Travis Kalanick, co-founder and CEO of Uber Technologies, was recently sued in the Southern District of New York for allegedly fixing prices among competitors through its smartphone app in violation of Section One of the Sherman Act and Section 340 of the Donnelly Act. In separate litigation over the status of Uber’s drivers as employees or independent contractors, Uber claims that it is not a transportation company, but rather a technology company—a claim that has made the company vulnerable to antitrust liability for the use of their app’s pricing algorithm.
In Plaintiff’s view, the uniform fixed price discourages competition and artificially increases prices for consumers.
Uber’s smartphone app pairs users with private drivers who can pick them up and drive them to their desired location. Uber makes a profit by collecting a percentage of the fare paid by riders as a software licensing fee, part of which is remitted to the driver as payment. The fare paid by the rider is set by Uber’s pricing algorithm, at issue in the New York lawsuit.
Plaintiff Spencer Meyer argues that drivers don’t merely use Uber’s app to match riders with drivers; drivers also use the app to implement Uber’s pricing algorithm, resulting in drivers uniformly charging a fixed price. In Plaintiff’s view, the uniform fixed price discourages competition and artificially increases prices for consumers. Kalanick argues that there is a “natural explanation for the noncompetition alleged,” and that drivers each independently decide that it’s in that particular driver’s best interest to use the suggested Uber pricing algorithm. Additionally, Kalanick stated that Uber’s algorithm is merely a proposed term of dealing, that each driver is free to accept or reject that term, and that its conduct has been recognized as lawful under Section One of the Sherman Act.
The Sherman Act prohibits unreasonable agreements in restraint of trade. To prevail on a claim under Section One of the Sherman Act the plaintiff must prove: (1) the existence of a contract or conspiracy among two or more persons or entities; (2) that unreasonably restrains trade or competition; and (3) that affects interstate or foreign commerce.
Meyer claims that the conduct of Uber’s drivers amounts to a conspiracy.
Courts take two approaches in analyzing whether a particular action is unreasonable, either by using the per se approach or the rule of reason approach. Under the per se approach, activities such as price fixing are considered per se illegal. Limited types of conduct are considered illegal per se because the alleged actions “are so plainly harmful to competition…that they are conclusively presumed to be illegal without further examination.” Meyer’s complaint alleges that Kalanick has engaged in direct horizontal price-fixing, a form of conduct that is illegal under the per se approach.
In contrast, when courts apply the rule of reason approach they must consider whether the “questioned practice imposes an unreasonable restraint on competition.” Courts do so by examining specific information relating to the business, the condition of the business “before and after the restraint was imposed, and the restraint’s history, nature, and effect.” When pleading an antitrust violation that is analyzed under the rule of reason the plaintiff bears the burden of showing that the challenged action has an “actual adverse effect on competition as a whole.”
Meyer claims that the conduct of Uber’s drivers amounts to a conspiracy. Due to the use of Uber’s algorithm, drivers “forgo competition” because they are assured that other Uber drivers will not undercut their rates. Kalanick argues that parallel conduct occurs when a small number of competitors engage in the same action around the same time and that there is no evidence of communications between drivers to support the theory that drivers are engaging in parallel conduct. Additionally, Kalanick argues that the mere use of Uber’s pricing algorithm does not reduce the independence of drivers’ pricing decisions. In its order and opinion, the court stated that, when examining agreements that supposedly form the basis of a conspiracy, the misconduct should be judged not by “technical niceties but by practical realities.” In the court’s opinion, the de-centralized nature of Uber’s app does not prevent the software company from constituting a market where a conspiracy may take place.
Kalanick has attempted to characterize Uber’s alleged price fixing as a type of vertical conduct. Vertical action takes place among parties in the same chain of distribution; in contrast, horizontal action occurs among competitors present at the same level. A horizontal price restraint takes place between competitors, including “agreements among competitors to fix prices.” Kalanick claims that when a “vertical actor” such as Uber announces their price in advance and refuses to deal with those who fail to comply they are simply sharing their terms of dealing. According to Kalanick, Uber has merely proposed terms of dealing to their down-stream independent contractors, and that each contractor has the freedom to accept or reject those terms.
Meyer alleges that if drivers were truly acting independently, they would not agree to follow said pricing algorithm.
The suit brought against Kalanick is a class action, alleging that all persons in the United States who have used the Uber app to obtain rides from drivers and paid fares for their rides that were set by the pricing algorithm are members of the class, with a distinct sub-class of riders who paid fares based on the surge charge pricing algorithm. O’Connor v. Uber Technologies, Inc., a separate case being litigated in the Northern District of California over the alleged misclassification of Uber drivers, is also a class action.
At issue in the present case is Uber’s surge pricing, or their algorithm that sets prices based on demand or availability of drivers. Kalanick states that the surge pricing is implemented to perfectly match the supply of drivers to the demand for rides. Alternatively, Meyer argues that the surge pricing is actually a way to “remove some demand so that prices stay artificially high and Kalanick reaps artificially high profits.” The surge pricing algorithm can permit fares to rise to ten times the normal fare during times of high demand. Meyer alleges that if drivers were truly acting independently, they would not agree to follow said pricing algorithm.
Additionally, Meyer alleges that Uber has an 80 percent market share in the mobile app-generated ride-share service market, with Lyft having a 20 percent market share. A third competitor, Sidecar, left the market at the end of 2015. When the market is broadened to include taxis, cars for hire, and app-generated ride-share services, Uber controls a 50 percent to 70 percent of the market share. In its order and opinion denying Kalanick’s motion to dismiss, the court stated that Meyer had provided a plausible market definition in its complaint. Judge Rakoff also stated that plaintiff had adequately pled “adverse effects in the relevant market.”
On February 8, 2016, Kalanick moved to dismiss the complaint, but on March 3, 2016, Judge Rakoff declined to dismiss plaintiff’s Sherman Act claim and plaintiff’s Donnelly Act claim. In Judge Rakoff’s opinion and order he stated that Meyer’s complaint stated enough facts to support a reasonable expectation that discovery will reveal evidence of an illegal agreement. The court also stated that Meyer had “adequately pled both a horizontal and a vertical conspiracy.” The court explained that plaintiff’s Donnelly Act claim withstood Kalanick’s motion to dismiss for the same reasons that plaintiff’s Sherman Act claim withstood the motion, leaving both of plaintiff’s claims viable after the judge’s order.