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Between an UBER Rock and an UBER NOT TOO Hard Place.

12 febrero, 2016

I was invited to write in this blog by Mr. Juan David Gutierrez, whom I would like to thank the opportunity and the space to express my ideas.

As a regular reader of Mr. Gutierrez blog, I came across with a very interesting post titled “Between an UBER Rock and an UBER Hard Place” written by Professor Julian Nowag. In said post, Professor Nowag argued that it could be of the best interest of Uber to be seen as the employer of the Uber drivers (the “Drivers”) in order to reduce the risk of being held responsible for price fixing in the market of taxi services.

The core of his argument is that the Uber’s price definition model could be challenged as a “hub and spoke” cartel that coordinates the prices that Drivers charge to consumers, as already happened in Canada. Therefore, Professor Nowag argues that “it might be less risky (and cheaper) for UBER to advance the argument that it is employing it’s drivers”. According to him, by accepting that there is a labour relation with the Drivers, Uber would avoid “any risk of antitrust liability by means of the EU’s Poucet et Pistre case law (workers are not undertakings) or section 6 of the Clayton Act in the US.”

Nevertheless, Uber itself has been fiercely fighting all claims aiming the recognition of Drivers as employees and, in my opinion for good reasons. The first one, without doubt, is that recognizing such labour relationship would contradict the reality of the organizational model of the company in which Drivers are independent contractors who enjoy full independence as to how many hours and in which places they want to work. Additionally, executing labour agreements with the Drivers could increase Uber’s costs up to 30%, and would cause this firm to assume immeasurable legal implications worldwide, which altogether could put at risk its own sustainability, and in the long-term even cause a prejudice to the Drivers.

Thus, although the strategy proposed by Professor Nowag could be a recommendable alternative for firms facing similar challenges, it is clear that in the case of Uber, recognizing the Drivers as employees is a highly costly solution, perhaps even an impracticable one.

Therefore, I would like to use this space to discuss some arguments that in my opinion, would help Uber to structure a solid defence in case of a claim for infringing competition rules, and that would also safeguard the interest of the company of not being regarded as the Drivers’ employer. My purpose here, is not to discuss the existence of a labour agreement between Uber and the Drivers, this is a matter that I leave to labour lawyers, but rather to show that even disregarding such situation, Uber’s practices do not constitute a cartel or an unlawful agreement in the light of article 101 of the Treaty on the Functioning of the European Union.

Uber and Drivers are a single economic unit.

As Professors Okeoghene Odudu and David Bailey explain, the “conception of competition requires two or more entities capable of acting independently on the market. The clash between the autonomous strategies each entity adopts is competition and each entity is at this stage able to contribute to the commission of an infringement” (Odudu and Bailey p 4) of the rules protecting competition.

Thus, agreements between two or more persons belonging to the same economic entity fall outside the scope of  competition law  (see Hydrotherm Gerätebau GMBH Vs the Commission). The most popular situation occurs under ownership and labour relations. As Professor Nowag mentions, the applicable case law considers that agreements within the framework of a labour relationship are not covered by competition rules because employees form part of the entity that has employed them (Whish and Bailey P 93)[1]. Consequently, an agreement entered between employees and employers, or holdings and subsidiaries cannot be characterized as a cartel.

Nevertheless, these two situations are not the only means by which two entities or individuals become part of one same economic entity. A person can also have competitive control over another as a result of “contractual (…) structural, or economic links” (Odudu and Bailey p 5). This is the case of commercial agents, and some distributors or subcontractors.

Thus, for Uber, the legal issue is whether Drivers are independent undertakings or if they form part of a single economic unit with it. Legally, to answer this question one has to apply the test of control, and thereby determine the extent to which an individual or entity has a real autonomy to act in the market and define its own competitive performance. In this case, said test would inform whether Uber exercises a decisive influence over the Drivers, making them adopt “in all material respects” the instructions given to them by Uber (see Akzo Nobel NV and Others v Commission). If it does, the conclusion would be that the Drivers form, indeed, one single undertaking with Uber.

