Some Suggestions on Regulating Technological Innovation: City of Toronto v Uber Canada Inc.

In November of last year, I wrote an article for The Court on the recent decision in Uber Canada Inc. v City of Toronto, 2015 ONSC 3572 [“Uber”] by the Ontario Superior Court of Justice (“ONSC”). In Uber, 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.  In other words, the Court said that Uber cannot be regulated under the existing municipal framework that has regulated the taxi industry in Toronto for several decades.  However,  as Justice Dunphy alluded to, it is open to municipalities to develop new approaches to regulating this form of Disruptive Innovative Technology (“DIT”), however, it is abundantly clear that ‘outside the box’  thinking is necessary.

In this regard, I suggested in the above referenced piece that Uber, from a policy standpoint, should not be viewed entirely as an elusive regulatory subject. Instead, it is better understood as mimicking the role that law plays in enabling a market framework to exist, as market regulator, constraining the behavior of market actors in the public interest. I further suggested that Uber’s framework of rules and their implementation might surpass the public interest function played by the municipality in the areas of driver safety, passenger safety, and cost regulation. The purpose of this article is to further explore that claim, highlight the strengths and weaknesses of the Uber framework in light of recent information, and propose how municipalities might approach the issue.

The Market for Plates

The rapid proliferation of Uber as a cheaper alternative to licensed taxi services is partly fueled by the inability of licensed taxis to compete on price. Notwithstanding that rates are directly regulated, licensed taxi drivers incur very high costs to obtain a taxi license, or the use of one, in order to make a living.  In the City of Toronto, a plate could cost $300,000to purchase and $2000 a month to lease or more. As I previously argued, municipalities, by allowing this market to continue, are allowing the industry to price themselves out of the market. Shortly after my November article, the Competition Bureau of Canada (“Competition Bureau”) echoed these very sentiments.  Amongst other things, the Competition Bureau states “regulators need to make sure that their rules get the overhaul they desperately need, before the whole taxi system seizes up.”

In November, I also highlighted that an interesting consequence of the municipal taxi licensing regime is a market for plates that has grown since the 1950s. In issuing a taxi license to a qualified driver, municipalities will grant the license indefinitely, as opposed to recalling the license once a driver retires or passes away. In other words, once a license is granted, subject to its renewal every year and ongoing use in the industry, the plate is transferrable property. In fact, it is common practice for license holders to bequeath them in their wills.

Of course, since a fundamental part of having such a regime is to control the supply of taxi services (and price) by strictly limiting the number of new licenses issued, the plates become relatively scarce. A driver seeking entry into the market could wait years to get a plate issued from the municipality. Alternatively, that driver could purchase or lease a plate from a retired driver or a taxi broker that has accumulated several plates from former drivers.

Given that scarcity commands a high price, and that there is a seemingly endless supply of drivers seeking entry into the market, the high price of plates is understandable but, in my opinion, not justifiable. The problem with the costs associated in either purchase or lease of such plates is that it fails to represent ‘real value’ or anything tangible that was created. The cost of a taxi license payable to the municipality is nominal, usually $100. However, a plate’s value is inflated by scarcity, which in turn is a by-product of the regulator limiting supply in the market and failing to set limits on the lifespan of each plate. In other words, to the extent that owning a plate gives the holder a license to participate in a monopoly, that monopoly is then further leveraged by market players to extract a staggeringly high rent from new market entrants. In sum, it is very possible that large amounts of money are being extracted from the ‘taxi economy’ without additional value being provided to drivers or passengers.

On the issue of the market for plates, I argue that the desired policy approach is quite clear: eradicate the market for plates. Municipalities could better regulate the issuance of plates by making them non-transferrable and by requiring drivers exiting the market, or their estates, to return the license to the issuer.  The license could then be re-issued to a new driver or a new one issued altogether.

What about Taxi Brokers and Market Supply?

In theory, overall supply would not be effected, only distribution. There are currently a fixed amount of plates in existence all of which must be renewed with the City on a regular basis. Drivers entering the market can obtain a plate from the City, if they choose to wait, or can obtain one privately, albeit at a significant cost. The only difference would be that private citizens or corporations could not sell or lease plates. Thus, the end result would be: one driver, one plate.

However, a seemingly simple restriction on plate transfers has the potential to disrupt and re-arrange an entire industry, making any regulatory approach inherently political and interest-group driven. While this is no surprise, the impact on the industry could outweigh the benefits of eradicating the market for plates, which entails eliminating a value-extracting middleman.

