Peer-to-peer (“P2P”) business models based on the Internet and technology platforms have become increasingly innovative. As such models have proliferated, they frequently result in clashes with regulators or established market competitors using existing laws as a defensive tactic. The legal battles that result illustrate the need for proactive planning and consideration of the likely legal risks during the early structuring phase of any new venture.
Collaborative consumption, or the “sharing economy” as it is also known, refers to the business model that involves individuals sharing their resources with strangers, often enabled by a third-party platform. In recent years, there has been an explosion of these P2P businesses. The more established businesses include online marketplaces for goods and services (eBay, Taskrabbit) and platforms that provide P2P accommodation (Airbnb, One Fine Stay), social lending (Zopa), crowdfunding (Kickstarter) and car sharing (BlaBlaCar, Lyft, Uber). But these days, new sharing businesses are appearing at an unprecedented rate; you can now find a sharing platform for almost anything. People are sharing meals, dog kennels, boats, driveways, bicycles, musical instruments – even excess capacity in their rucksacks (cyclists becoming couriers).
The Internet – and, more specifically, social media platforms and mobile technology – has brought about this economic and cultural shift. Some commentators are almost evangelical about the potential disruption to traditional economic models that the sharing economy provides, and it’s clear that collaborative consumption offers a compelling proposition for many individuals. It helps people to make money from under-utilized assets and tap into global markets; it gives people the benefits of ownership but with reduced costs and less environmental impact; it helps to empower the under-employed; and it brings strangers together and offers potentially unique experiences. There’s clearly both supply and demand, and a very happy set of users for a great many of these new P2P services.
However, not everyone is in favor of the rapid growth of this new business model. Naturally, most of the opposition comes from incumbent businesses or entrenched interests that are threatened by the new competition or those that have genuine concerns about the risk posed by unregulated entrants to the market. Authorities and traditional businesses are challenging sharing economy businesses in a variety of ways, including arguing that the new businesses violate applicable laws, with accommodation providers and car-sharing companies appearing to take the brunt of the opposition to date.
One of the most successful P2P marketplaces, San Francisco-founded Airbnb is a platform that enables individuals to rent out part or all of their house or apartment. It currently operates in 192 countries and 40,000 cities. Other accommodation-focused P2P models include One Fine Stay, a London-based platform that allows home owners to rent out empty homes while they are out of town.
Companies such as these have faced opposition from hoteliers and local regulators who complain that home owners using these platforms have an unfair advantage by not being subject to the same laws as a traditional hotel. City authorities have also cited zoning regulations and other rules governing short-term rentals as obstacles to this burgeoning market. It has been reported that some residents have been served with eviction notices by landlords for renting out their apartments in violation of their leases, and some homeowner and neighborhood associations have adopted rules to restrict this type of short-term rental.
These issues are not unique to the United States. Commentators have reported similar resistance – with mixed responses from local or municipal governments – in cities such as Barcelona, Berlin and Montreal.
It’s not particularly surprising that opposition to P2P accommodation platforms would come from existing incumbent traditional operators – after all, that’s typical of most new disruptive business models in the early stages before mainstream acceptance. But the approaches taken by P2P opponents illustrate that most regulations were originally devised to apply to full-time commercial providers of goods and services, and apply less well to casual or occasional providers.
This has consequences for regulators, who are likely to have to apply smarter regulatory techniques to affected markets. Amsterdam is piloting such an approach to accommodation-sharing platforms, realizing the benefits that a suitably-managed approach to P2P platforms could have on tourism and the local economy.
Companies that enable car-sharing services have also faced a barrage of opposition, both from traditional taxi companies and local authorities. In many U.S. cities, operators such as Lyft and Uber have faced bans, fines and court battles.
It was reported in August 2013 that eleven Uber drivers and one Lyft driver were recently arrested at San Francisco airport on the basis of unlawful trespassing offenses. In addition, during summer 2013, the Washington, D.C. Taxicab Commission proposed new restrictions that would prevent Uber and its rivals from operating there. Further, in November 2012, the California Public Utilities Commission (“CPUC”) issued $20,000 fines against Lyft, SideCar and Uber for “operating as passenger carriers without evidence of public liability and property damage insurance coverage” and “engaging employee-drivers without evidence of workers’ compensation insurance.”
All three firms appealed these fines, arguing that outdated regulations should not be applied to peer-rental services, and the CPUC allowed the companies to keep operating while it drafted new regulations, which were eventually issued in July 2013. In August 2013, the Federal Trade Commission intervened and wrote to the Commissions arguing that the new rules were too restrictive and could stifle innovation. The CPUC rules (approved on September 19, 2013) require operators to be licensed and meet certain criteria including in terms of background checks, training and insurance. The ridesharing companies will be allowed to operate legally under the jurisdiction of the CPUC, and will now fall under a newly created category called “Transportation Network Company.”
Some operators have structured their businesses in an attempt to avoid at least some of the regulatory obstacles. For example, Lyft does not set a price for a given journey; instead, riders are prompted to give drivers a voluntary “donation.” Lyft receives an administrative fee in respect of each donation. In addition, in its terms, Lyft states that it does not provide transportation services and is not a transportation carrier; rather, it is simply a platform that brings riders and drivers together. In BlaBlaCar’s model, drivers cannot make a profit, just offset their actual costs, which helps to ensure that drivers are not considered to be traditional taxi drivers, thereby helping them avoid the regulation that applies to the provision of taxi services.