In the case at hand, I believe the Drivers do not enjoy the autonomy to “independently determine [their] own conduct on the market” (Whish and Bailey P 93). I arrive to this conclusion because it is possible to see how Uber unilaterally determines: i) the name and the branding of the service; ii) the price of the service; iii) the standards according to which service should be rendered; iv) the code of conduct of the Drivers; v) the criteria for becoming a Driver; vi) the way in which each service is allocated; vii) the distribution of the earnings, among others. Therefore, it is clear for me that, even if Drivers are not regarded as Uber’s employees, there exists an undeniable structural link between Uber and the Drivers by which individuals that join Uber’s network as Drivers immediately become part of an “unitary organization of personal, tangible and intangible elements, which pursue a specific economic aim” (Shell v. Commission, cited in Odudu and Bailey p 5). Thus, competition among Drivers is impossible.

A very similar conclusion was reached by the Office of Fair Trading of the United Kingdom (OFT) regarding an alleged price fixing cartel among a number of anaesthetists belonging to an association named GAS. In that case, the OFT dismissed the charges because it considered that GAS members acted as a single undertaking. Its conclusion was based on the grounds that the members competed under a common name, only participated in the market through the group, and shared administrative functions, among others (see OFT Summary of the Decision).

Following the above reasons and precedent I consider that there are sufficient grounds to defend that Uber and the Drivers are a single economic unit. The purpose of this entity is to compete in the taxi service market under the competitive conditions set by the Uber headquarters. Thus, I consider that any claim against Uber for price fixing among Drivers should be dismissed[2].

Uber’s pricing policy could be considered as unilateral behaviour.

Furthermore, I believe that Uber has arguments to deny the existence of a cartel, even under the dissenting hypothetical premise that Uber and the Drivers are different undertakings. As I explain below, the methods by which Uber determines its prices do not breach any competition rules.

To start with, it could be argued that Uber‘s pricing methodology is not an agreement at all. This issue was examined by General Court and the Court of Justice of the European Union in a case where a pharmaceutical company reduced the volume supplied to its wholesalers in Continental Europe in order to ban parallel importations to UK and keep the final prices of its products up (see. Commission v Bayer).

In that occasion, such Courts agreed that an anticompetitive “agreement cannot be based on what is only the expression of a unilateral policy of one of the contracting parties, which can be put into effect without the assistance of others” (Commission v Bayer). It is important to bear in mind that, as it was established by the General Court in this case, the sole fact that the wholesalers continued to conduct business with the pharmaceutical company after the export ban was implemented did not amount to a sufficient prove of the existence of an agreement.

Therefore, it would be important to differentiate cases where there is a concurrence of wills of “the contracting parties to achieve an anti-competitive goal” (Commission v Bayer) and cases where one party has a unilateral economic policy which can be implemented without the concurrence of its counterparty. In that case, the Courts found that the pharmaceutical company had absolute autonomy to set its own commercial policy, while its contractual counterparts had no power to impede or modify it. Therefore, all anticompetitive charges were dismissed since the analysed conduct was not an agreement, but rather a unilateral behaviour of a non-dominant undertaking which falls outside the scope of articles 101 and 102 TFEU.

In the case of Uber, rather than being agreed, the price of the services rendered by Uber -and the Drivers- is determined unilaterally by Uber according to its own commercial policy and the features of its technology. Hence, it seems that Drivers have never agreed or even discussed the prices that they charge to consumers. In the word of the applicable case law, concerning the mentioned prices, there is never a “concurrence of wills” between the Drivers and Uber. Thus could be argued that Uber pricing policy is not a cartel.

Even if all the above mentioned arguments fail, Uber would benefit from the exception of article 101(3) TFEU.

According to Professor Nowag, Uber’s pricing policy would be considered as an object restriction and will fail to meet the last requirement of Article 101 (3) TFEU.