To argue that some type of value  is created for the industry as a whole by enabling drivers to get into the industry sooner rather than later by privately procuring a plate is simply wrong.  . Given that, presumably, the plate would have gone to someone else anyway had it been returned; on net, there is no new value created through this process, only value extracted.  Paying for a plate is merely akin to budding into a line-up by bribing the person near the front to let you in.

The real havoc would fall on taxi companies who currently play a dual role in the market. Many cab companies provide dispatching services to drivers, which is an activity caught by municipal regulation. Just to recap, Justice Dunphy held that Uber does not fall into the category of being a “taxi broker”, despite offering a replacement in the market for that very service.  This is primarily because the Uber’s are not provided by a person or entity, but merely a machine offering an interface for willing contractual parties to do this ‘brokering’ activity themselves. In fact, there is no dispatching that occurs in the ordinary sense. While I would agree that dispatching creates value, it is abundantly clear that machines can do it better.

The second role played by taxi companies is that they own several cars, own or lease several plates, and hire or subcontract drivers to operate said vehicles. Implementing a one driver, one plate scheme by restricting plate transferability would, in effect, render these companies obsolete, or at least limit them to fielding calls from incoming riders and dispatching taxi cabs.  However, do such taxi companies create value or, on the contrary, do they extract wealth from the ‘taxi economy’?

Not all taxi drivers have the resources to purchase or lease their own vehicles, which precludes them from entering the market. Paying a fee or percentage of earnings to a taxi company for using their vehicle, in order to earn a living, is arguably a value creating endeavour. However, this value-creating aspect of what taxi companies do must be separated from what taxi companies charge drivers for using their plates. Alternatively, if a taxi company is leasing a plate from a ‘retired’ driver for use on one of its vehicles, it is likely passing this fee onto the driver . In any event, taxi companies, by owning or leasing multiple plates, are either capturing non-value creating rents from the ‘taxi economy’ or paying such rents to plate owners and passing on the cost.

Uber and Regulating the Public Interest

Having become personally fascinated with the Uber phenomenon, I have made it a point to regularly use the service to gather ‘field evidence’ on how it works (and to save money). From my own user experience and through conversations with many drivers, I have observed a small handful of weaknesses, raising some doubt on Uber’s ability to effectively address public interest concerns.

A common complaint of Uber drivers is that too many drivers are on the Uber network at any given time. While prices have not dropped as a result, drivers experience this competition through reduced fare rates.  As a result, the drivers I have encountered feel they cannot make a full-time living being an Uber driver. This creates the opposite situation of what the municipal legal framework intended.  The municipal scheme aims to control the amount of drivers in the market in relation to the City’s population, ensuring that every market participant can at least make a living. This lessens the amount of ‘undercutting’ in the market and lowers incentives for non-compliance.

On a positive note, Uber’s online rating system, which requires passengers to rate drivers at the end of a trip, could eliminate some of the drivers from the market with low ratings. These ratings are immediately visible to would-be passengers upon initiating the ‘request a driver’ feature on the online app. I don’t view the high level of competition caused by the rating system to be a major concern, at least from a regulatory standpoint.  While in a traditional regulatory setting, too much competition might induce higher levels of non-compliance, I am not convinced that Uber customers are so easily fooled. In any event, the trend I have observed through my fieldwork is that most drivers are ‘Ubering’ on a part-time basis around their other jobs.  The main advantage Uber offers, is flexibility, wherein drivers can work whenever they feel like it.

Perhaps Uber is poised to change the work habits and income earning patterns of urban populations or at least a segment of them. By no coincidence, municipal regulation does the same, sometimes quite pervasively. While the undemocratic nature of how DITs shape our behavior is concerning to some, municipalities cannot put up proverbial legal barricades to prevent Uber drivers from ‘entering’ city limits.

 Conclusion

 While Uber has the potential to address many of the public interest concerns targeted by the municipal legal framework, it is far from perfect. However, instead of finding creative ways to push-back against Uber’s growth, municipalities should look at the ways in which DITs, like Uber, actually work to protect the public interest and should endeavour to enhance and integrate those features.  While municipalities, as a result of Uber, will be inevitably bound up in contentious politics, the possible demise of the taxi industry should be carefully weighed against the back-lash that would arise from restricting the transferability of plates. This could allow licensed taxis to compete on price with Uber and ultimately facilitate some type of convergence or integration between these industries.