unlicensed private drivers using their own cars could not be permitted to exist in Germany either. At the time Uber temporarily suspended its services in four of six cities for about a year. Then it returned and implemented its new business model in order to stay in the good graces of regulators.

Below is a summary of the relevant German court rulings from Reuters. To anyone not familiar with the stultifying nightmare that is the regulatory regime prevailing in much of continental Europe, the court’s convoluted reasoning must sound utterly bizarre:


The court in 2015 forbade Uber from matching up drivers using their own cars with ride hailers. Uber’s current service, which lets customers hail rides carried out in rented cars, is also illegal as it violates competition rules, the court said. Uber advertised rides to customers in a way that led them to view it as the provider of the transport service, the court said, adding that the firm also selects specific drivers and determines prices.

“From a passenger’s point of view, Uber provides the service itself and is therefore an entrepreneur,” the presiding judge said, adding this meant Uber has to comply with laws governing passenger transport. Separately, Uber breached the obligation that hired cars have to return to a rental firm’s main office after carrying out a ride, the court said.”


(emphasis added)

An organization by the name of “Taxi Deutschland” is the plaintiff in the case (a national Taxi association that has reportedly been filing injunctions and law suits against Uber since 2014). In other words, this is an attempt to get rid of the competition via the courts, based on byzantine licensing regulations that seem primarily designed to prevent upstarts from disrupting established businesses by offering a superior service.


The disruptors vs. the established quasi-monopoly… still not a level playing field in Europe.


Evidently the wishes of consumers don’t play a role in these proceedings – customers of Uber were certainly not asked to provide their views (of course it is already known full well that they like the service). With the wind of the recent court ruling at its back, Taxi Deutschland is trying to knock Uber out completely by filing a motion for immediate enforcement:


“The plaintiff, Taxi Deutschland, said it would seek immediate provisional enforcement. It said Uber would then have to pay fines starting at 250 euros per ride and rising to as much as 250,000 euros per ride in the case of repeated offenses.


The fact that such legal maneuvers are a serious threat to Uber’s business in Germany after it has been operating there since 2014 does make one wonder about the state of economic freedom in the country (on the Heritage economic freedom index Germany is ranked as “mostly free”, in place 24 between the Czech Republic and Mauritius. This is not bad, but it definitely could and should be better).

The ruling discussed above was handed down by a local court in Frankfurt. According to a report on a German web site, a court in Cologne actually decreed in late October that Uber’s app itself was illegal. Apparently the court found that German law stipulates that a taxi ride must be arranged via a central dispatch office, a requirement that is obviously bypassed by Uber’s app. If this ruling is upheld, it will represent an existential threat to Uber’s German business aspirations. Obviously the regulation as such is beyond absurd.

And while Taxi Deutschland gleefully remarked that “the court has made it clear that Uber’s system is illegal in Germany”, a far more sensible comment was provided by Bernhard Rohleder, head of Bitkom, the German trade federation for online businesses:


The law protects the profits of taxi companies at the expense of consumers… This is not about a single company, it’s about an entire industry and the question of how we want to organize climate-friendly, comfortable and affordable mobility”.


(emphasis added)    


The Tender Ministrations of the Woke   

Uber is encountering problems in the US as well. In the wake of a recent  (we believe misguided) Supreme Court decision, California’s politicians concluded that the entire so-called “gig economy” was in need of regulation, ostensibly to protect workers. The legislation inter alia takes aim at Uber, which is a significant player in the gig economy.

According to California’s lawmakers, Uber drivers and other independent contractors are henceforth considered to be employees rather than self-employed entrepreneurs. With California’s Assembly Bill 5 (AB-5) the status of almost everybody active in the gig economy is bound to be reclassified, as it will be extremely difficult for companies to prove their contractors are not employees.


There are countless cartoons with a similar message as this one. The “gig economy” certainly has a bad reputation – we believe it is undeserved, but that is a topic for another time.


The problem with so-called pro-labor legislation of this kind is that the laws of economics cannot be magically suspended by legislative fiat. If the market cannot bear the additional cost, a great many of today’s independent contractors will simply become tomorrow’s unemployed.

