Uber Surge-Pricing Antitrust Suit Green-Lighted by Judge

Uber Technologies Inc.’s “genius” just backfired on the company and its co-founder Travis Kalanick.

U.S. District Judge Jed Rakoff in Manhattan on Thursday denied Kalanick’s bid to dismiss a proposed class-action lawsuit claiming the technology in Uber’s popular ride-hailing app is used to illegally coordinate high surge-pricing fares.

Rakoff rejected Kalanick’s assertion that a conspiracy involving hundreds of thousands of drivers was “wildly implausible” and “physically impossible,” an argument the executive made in filings since the suit was filed in December.

“The capacity to orchestrate such an agreement is the ‘genius’ of Mr. Kalanick and his company, which, through the magic of smartphone technology, can invite hundreds of thousands of drivers in far-flung locations to agree to Uber’s terms,” the judge said.

The ruling allows Spencer Meyer, a customer in Connecticut, to move forward with his claim that Uber’s pricing algorithm violates antitrust laws used to protect consumers from price manipulation.

Meyer’s lawsuit seeks damages on behalf of millions of U.S. riders who rely on the world’s largest ride-hailing company, and opens a new line of legal attacks on sharing-economy businesses. Uber faces other lawsuits and regulatory challenges over its business model, including demands by its drivers to be classified as employees instead of independent contractors.

Fundamentally Flawed

Uber argues the conspiracy described in the New York complaint and ruling would be physically impossible under the antitrust law, and that if Uber lost at trial then thousands of drivers would be forced to pay damages. The company also contends the case is fundamentally flawed because Kalanick would have to personally compete with Uber drivers for rides in order for the type of conspiracy alleged in the case to be true.

“These claims are unwarranted and have no basis in fact. In just five years since its founding, Uber has increased competition, lowered prices, and improved service,” Uber said in an e-mailed statement. 

New York Attorney General Eric Schneiderman and other regulators have also complained about Uber’s pricing algorithm, which ensures standard fares under normal conditions. In certain situations, such as heavy traffic, bad weather or on holidays, the fares rise sometimes to many times the normal rate in a practice known as surge pricing. The company pledged to limit the increases in emergencies under an agreement with Schneiderman in 2014.

Price Fixer

Meyer alleged in his complaint that Kalanick designed the company “to be a price fixer” because its drivers “do not compete” but rather charge fares set by the algorithm. Uber takes a cut of the fares. The business plan amounts to an antitrust scheme because the drivers, despite charging the same prices, are supposedly independent service providers, according to Meyer.

“Kalanick has long insisted that Uber is not a transportation company and that it does not employ drivers,” Meyer’s lawyers said in his complaint. “Instead, Uber is a technology company, whose chief product is a smartphone app.”

Rakoff said Meyer has plausibly alleged a conspiracy and the case should go to trial.

‘Disguise Itself’

“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,” the judge said.

At this point in the case, the plaintiff doesn’t need to present “direct, ‘smoking gun’ evidence of a conspiracy,” Rakoff said.

Evan Rawley, a professor at Columbia Business School, still sees the risk to Uber as remote.

“One always has to worry about lawsuits, but this one is so far-fetched that I wouldn’t lose much sleep over it if I were Uber,” Rawley said. “However, if the plaintiff won, it would indeed be potentially costly to Uber since it would interfere with how the core of their business operates.”

Andrew Schmidt, Meyer’s lawyer, didn’t immediately respond to voicemail and e-mail messages seeking comment on the ruling.

Drivers’ Trial

Uber is set for a trial in June in San Francisco federal court in a case brought by drivers seeking to collect pay and benefits as employees. A victory for the drivers may upend Uber’s business model and cut into its more than $60 billion valuation.

The ride-hailing service launched in 2010, has grown rapidly and now has a presence in 65 countries.

Uber and its competitors are able to keep down their costs by using contractors rather than employees. Typically, contractors pay their own expenses and aren’t protected by minimum wage and overtime laws. Companies don’t pay for their unemployment insurance, workers compensation or Social Security.

The case is Meyer v. Kalanick, 1:15-cv-09796, U.S. District Court, Southern District of New York (Manhattan).

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