Battle to Regulate Uber, Lyft Moves From City Halls to State Capitols

[Updated 5/19/15, 10:40 a.m. See below.] The push to regulate increasingly popular ridesharing services like Uber and Lyft has shifted from city halls to state capitol buildings—with implications for the companies’ reputations and expansion plans, as well as the future of transportation systems worldwide.

Last year saw passage of the first rules for ridesharing companies—or “transportation network companies,” as they’re often called in such legislation—at either the municipal or state level. Legislators in 17 U.S. cities and three states—Colorado, California, and Illinois—approved measures in 2014 that provided the companies a pathway to legalization, according to the Wall Street Journal and Xconomy research.

That activity has ramped up around the country this year, especially in state legislatures. As of this writing, 15 governors have signed ridesharing bills into law in 2015, according to research by Xconomy and Douglas Shinkle, a transportation policy expert with the National Conference of State Legislatures who has been tracking ridesharing legislation nationwide.

More ridesharing laws could follow. Nearly every remaining state has considered similar legislation this year, and there are several bills pending, Shinkle says. Those include proposed laws in Massachusetts, Michigan, and North Carolina.

The legislative barrage seems to be “springing from the prevalence and proliferation of these services, and folks wanting to have some basic regulatory framework in place,” Shinkle says.

The companies’ mobile apps let consumers book rides around town from private drivers. The companies don’t own the vehicles, and the drivers are paid as independent contractors. When entering new markets, these companies have operated in a state of questionable legality that has led to clashes with city officials and the taxi industry.

Despite these hurdles, Uber and Lyft have expanded rapidly. Uber, founded in 2009, has reportedly raised more than $5 billion in equity and debt—a record for a private company, the Wall Street Journal reported. Its service is now available in more than 280 cities across 57 countries, mostly concentrated in the U.S. Launched in 2012, Lyft has raised about $1 billion from investors and has drivers in 60 U.S. cities. [This paragraph was updated to include the latest fundraising total for Lyft.]

Initially, Uber and Lyft took a bold expansion approach: set up shop in a city, ask questions later. The idea, as the Wall Street Journal noted earlier this year, was to quickly build a big, vocal base of riders and drivers in a new market, then use that popular support to ward off challenges.

Sources: Douglas Shinkle, National Conference of State Legislatures; Xconomy research
States that have passed ridesharing laws
North Dakota

But over the past year or so, the companies have appeared more willing to work with legislators to move their services out of legal limbo.

Uber, for example, has publicly voiced intentions to shift from combativeness to compromise. The company is working with regulators “in markets across the world,” spokeswoman Lauren Altmin says in an e-mail message to Xconomy.

Last year, Uber hired David Plouffe— President Barack Obama’s former campaign manager and political adviser—to help hone its public messaging and oversee its policy initiatives. (Plouffe’s role is being taken over by Rachel Whetstone, previously Google’s public policy and communications leader. Plouffe remains an Uber adviser and took a board seat, Re/code reported last week.)

Plouffe has been “instrumental in helping to refine” Uber’s communications strategy and making it more “level-headed” and “cooperative,” says Matt George, CEO of Bridj, a startup that runs a demand-driven, private bus service in Boston and Washington, DC. He believes the companies in the transportation technology industry have moved toward cooperation on innovation—and are doing so “in fundamental partnership with those that are entitled to protect the public good, which is our government,” he adds.

Shannon Liss-Riordan, a Boston attorney representing drivers in separate lawsuits against Uber and Lyft, sees the companies’ recent approach differently: “They’re trying to legislate themselves into legitimacy after having to force their way into various markets. Now they’re trying, after the fact, to get the rules written to allow them to be there.”

Uber’s Altmin didn’t directly answer Xconomy’s question about why the company has started working more closely with legislators.

It’s not likely that these legislative debates are putting the future of the ridesharing industry in jeopardy. The services have become so popular among consumers that even the most staunchly opposed regulators don’t expect to put the genie back in the bottle. Many politicians have expressed willingness to accommodate—or even excitement to embrace—this emerging industry by creating a regulatory framework that aims to balance consumer protections and public safety with the companies’ business models.

But the pace of expansion for Uber and Lyft could be affected by the state laws that get passed, as the companies evaluate on a case-by-case basis whether the rules are too onerous for them to operate in different markets. (More on that below.) Although regulations might bring higher business costs, securing widespread legal approval would probably allow executives and investors—who have hundreds of millions of dollars on the line—to breathe easier.