Now, assuming that all the above mentioned arguments fail, I would agree with Professor Nowag that Uber’s pricing practice most likely will be considered as a restriction to competition by object [3]. Nevertheless, I have to disagree with him regarding the applicability of Article 101 (3) TFEU in this case. In fact, I believe that Uber has very good chances of benefiting from the exception contained in article 101 (3) TFEU. To support this position it would be necessary to examine in depth all the criteria of such article, however, for the sake of the space I will exclusively refer to the only requirement that according to Professor Nowag, Uber’s price policy won’t be able to meet.

According to the commented article, the analysed price fixing scheme “would fall short of the final requirement of Article 101 (3) TFEU[4]”, because, the arrangement does eliminate competition entirely.

However, pursuant to the European Community Guidelines on the application of Article 101(3) TFEU “Whether competition is being eliminated within the meaning of the last condition of Article 81(3) depends on the degree of competition existing prior to the agreement and on the impact of the restrictive agreement on competition, i.e. the reduction in competition that the agreement brings about.”

If we examine the composition of the taxi services market before and after Uber entered it, the evidence shows that competition has increased. Certainly Uber is now competing in a market before dominated by long lasting incumbents offering a new alternative to consumers. As it was revealed by the Economist in a recent study conducted in New York, data provide strong evidence that Uber is exerting a competitive pressure on the taxi industry, at least 65% of the growth in Uber rides from June 2013 to June 2015 “has replaced trips that would otherwise have gone to taxis”, while the remaining 35% provide service to under-served market segments. This also had an impact on the reduction of the price of the medallions which has fallen from an average of $1m during the summer of 2014 (see Taxis v Uber Substitutes or complements).

The Economist even goes further and states that the available data shows that “the market is not zero-sum, and that the benefits enjoyed by Uber and its customers and drivers have not come entirely at yellow cabs’ expense”.

On the other hand, also there are new efforts to compete with Uber around the world to the benefit of the market and consumers. Examples of this are the recent merger in Latin America between Easy Taxi and Tappsi, and the development of new Apps Arro, Bla Bla Car, Lyft etc. Indeed the latter already challenged Uber position in the market by setting a price war in San Francisco.

On top of that, it might be useful to note that Uber business model is a disruptive technology that has proven beneficial effects for competition and innovation as it has used idle capacity (see Rauch and Schleicher), reduced consumers’ payment transaction costs(see Federal Trade Commission Comments Before the Public Utilities Commission Colorado), reduced city congestion[5], promoted a “more efficient allocation of resources (e.g., vehicles and drivers) to consumers”( OECD Hearing on disruptive Innovation), and offered new alternatives for consumers. On the contrary, there is no empirical evidence supporting that Uber has had negative effects on competition, and claims against the firm usually regard the way in which Uber has forced its eventual competitors to take action to revise their own ways of participating in the market. Therefore, I believe that Uber defence under art 101(3) has good chances of success.

 Final comment.

I hope I managed to present some arguments as to support Uber position in the light of competition rules, without having to incur in the immense cost and risk of giving up its position in the labour claims. For future discussion, I think that the most interesting conduct to study in the light of competition law is the one of the incumbents of the market, the taxi drivers. It is worth considering whether the actions of some taxi drivers around the world (i.e., the use of violence, or blockage of roads) constitute an anticompetitive behaviour that authorities should analyse. In my opinion, it is clear that such acts could breach the competition regimes, and so does the Brazilian competition authority, which just announced possible investigations against taxi drivers for actions against Uber.

To contact the author please send email to carlosesguerra@hotmail.com

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[1]                      Richard Whish and David Bailey, Competition Law, Eight Edition, Oxford University Press 2015.

[2]               Now, this leave us with a final question: if Uber model is not based on labour relationships, which of the other two traditional categories of single economic unit (ownership or commercial agency model) could be used to label Uber business model?. Although this is an interesting discussion, for the purpose of this article this is irrelevant. As long as the economic facts supports that Uber and the Drivers act in the market as a single economic entity, it becomes unimportant if at the end Uber business model is categorised as a commercial agency,   any other category, perhaps even a new one.