As the Times of San Diego opines:


AB 5 is a destroyer. Worse, other states are determined to duplicate California’s mistake. AB 5, passed and signed last month, virtually bars Californians from working in the gig economy. The law, which implements a California Supreme Court decision, imposes a three-pronged test that identifies who’s still free to be a contract worker and who has to be a hired employee.  A worker can be an independent contractor only if he or she:

  1. A) Is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
  2. B) Performs work that is outside the usual course of the hiring entity’s business; and
  3. C) Is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Is there a freelance worker who could possibly pass Part B?  Under that requirement, janitors could work as independent contractors only when they have contracts with companies not in the business of cleaning. Or a ride-share driver could work under a contract with Uber or Lyft only if those companies were primarily in the business of, say, selling vacuum cleaners. 

It’s a rigid framework, says labor law firm Fisher Phillips, that will appear, if it already hasn’t, in “the nightmares of your average gig economy business executives.” It’s already a bad dream for workers.

Despite AB 5, Uber Drivers Would Rather Quit Than Be Employees ,” reads the headline to the first installment of a two-part series in the online publication, Los Angeleno. One driver interviewed for the story said that “when the lawmakers make these laws, they don’t live our lives. I have to pick my kids up or drop them off. I do that and come back to work, driving. What shift is going to let me do that other than this?”

Los Angeles Times columnist George Skelton, no puppet for corporations, recently wrote      “there are tens of thousands of independent contractors who apparently don’t feel the slightest bit exploited. And they don’t want anything to do with formal employment or unions.”

The few able to pass the test and remain independent contractors might not be independent for long.  In a signing statement, Gov. Gavin Newsom said the next step “is creating pathways for more workers to form a union , collectively bargain to earn more, and have a stronger voice at work.”  It is “in this spirit,” he said, that he would persuade political, labor, and business leaders to support an effort in which “workers excluded from the National Labor Relations Act” would have “the right to organize and collectively bargain.” When Skelton said that maybe the aim of AB 5 was “to rope in more dues-paying union members,” he might have been more correct than he realized. 


(emphasis added)

Not surprisingly, many left-leaning publications were happy to see this glorious “victory for the working class” come to pass. A friend mailed us the following collage of two tweets, which is quite revealing (unfortunately we don’t know who created it, so we cannot give credit – but we would like to thank whoever made it for helping us make our point):


Woke leftie web publication VOX Media was all agog over the “victory for workers everywhere” after California’s AB 5 was passed in mid September. Precisely three months later, hundreds of freelance jobs at VOX Media have been cut just ahead of the law coming into effect. Somehow we doubt that those affected by the cuts are in a mood to celebrate this great “victory”.


We feel reminded of the time when Bernie Sanders was caught paying his campaign staff less than the minimum wage he had sotto voce clamored for in his campaign speeches. It is always amusing to see the hypocrisy of socialists exposed, but the really important point is that the laws of economics are universally valid and do not care about anyone’s ideology.

The VOX authors who praised the adoption of AB-5 so fulsomely in September failed to appraise its implications beyond the most superficial level. As for the economic policy proposals of Bernie Sanders (and those of several other Democratic candidates competing for the nomination), the less said the better. As Friedrich Hayek observed: “If socialists understood economics, they wouldn’t be socialists”. This is undoubtedly the most economic way of putting it.

It remains to be seen how severe the impact of the new law on Uber will be. The company argues that ride-hailing services are not its main business line. Rather, it is simply “a technology company that operates a marketplace” and “connects individuals with a work opportunity”. Thus it believes its drivers should be exempt from AB-5 as the work they perform has “nothing to do with the company’s usual course of business”.

This argument is not entirely bereft of merit, as Uber could be seen as a kind of (future) “Amazon marketplace for services”. The company does in fact plan to expand into new areas, with food deliveries next on its to-do list. Alas, it is not certain that the courts in California will agree. Our guess is they probably won’t.

This would leave Uber with the stark choice of either abandoning the Californian market or raising its prices sufficiently to cover the additional costs. Uber drivers may or may not get lucky. Whether the company will remain competitive if it is forced to raise prices is uncertain, but it would clearly be a major headache (it is estimated that the reclassification of drivers in California alone would add around $3,625 per driver, or roughly $500 million to Uber’s annual operating costs).

