Uber is the victim of Judge Rakoff’s curiosity in antitrust case

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 response that 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.

The plaintiffs have been shrewd about this case from the beginning. There are two good reasons why their complaint named Uber’s CEO – but not the company itself – as a defendant. The tactic raised doubts about the application of Uber’s mandatory arbitration provision, since the user agreement is between the company and its users, not Kalanick and users. (Uber has argued that because the allegations all involve Kalanick’s conduct as a company official, the user agreement should apply.) Naming the CEO personally also allowed plaintiffs to claim a per se illegal price-fixing conspiracy across the ranks of Uber drivers, because Kalanick has personally driven Uber customers a few times. Kalanick is the only Uber driver identified by name in the complaint.

The plaintiffs also turned Uber’s business model against the company, exploiting a risk for innovative businesses. Uber is a so-called disrupter that, by design, does not operate like traditional taxi or car service companies. The company’s product is its mobile app, which customers use to request a ride for a price pre-determined by an Uber algorithm. Drivers who have signed up as independent Uber contractors are notified of customer requests and can respond or not, as they choose. Uber processes customer payments so customers don’t have to use cash or credit cards; drivers receive most of the money for each transport, with a percentage going to Uber. (The company claims drivers are permitted to accept less than the price set by the company, but Judge Rakoff pointed out that as a practical matter, there’s no way for such price-cutting to occur because Uber has exclusive control over payment processing.)

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.

“Antitrust law has long appreciated the procompetitive benefits that come along with technological innovation and new market entry,” the company said in its motion to dismiss. “This lawsuit, if allowed to proceed, would strangle innovation, decrease competition, and increase prices – defeating precisely the behavior antitrust law is designed to encourage.”

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. And by insisting that it is not a taxi company or car service, they argued, Uber cannot claim it competes with those businesses. According to the plaintiffs, the relevant market for antitrust claims against Uber is mobile app-generated ride-share services – and Uber controls 80 percent of that market.

Rakoff found those points persuasive. “Uber’s digitally decentralized nature does not prevent the app from constituting a ‘marketplace’ through which Mr. Kalanick organized a horizontal conspiracy among drivers,” he said, citing (as plaintiffs did) a ruling by his Manhattan federal court colleague Katherine Forrest that held online narcotics sales at the Silk Road site to be part of a single, overarching conspiracy. “The fact that Uber goes to such lengths to portray itself – one might even say disguise itself – as the mere purveyor of an ‘app’ cannot shield it from the consequences of its operating as much more.”

For antitrust geeks, there’s much more to chew on in this case, including Judge Rakoff’s reliance on last year’s decision by the 2nd U.S. Circuit Court of Appeals in the Justice Department e-books antitrust litigation against Apple. As you probably know, the Supreme Court denied Apple’s petition for certiorari last month, declining the invitation to clarify the standard for evaluating a hub-and-spoke conspiracy like the vertical scheme alleged in the Uber case. Uber has emphasized that the facts in the Apple case, which involved a small group of publishers conspiring to use Apple’s e-books platform to wrest control from Amazon, are very different from the allegations of a conspiracy among hundreds of thousands of drivers. But it’s a bit discouraging for Uber that Apple failed to persuade the appeals court that its innovative digital platform actually increased competition.

Rakoff, meanwhile, has set a Nov. 1 trial date. Uber may try to change course and force this case to arbitration, but otherwise, the case will charge on.

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