The Challenges of Regulating Technological Innovation and the Obsolescence of the Regulatory State: City of Toronto v. Uber Canada Inc.

City of Toronto v Uber Canada Inc., 2015 ONSC 3572 [Uber] is a recent decision of the Ontario Superior Court of Justice (“ONSC”) dealing with the legal status of Uber, an interactive ride-sharing service that is disrupting the regulated taxi industry in Toronto. Justice Sean F. Dunphy ruled that Uber is neither a “taxicab broker” nor a “limousine service” within the meaning of the City of Toronto Municipal Code and thus cannot be prohibited from operating without a license. As the ongoing saga of Disruptive Technological Innovation (“DTI”) continues to unfold not only in Toronto but in the 260 other urban centres where Uber is present, the substantia et forma of Uber from a regulatory standpoint is far from clear. In this article, I suggest that Uber, rather than being viewed as an elusive regulatory subject, can be understood simultaneously as a market-enabling framework and a market regulator that not only challenges—but also, in many ways, surpasses—the public interest function performed by a municipality in its regulation of the taxi industry. While Toronto’s defeat at the ONSC does not foreclose the possibility for Toronto to amend its Municipal Code to capture some aspect of what Uber players actually do, Uber as a collective entity poses a larger challenge—namely, that the existing municipal regulatory apparatus is increasingly rendered obsolete by DTIs like Uber.

The Public Interest Served by Taxicab Regulation

As Justice Dunphy aptly describes, there are several public interest functions served by taxicab regulation in Toronto:

[T]he foundation of the regulatory system is the requirement that “every owner and every driver of a taxicab” and “every owner and driver of a limousine” obtain a license in order to carry on business…[G]iven the main thrust of the public interest in regulating the industry (consumer safety and protection), licensing the actual providers of the service to the public is the obvious cornerstone of the regulatory edifice (Uber, para 21).

These regulations, I suggest, can be roughly divided into two categories: 1) market-enabling regulations, and 2) public protection regulations.

Regulations that fall into the market-enabling category, albeit roughly, serve the purpose of creating a stable functioning market and consistent market relations. While this function overlaps with protecting the public, it relates more to the economic conditions and parameters of the market such as factors affecting supply and demand.

The key market-enabling function served by the municipal framework is the tight control of supply by strict limitations on the number of licenses issued, the control of prices, and rules of engagement between drivers. While these three measures enable a number of public protection goals to be addressed by other aspects of the regulation (such as transparency), they play the more fundamental role of creating a level playing field by eliminating aggressive undercutting between taxi operators and brokers. Thus, competition is regulated to ensure that every driver who invests into the municipality’s licensing requirements can depend on receiving fair access to the market. This results in stable and predictable revenue for drivers and controls disincentives to attend underserviced areas.

Regulations that fall into the public protection category relate more to mitigating the risks faced by users of taxi services imposed onto them by the negligence or malfeasance of drivers. These include personal health and safety as well as vehicle safety. The Toronto Municipal Code contains several provisions that create a system of accountability to the public by individual drivers and the industry as a whole. The more basic of these include provisions ensuring the identifiability of taxi brokers, individual cabs, and their drivers; the display of tariff cards; a requirement to document interactions with passengers; and rules against refusing passengers. More specifically to safety, drivers are required to undergo mandatory training; ensure their vehicles are clean and comfortable; drive current and properly maintained vehicles; install snow tires in the winter; and submit to vehicle inspections at local garages. Perhaps the most significant requirement is for owners and operators to have adequate insurance coverage.

To What Extent Should Municipal Taxi Regulation Protect the Interests of the Regulated?

Driving a taxicab in a densely populated urban area poses a significant risk to the personal safety of the driver. Several provisions exist in Toronto’s Municipal Code to protect driver safety. A more recent development has been a provision in the Municipal Code requiring owners to install an emergency lights system, camera system, and global positioning in all taxicabs—albeit at a significant cost.

An interesting consequence of the municipal taxi licensing regime in several municipalities has been the development of a market for taxi plates within the larger market for taxi services. While the extent to which the development of this market was intended or anticipated by the regulator is not clear, it is apparent that municipalities have done very little to curb the market for plates.

In municipalities such as the City of Brampton, for instance, the writer has witnessed plates trading for as much as $100,000. In Toronto, taxi plates trade for up to $300,000. Transfers are typically registered with a municipality’s licensing office, at which point the consideration paid for the plate is declared. Deceased taxi drivers who have accumulated several plates over a lifetime often leave the plates in their wills.

The trade value of taxi plates stems from their relative scarcity, which is governed directly by how many new plates a municipality decides to issue in a given period; the concomitant waiting list to receive a plate once an application is submitted (which is upwards of several years); and the steady demand of new drivers seeking entry into the market. Since new drivers cannot financially justify purchasing a plate for $300,000, purchasing a vehicle, carrying costly insurance, and paying a fee for dispatching services, many drivers or even brokers enter into leasing arrangements with plate holders. The monthly fee for leasing a plate can exceed several hundred dollars per month in Brampton and $25,000 in Toronto.

