Forbes, by Daniel Fisher
Adi Vaxman tried to do the right thing when she was setting up Tripda, a ride-sharing application that allows drivers to find passengers and share the cost of long-distance trips. She wanted to know whether Tripda could be liable if somebody using the site got in an accident, and whether the company should insure itself or provide insurance to drivers to protect against loss.
“We spent a ton of money on lawyers to try to figure out the best way to run this,” said Vaxman, a veteran entrepreneur and former PayPal executive, who’s raised $11 million in venture financing for Tripda so far. “And with all the questions we’re asking, the answer always is `it’s a gray area.’”
It’s the same for ride-sharing companies like Uber and Lyft, apartment-sharing companies like Airbnb, and even publications like Forbes that increasingly rely upon an army of freelance contributors who may or may not be considered employees when somebody sues. As the so-called “sharing economy” expands with the proliferation of digital technology making it simple to match up willing buyers with willing sellers of just about anything you can imagine, the traditional job of tort law – matching up victims of misfortune with the people who must pay them for their losses – is falling behind.
Vaxman will be a speaker at a conference Thursday night at Yeshiva University’s Cardozo School of Law that will feature executives from several other sharing-economy services as well as Michael Costonis, executive director in charge of insurance at Accenture consultants. The conference was organized by Kai Falkenberg, a visiting professor at Cardozo and until recently the head media lawyer at Forbes.
Tripda embodies the legal challenge facing sharing-economy firms and the people who use them. When somebody uses the site to find a ride or a passenger, Vaxman told me, they’re only doing in electronic fashion what generations of college students have done by checking out the bulletin board in their dorm lobby. While Tripda has raised millions from venture capitalists, it doesn’t actually charge drivers or passengers yet, so it’s hard to see how it would be liable for what happens in a user’s car. In theory, the driver’s insurance should cover any claims from an accident.
But U.S. law is hardly as simple as that. Plaintiff lawyers in this country are always searching for deep pockets, and if they can tap a corporate insurance policy instead of an individual policy, they will craft their arguments to get at the bigger pot of money. Judges have long shown a willingness to go along. And insurance companies often insert clauses into individual car and homeowner policies that deny coverage for claims that arise from business activities.
Services like Uber and Airbnb have blown these traditional concepts of law apart, by making it much easier for individuals to use their homes, cars or even talents for profit. It’s unsettled whether their insurance follows them into these new ventures, Falkenberg said.
“Theres a real open question,” she said. “It’s a gray area about whether or not your insurance covers it.”
Uber, Airbnb and other sharing economy firms that have soared to multibillion-dollar valuations maintain they aren’t liable for the actions of the people using their sites, but many provide supplemental insurance — Airbnb has a Host Guarantee — that kicks in after their individual policies have been exhausted. They’re still getting sued, though, and they’re quietly settling damaging cases before they get to trial, Falkenberg said.
“They can do that now, for one or two,” she said. But with tens of millions of people using a platform, “they cannot be doing that all over the world forever.”
Uber, for example, was sued after a 6-year-old girl in San Francisco was killed by a car operated by a driver using its app. Uber maintains it isn’t liable, especially because the driver was between Uber assignments when the accident occurred. But both the family of the 6-year-old and a pedestrian in a similar accident in New York are trying creative approaches, including suing Uber because the app is allegedly a distraction that can cause accidents. And lawyers are jumping into the fray with their own opinions about who is liable for what, casting for that dream client who will allow them to crack the corporate pinata of liability insurance.
One thing courts will consider is whether users of matchmaking services are really employees. Two federal judges in California recently decided to allow cases against Uber and Lyft to go to a jury on whether drivers are employees. Under the ancient legal theory known as respondeat superior, employers are responsible for the actions of their employees if they control the manner and means of work and the employee’s actions occurred on the job.
Does the simple fact a ride-sharing service vets drivers and gives them the electronic tools for finding a passenger and collecting a fee make that service an employer? Nobody knows, but the Ninth Circuit Court of Appeals in California last year determined that Federal Express drivers using their own vehicles were employees, not independent contractors, because they drove FedEx FDX -0.87%-flagged trucks, wore FedEx uniforms, and operated under a contract that effectively controlled their work hours.
The FedEx decision will loom large in the pending Uber and Lyft cases, and if the plaintiff lawyer who claims to represent the drivers for both services wins, she could succeed in destroying a business model many drivers actually prefer to formal employment. Drivers can opt out of the class actions, but that only preserves their right to sue on their own. If attorney Shannon Liss-Riordan wins her case, they can’t opt out of whatever changes Uber and Lyft are forced to make to their operating arrangements. And if she wins, those companies will likely face much greater liability for whatever a driver using their service does.
The law has long struggled with this question in franchise operations, Falkenberg said, and it is far from resolved. “The prevalent rule is the corporate entity will be on the hook” for an injury or other claim, she said, “if it assumes responsibility for the particular condition” that gave rise to that claim. A franchisor that gives detailed instructions on how to clean tile floors, for example, might be liable if a patron slips and falls.
Uber, of course, maintains it is just providing an app that helps drivers find passengers and vice versa. As such ridesharing services might be analogous to Craigslist or any online ad service, but there are important differences. Craigslist doesn’t vouch for the vendors who advertise on its site and it doesn’t provide them with valuable services like processing their credit-card charges. Some companies are already weighing the advantages of just classifying participants as employees and buying insurance to cover claims, Falkenberg said.
Media is another potential trouble zone for the sharing economy. In the print days, freelancers were technically on the hook for what they wrote, Falkenberg said, but in reality publishers almost always paid their legal bills. As outlets like Forbes and the Huffington Post recruit independent contributors to write for them, they are walking away from that arrangement. They are relying on Section 230 of the Communications Decency Act, which protects “interactive computer services” from being treated as publishers.
The law doesn’t explicitly exclude contributors who are paid incentive fees based on the viewership of their work, and AOL AOL +0.15% won an important ruling on this question in 1998. But while that’s good for social-media content firms, it means contributors can be forced to pay for their own defense if the subject of one of their articles gets mad and sues.
“The fundamental change is everybody’s now a publisher,” she said. “They all assume liability for what they’re publishing without recognizing the exposure. The wave of litigation coming down the pike won’t be against the institutional media but against Joe Shmoe by his neighbor.”
Insurers may cover the expense of the first suit, but drop them after that, meaning a freelance contributor could risk financial ruin if they are sued again.
“You’ll get covered the first time. But then what?” Falkenberg asks. “You’re going to continue your blog?”
Falkenberg has proposed setting up a law-school clinic where freelancers could submit their works for review by First Amendment experts before publication, to make sure they aren’t risking a lawsuit. Most big publishers do this now for their own writers, and it could head off disastrous lawsuits as well as disarming bullies who try to sue journalists into silence.
For Vaxman of Tripda, “the investment piece wasn’t that difficult.” Neither was building the platform. Tripda is now operating in 13 countries with more than 100,000 active users.
But she still doesn’t know whether a court will determine there is some fundamental difference between two friends sharing the expenses of a cross-country car trip and two strangers doing the same thing after meeting up on Tripda.
“I would love to know the answer, and I would love to know how to mitigate that risk,” she said. “We are not in the business to put people at risk.”
But given the way the court system works in the U.S., it will take a lot more litigation, and a lot more judicial rulings, to find out.