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District Court Finds Uber CEO, by Driving for Uber, May be Liable for Driving Up Prices

It is plausible that Uber’s CEO, Travis Kalanick, may have violated antitrust law by fixing prices charged to Uber passengers, a judge in the United States District Court for the Southern District of New York concluded last week in denying Kalanick’s motion to dismiss.  The lawsuit, Meyer v. Kalanick, is a putative class action initiated by Spencer Meyer, a resident of Connecticut, on behalf of people who, like him, have used Uber car services.  The complaint also names a subclass of people who have been charged according to Uber’s “surge pricing” model.

Notably, the action was not brought against Uber Technologies, Inc., but rather against Kalanick himself—Uber’s CEO, co-founder, “public face,” and occasional driver.  According to Judge Jed S. Rakoff, the allegation that Kalanick has driven for Uber is important to the survival of plaintiff’s claims, since it enables the plaintiff to charge not just a vertical conspiracy between drivers and Uber, but also a horizontal conspiracy between Kalanick and other drivers.

Founded in 2009, Uber is a smartphone app that facilitates on-demand car service.  Drivers pay Uber a percentage of their fares but, as the complaint in this case underscores, Uber “steadfastly maintain[s]” that it does not employ drivers.  Uber calculates fares for rides using an algorithm that it claims is market-driven.  When demand for car services is particularly high—for example, in inclement weather or during rush hour—Uber’s algorithm increases fares to charge “surge prices” that can be up to ten times the standard fare.

Kalanick has publicly touted Uber’s algorithm for calculating prices based upon market supply and demand.  However, in denying Kalanick’s motion to dismiss, Judge Rakoff held that the plaintiff sufficiently alleged that Uber’s algorithm violates both federal antitrust law (the Sherman Act) and its New York state analog (the Donnelly Act) because it “restrict[s] price competition among drivers to the detriment of Uber riders.”

Kalanick argued that drivers’ independent decisions to enter into vertical agreements with Uber are inconsistent with the horizontal conspiracy alleged by plaintiff.  Furthermore, relying on Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), defendant claimed that vertical action by a single firm does not constitute a violation of antitrust law.  However, Judge Rakoff explained that Leegin concerned vertical agreements setting minimum resale prices, which are not at issue in the instant case.

The court concluded that plaintiff plausibly alleged that Kalanick orchestrated and planted himself at the center of a “hub-and-spoke” conspiracy.  As the Court of Appeals for the Second Circuit explained in United States v. Apple, Inc., 791 F.3d 290 (2d Cir. 2015), such a conspiracy “consist[s] of both vertical agreements between the hub and each spoke and a horizontal agreement among the spokes to adhere to the hub’s terms.”  Indeed, according to the allegations of the complaint, Kalanick coordinated vertical agreements between Uber and affiliated drivers—in addition to entering into horizontal agreements with other drivers by virtue of being an Uber driver himself.

Kalanick argued that the alleged horizontal conspiracy was not only implausible but impossible, as it requires agreement between Kalanick and hundreds of thousands of drivers across the United States.  But the court credited plaintiff’s argument that Uber’s “genius” derives from its use of technology to accomplish coordination among a massive group of potential drivers.  While emphasizing that conspiracy is “a concept that is as ancient as it is broad,” Judge Rakoff admonished that “[t]he advancement of technological means for the orchestration of large-scale price-fixing conspiracies need not leave antitrust law behind.”

Furthermore, the court found that, at least at the pleading stage, plaintiff’s allegations of vertical conspiracy satisfy the “rule of reason” analysis applied to such agreements.  The court accepted plaintiff’s definition of the market as the “mobile app-generated ride-share service market,” acknowledging the distinction between on-demand app-based car service (which includes a driver-rating system, and automatic electronic payment) and taxi service—and noting Uber’s own statement that it does not compete with taxi services.  Because Uber “helped force . . . out of the marketplace” a competitor app (Sidecar), plaintiff sufficiently pleaded the adverse effects rule-of-reason analysis requires.

The court’s decision highlights plaintiff’s strategic use of several facts that Uber has tended to emphasize in its own marketing:

•  Uber is a technology company; it is not a transportation company and does not employ drivers;

•  Kalanick has used the Uber app to work as a driver; and

•  The market in which Uber operates is separate from the market in which taxis operate.

Footnoted on the last page of the opinion is the court’s response to Kalanick’s argument that Plaintiff is equitably estopped from filing a class action lawsuit because Uber’s User Agreement, signed by Plaintiff, provides that the user waives “the right . . . to participate as a plaintiff or class User in any purported class action.”  Judge Rakoff determined that, because Kalanick does not seek to compel arbitration and the lawsuit does not seek to enforce the User Agreement, the arbitration clause poses no barrier to this putative class action suit.