To be clear, it is not the municipality that charges new applicants this amount; the fee for a new plate application is minimal. However, there are only so many taxi plates in existence at a given time and the waiting period is considerably lengthy. From the writer’s experience, in the City of Brampton, a prospective applicant must first demonstrate that he or she has been active in the industry for a period of time, presumably driving as an employee for somebody else. This secures the applicant a place on the City’s Driver’s List. The City will periodically decide to issue new taxi plates. This could be annually, biannually, or less frequently, depending on the City’s assessment of supply and demand in the market. This gives rise to the waiting list mentioned above—and hence the premium paid to either lease or own an existing plate.

By allowing and actively registering the transfer of such plates—as opposed to cancelling them once a plate holder is deceased or retired—municipalities enable the market for plates to exist. This allows an individual or corporation, who has obtained one or more plates for a minimal cost for the purpose of becoming licensed in the industry, to extract a significant rent from other players. This not only raises the costs of driving a cab to make a living, but likely results in considerably higher fees. Thus, a key question arises in the ongoing debate over regulating Uber: What assurances of protection, if any, must a regulator give to the regulated from being priced out of the market due to excessive costs?

Can Uber Better Serve the Public Interest?

Even without an in-depth comparison between the market-enabling and public protection functions served by the municipal regime versus the Uber framework, it is apparent that Uber is challenging—and in some instances surpasses—the value provided by the municipal regime. The most obvious advantage is the considerably lower price offered by Uber compared to municipally licensed taxis. As discussed, this stems from eliminating a host of middlemen from the process of delivering private transportation services. Assuming that most consumers are rational and take their own safety into account when making consumption choices, the success of the Uber model from the standpoint of attracting passengers overwhelmingly indicates a rational trade-off at play. For consumers who have switched to using Uber, any perceived safety risk of using a non-licensed taxi is outweighed by the reduced cost and ease of using the Uber service.

While the list of similarities between Uber and licensed taxis is quite lengthy, the following key points of difference are an indication of the comparative value delivered by the Uber versus municipal frameworks:

Driver Accountability and Market Access

As Justice Dunphy acknowledges throughout paragraphs 27 to 47 of his decision, Uber employs an elaborate system to match willing drivers with passengers seeking transportation. The Uber network, to which drivers and passengers alike subscribe using only their smartphones, continuously monitors supply and demand in the local market, consisting of all the registered drivers and passengers that are on the network at any given time. It uses the GPS capabilities of its drivers’ smartphones to constantly monitor where any given driver is located. This arguably eliminates the need for a costly taxi light, decals on the cab, a meter, and other mandatory accessories.

When a passenger activates his or her Uber app, the network matches that passenger to the closest available driver. Once the driver accepts the request, the passenger is sent a message prompting them to accept that particular car and a bargain is made at a pre-determined rate. If a particular area is underserved and a request originates from there, the network will initiate “surge pricing” that offers drivers an incentive to pick up the distant passenger.

A key aspect of monitoring both driver and passenger behaviour is the online rating system employed by Uber. Passengers and drivers alike can rate the driver’s demeanour, friendliness, and driving habits, as well as the cleanliness of the cab and vehicle safety issues. Likewise, drivers can rate passengers, as each passenger has a unique account number. Several negative ratings can result in a driver’s or passenger’s account being suspended or cancelled. Such information is permanently stored in the network, providing significant incentives for both parties to the transaction to behave appropriately.

Personal Security

Uber drivers are subject to security requirements when registering as drivers. They are required to submit several pieces of identification (including a passport) as well as information on their vehicles. Moreover, a photograph of that driver, the license plate number, and vehicle particulars are sent to the passenger making the request, recording details of the transaction permanently in cyberspace. Moreover, every minute of the trip is monitored in real-time and recorded both by the driver’s and passenger’s smartphone. Drivers committing harassing, threatening, or violent acts against a passenger can be promptly identified and arrested due to Uber’s information requirements. More recently, an Uber driver who perpetrated a sexual assault in Mississauga was quickly identified and arrested.

Vehicle and Passenger Safety

With respect to passenger and vehicle safety, Uber drivers are required to install snow tires on their vehicles when the winter season begins. Importantly, Uber drivers are prohibited from registering with a vehicle more than ten years old and must have an annual comprehensive safety inspection performed on their vehicle by a licensed garage using an Uber-approved form.

There has been recent controversy over the insurance coverage that Uber provides for those injured in a collision involving an Uber vehicle. While Uber provides passengers, pedestrians and other vehicles with a $5 Million liability policy to claim against, it is unclear whether its drivers are covered for damage to their vehicles. Moreover, several Uber drivers were charged this past winter with failing to carry adequate insurance when operating a commercial vehicle. To address this uncertainty, Uber has recently partnered with a major Ontario insurer to provide commercial coverage for ride-sharing services.

Conclusion

The regulatory paradigm from which municipalities are to approach Uber should not focus on fitting Uber’s activities into the existing framework for regulating the taxi industry. Instead, municipalities should recognize the many needs served by the Uber model and how their own regulatory frameworks have in some ways contributed to Uber’s proliferation. Ultimately, municipalities should attempt to deliver greater “regulatory value” to the public and industry participants.

Some of the information provided in this article is based on personal conversations between the author and licensed taxi drivers in Toronto.