On the other hand, the relevant market definition of Uber is still subject to discussion. Although some commentators consider that their relevant market is the one of the taxi services, there is another position arguing that Uber does not participate in that market since it is just a technology platform that does not provide that service. This issue is not addressed in my article since I am responding to Professor Nowag’s previous post which, in turn, is based on the assumption that the relevant market is defined as the “taxi services market” in regards to the complaint in Canada.

[3]           Regarding Uber price fixing being considered an object restriction, Uber could argue that it’s pricing policy is not an object restriction that “reveals in itself a sufficient degree of harm to competition” (Groupement des cartes bancaires) and therefore its conduct has to be analysed on the grounds of its effects on the market which have been beneficial.

Generally, price fixing, is considered as a hard-core restriction by object. However, there are certain circumstances in which the specific particularities of an agreement permit not to condemn a price fixing agreement as an object restriction or hard-core cartel, and instead to judge it for its effects on the market. Evidence of this is the COMMISSION DECISION of 24 July 2002 relating to a proceeding under Article 81 of the EC Treaty and Article 53 of the EEA Agreement (Case No COMP/29.373 — Visa International — Multilateral Interchange Fee).

To advance in that position, Uber could argue that fixing the prices of the Drivers have the pro-competitive purpose to incentive inter-brand competition, to promote competition based on quality rather that price among the Drivers, and manage the image of its brand. This pro-competitive effects of vertical price fixing were accepted by the Supreme Court of United States in the famous Leegin case which changed the long lasting doctrine of per se illegality of this kind of arrangements and which are now analysed on the grounds of their effects on the market.

If Uber wins this argument, any authority, court or private party that would like to challenge Uber for price fixing, will have to bring sufficient material proves of the alleged negative effects in the market, which is, in the case of Uber seems to be very difficult to achieve. However, although in theory this argument sounds appealing, in practice I have to agree with professor Nowag’s stance, since all the Commission Guidelines on Vertical Restraints, the Block Exemption Regulation, and the DE Minimis Notice condemn price fixing, whether vertical or horizontal, as hard core restrictions by object. Therefore arguing that the conduct of different undertakings agreeing on a price fixing practice is not an object restriction, has very little chances to success.

[4]           The agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

[5]              Studies show that for every vehicle added to ride sharing fleets, five personal cars get out of the road. Rosabeth Moss Kanter/ Move: Putting America’s Infrastructure Back in the Lead 1st Edition/ kindle edition/ P 140.

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3 comentarios leave one →
  1. 1 marzo, 2016 4:03 AM

    Reblogueó esto en Developing World Antitrusty comentado:
    In this post from LaLibreCompetencia, Carlos Esguerra Cifuentes makes a compelling case on why Uber’s decision to not treat its drivers as employees does not make it vulnerable to price-fixing liability. We recommend this reading of an issue that is likely to appear in many jurisdictions in which the company operates.

  2. 3 marzo, 2016 9:28 AM

    I really like this thorough defence and would like to congratulate you to this post. If I were UBER’s lawyer I would argue along similar lines. I may like it particularly as it picks up the line of defence I suggested in my post ie the agency/franchise model. 😉

    When reading this, three things came to mind.

    1. The arguments/evidence that would need to be presented in a competition law setting to convincingly argue that the drivers and UBER present one undertaking would usually be similar to those that would be used against UBER in the context of labour law. So the argument might provide ammunition in for the labour lawyers.

    2. In terms of elimination of competition, it is not the competition on the market in general but rather the competition between the parties of the agreement that is relevant. Otherwise hardcore cartels in markets where not all player are part of the cartel agreement would pass this criterion.

    3. The agency/one undertaking defence could be dangerous in some markets. Particularly where the ‘regular’ taxi providers are all undertakings which involve one driver/car and not taxi companies with numerous drivers/cars. In such a market the agency/one undertaking defence could potentially lead to the finding that UBER is the dominant undertaking. And I suppose the cry: oh my good this is all predatory pricing would be heard soon.

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  1. Now at an UBER rocky antitrust court bench: a follow up on the UBER price-fixing case | Derecho y Política de Libre Competencia en América Latina

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