Whatever the motivation of the companies, the increased legislative activity around ridesharing is hard to miss.

Shinkle thinks the emerging industry has become a top agenda item for state legislatures mainly because Uber and Lyft have quickly expanded beyond large metropolises into a growing number of smaller cities and suburbs. “It’s become clear that this is not something that’s just going to be a service offered in large cities,” Shinkle says.

The state laws that have been enacted obviously have broader geographic reach than municipal ordinances, which likely simplifies things for Uber and Lyft. In Wisconsin, for example, the companies now only need to follow the state law approved recently, which trumps rules passed earlier by the cities of Milwaukee and Madison.

In general, the state laws are similar to one another, Shinkle says. They have primarily focused on setting insurance requirements for the company and driver, requiring criminal and driving background checks for drivers, implementing standards and timelines for vehicle safety inspections, and alerting riders to estimated fares, among other stipulations.

In Virginia, for example, the companies must pay $100,000 for an operating license; drivers must be vetted to see if they’ve been convicted of any felonies or are listed in the sex offender and crimes against minors registries; and either the company or the driver must carry insurance that covers up to $1 million in accident damage, the Washington Post reported.

In some cases, state requirements mirror policies the companies already have in place. The insurance rules for California and Washington state, for example, track closely with Uber’s policy. The company provides commercial insurance with $1 million of liability coverage and $1 million of uninsured/underinsured motorist bodily injury coverage per accident, which is applicable from the time a driver accepts a trip request to the completion of the ride. During the period when a driver has the app on but hasn’t yet accepted a ride request, Uber backs up a driver’s personal insurance policy with liability coverage of up to $50,000 per person per accident (with a total of $100,000 in injury coverage per accident) and up to $25,000 per accident for property damage.

And some states have actually approved insurance rules that are less stringent than company policy. For example, Arizona’s liability insurance requirement while a passenger is in the vehicle is only $250,000.

But it hasn’t been smooth sailing for some of the state bills. A few have stalled or been killed off this year, including in Texas, Florida, New Mexico, and Mississippi. In some cases, stronger insurance requirements have been a sticking point between legislators and ridesharing companies, among other issues.

Uber recently threatened to abandon states like New Jersey and Oregon because of proposed regulations that the company says would make it too difficult to do business there. It might not be bluffing: Uber exited Kansas this month after the state passed a bill that the company sees as overly restrictive. Lyft also has ceased operations in some cities, including Houston and Tacoma, WA, in response to regulations it opposed.

Some state laws have also drawn objections from municipal leaders. The cities of Madison and Milwaukee opposed passage of the Wisconsin law, in part because some city officials preferred local control of the industry. Another result of state oversight: cities lose out on revenue from permitting fees.

Madison Mayor Paul Soglin has said he doesn’t think the state law is strong enough. He told the Wisconsin State Journal that the law should have limited the companies’ ability to hike up prices during high-demand times, a practice called surge pricing, and that it should have required driver background checks conducted by police.

Uber and Lyft hire private third-party services to perform driver background checks. They defend the thoroughness of their vetting processes, but questions have arisen after incidents where Uber drivers were accused of rape, assault, and misdemeanor vehicular manslaughter. In at least one of those cases, the driver was convicted of a prior offense that should have barred him from driving for Uber, the New York Times reported.

“There are concerns about some of these things, and that’s probably why a lot of states still haven’t passed bills,” Shinkle says.

There’s another wrinkle that Liss-Riordan, the attorney, thinks states are overlooking as they move quickly to pass ridesharing regulations. “I feel like state governments are losing out on massive tax revenues from Uber misclassifying its drivers as independent contractors,” she says.

That includes revenues from unemployment contributions, workers’ compensation funds, and payroll taxes that would go to state coffers if ridesharing companies paid drivers as employees, instead of contract workers, she says. (Defining the drivers’ proper employment status is one of the key questions at stake in the lawsuits Liss-Riordan is involved with against Uber and Lyft.)

The current ridesharing regulations aren’t perfect, but they’re also not set in stone, Shinkle points out. Indeed, California is already considering adding more rules for ridesharing companies regarding driver background checks and guarding passenger data.

“I would not be surprised with states over the next couple of years continuing to go back, as new information comes to light, and refine their laws and make changes based on what they learn,” Shinkle says. “I think they just want to get a foundation in place.”

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