Uber and Lyft have in the meantime jointly launched a 2020 ballot referendum to exempt ride-hailing companies from AB-5 rules. Uber is obviously concerned that the courts might end up not siding with it. This concern goes beyond California: the problem is that if the rules do change there, other states may follow suit. In fact, the AFL-CIO (union) is reportedly already diligently working on that.

This brings us back to the “stark choice” mentioned above. Even if Uber were to conclude that it will be able to achieve a small operating profit or at least a breakeven result under AB-5 rules, it may decide to suspend its activities in California anyway (at least temporarily), in order to dissuade other states from mimicking its example and to convince recalcitrant drivers that demanding employee status is suicidal.


There have been protests by Uber drivers over pay and work conditions, but most were surprisingly small


For the sake of completeness: both before and after the adoption of AB-5 there were a number of mainstream media reports about Uber drivers protesting their pay and working conditions. A search of headlines and images suggests that these protests were surprisingly small relative to the number of registered drivers, but clearly some drivers would prefer to become employees rather than remain contractors.



The performance of Uber’s stock since its listing in May is certainly nothing to write home about:


UBER, daily since its listing in May this year. Presumably this rather dismal performance was not expected, but it was probably not undeserved.


As is well-known, the company suffers from a severe case of Unicornitis, i.e., it continues to post astronomical losses – and the market does not seem to be in a particularly forgiving mood at the moment. One must concede it is quite a feat when a third quarter loss of USD 1.2 billion is hailed as “better than expected” or praised for being “less of a heart attack-inducing catastrophe than the second quarter loss” (which amounted to a truly eye-watering USD 5.2 billion).


Pricking unicorn bubbles…


One may be excused for wondering whether there is still enough time for this calamitous money-devouring singularity to be rescued by its total addressable fata morgana. On the positive side of the ledger, revenue growth continues apace and the company’s new CEO (relatively new, that is – he got the job in 2017) remains confident that the first profits will be seen within three years. The WeWork and Sprint-damaged chiefs of Softbank are probably praying that his optimism does not turn out to be misplaced.

The new CEO brings us to the old CEO – Uber’s co-founder Travis Kalanick,  who was forced by the company’s largest shareholders to resign as CEO under a cloud after he presided over a series of scandals (here is a detailed timeline). Recently news emerged that most people would probably consider a signal of impending trouble for Uber. As the FT reports, Kalanick has sold almost his entire stake in the company at quite an unseemly pace:


Travis Kalanick has sold the vast majority of his stake in Uber, liquidating more than $2.5bn worth of stock in less than two months. Mr Kalanick, Uber’s former chief executive, has now sold more than 90 per cent of his shareholding at the time of the ride-hailing group’s initial public offering in May.


Kalanick started dumping his shares immediately after the lock-up period expired.  Not surprisingly, the haste and thoroughness of this liquidation is widely regarded as bad news. The FT continues:


“The rapid selling does not suggest Mr Kalanick has much confidence that Uber’s shares will rebound, despite efforts by his successor Dara Khosrowshahi to curb its losses and make peace with regulators. Uber has been trading around 33 per cent below May’s $45 IPO price since the lock-up expired. “When insiders, current and past, sell, they normally signal bad news,” said Meziane Lasfer, professor of finance at City University’s Cass Business School. “The market is likely to follow him.”


In 2017 Uber unexpectedly became driver-less ahead of schedule… however, a new driver was quickly installed and he’s reportedly quite an optimist. He has to be.


We hear the good professor, but an alternative interpretation should not be ruled out in this case. The chart shows that the stock made its year-to-date low precisely on the day the the lock-up expired, i.e., on November 06. Other traders were front-running the event, as the largest daily losses were recorded in the days leading up to the lock-up expiry date.

The stock is actually in recovery mode ever since. Evidently the market had no problem whatsoever absorbing Kalanick’s $2.5 billion in sales (plus whatever selling other insiders engaged in), which is a sign of underlying strength. The only potential concern is that Kalanick may have sold because he knows or sees something the rest of the market doesn’t.

Kalanick is also financing a new business he has been focused on since stepping down as Uber CEO. In other words, his reason for selling may have nothing to do with Uber’s prospects, wobbly though they may appear at the moment. We would personally refrain from buying the stock for a variety of reasons (we are inter alia wary of the extremely overbought state of the broad market), but from a short term trading perspective, such situations strike us actually as intriguing.


Chart by stockcharts




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