Traditional players embracing the new model
Interestingly, not all traditional players are taking a completely defensive approach. From recent investment decisions, it appears that some companies appreciate that it could make sense for them to work closely with their upstart rivals, rather than oppose them. For example, in 2011, GM Ventures invested $13 million in RelayRides and, in January 2013, Avis acquired Zipcar, giving Avis a stake in Wheelz, a P2P car rental firm in which Zipcar has invested $14 million.
The incentive for incumbent operators to embrace P2P models will likely vary by sector. Perhaps it’s no surprise that this is best illustrated in the car rental industry, where there already exists a financial “pull” and a regulatory “push” towards greener and more sustainable models of service provision.
Legal and Regulatory Issues
Lawmakers and businesses around the world are currently grappling with how to interpret existing laws in the context of P2P sharing economy business models and considering whether new regulation is required. For example, the European Union is preparing an opinion on collaborative consumption in the light of the growth of P2P businesses there. One hopes that European policy makers focus more on incentivizing public investment in P2P projects via grants or subsidies than on prescriptive regulation of the sector.
Importantly, however, it’s a particular feature of the market for P2P platforms that much of the regulatory activity tends to be at the municipal or local level, rather than national. This tends to make for a less cohesive regulatory picture.
In the meantime, anyone launching a social economy business will need to consider whether and how various thorny legal and regulatory issues will affect both the platform operator and the users of that platform. Often, this may mean tailoring services to anticipate particular legal or regulatory concerns.
Privacy. Operators will need to address issues of compliance with applicable privacy laws in terms of the processing of the personal data of both users and users’ customers, and prepare appropriate privacy policies and cookie notices.
Employment. Where services are being provided, the operator will need to consider compliance with any applicable employment or recruitment laws, e.g., rules governing employment agencies, worker safety and security, and minimum wage laws.
Discrimination. Operators will need to consider potential discrimination issues, e.g., what are the consequences if a user refuses to loan their car or provide their spare room on discriminatory grounds, for example due to a person’s race or sexuality? Could the operator attract liability under anti-discrimination laws?
Laws relating to payments. One key to success for a P2P business model is to implement a reliable and effective payment model. But most countries impose restrictions on certain types of payment structures in order to protect consumers’ money. Where payments are made via the P2P platform rather than directly between users, operators will need to address compliance with applicable payment rules, and potentially deal with local payment services laws. Fundamentally, it needs to be clear whose obligation it is to comply with these laws.
Taxation. Operators will need to consider taxation issues that may apply – both in terms of the operator and its users. Some sectors of the economy – hotels, for example – are subject to special tax rates by many cities or tax authorities. In such cases, the relevant authorities can be expected to examine closely – and potentially challenge, or assess municipal, state or local taxes against – P2P models that provide equivalent services. In some places, collection of such taxes can be a joint and several responsibility of the platform operator and its users.
Safety and security. When strangers are being brought together via a platform, security issues will need to be addressed. Most social economy businesses rely on ratings and reciprocal reviews to build accountability and trust among users. However, some platforms also mitigate risks by carrying out background and/or credit checks on users. Airbnb also takes a practical approach, employing a full-time Trust & Safety team to provide extra assurance for its users.
Liability. One of the key questions to be considered is who is legally liable if something goes wrong. Could the platform attract liability if a hired car crashes or a host’s apartment is damaged?
Insurance. Responsibility for insurance is also a key consideration. The issue of insurance for car-sharing ventures made headlines in April 2013 when it was reported that a Boston resident had crashed a car that he had borrowed via RelayRides. The driver was killed in the collision and four other people were seriously injured. RelayRides’ liability insurance was capped at $1 million, but the claims potentially threaten to exceed that amount. Given these types of risks, some insurance companies are refusing to provide insurance coverage if policyholders engage in P2P sharing. Three U.S. states (California, Oregon and Washington) have passed laws relating to car sharing, placing liability squarely on the shoulders of the car-sharing service and its insurers.
Industry-specific law and regulation. Companies will need to consider issues of compliance with any sector-specific laws, whether existing laws or new regulations that are specifically introduced to deal with their business model (such as crowd-funding rules under the JOBS Act in the United States, and P2P lending rules to be introduced shortly in the United Kingdom). As noted above, some social economy businesses have already experienced legal challenges from regulators, and as collaborative consumption becomes even more widely adopted, regulatory scrutiny is likely to increase. Accordingly, rather than resist regulation, the best approach for sharing economy businesses may be to create trade associations for their sector and/or engage early on with lawmakers and regulators in order to design appropriate, smarter policies and frameworks for their industry.
Erasmus said, “There is no joy in possession without sharing.” Thanks to collaborative consumption, millions of strangers are now experiencing both the joy – and the financial benefits – of sharing their resources. However, the legal challenges will need to be carefully navigated in order for the sharing economy to move from being merely disruptive to become a firmly established business model.