Mobile-based ride-sharing service Uber created quite a stir this weekend, setting a new valuation record for a technology startup in a direct investment round. Injecting $1.2 billion into the San Francisco-based service, investors valued Uber at $17 billion, a dramatic increase from last year’s valuation of $3.5 billion. An alternative to traditional taxi services, Uber functions through a highly-interactive mobile app that instantly connects customers and drivers, who provide transport in their personal vehicles. The ease of payment is especially attractive to customers, as fare is automatically charged directly through the app based on route distance. Uber in turn takes 20 percent of its drivers’ fares.

Uber and its primary competitors Lyft and Sidecar have enjoyed impressive growth recently, with Uber now serving 128 cities in 37 countries. The company also claims it is creating 20,000 jobs for new drivers every month. While the growth potential has investors salivating, Uber faces significant legal challenges.

Generally, traditional taxi services are subject to a myriad of municipal and state licensing, insurance, fare and pickup regulations, and in many large cities, taxi drivers are unionized. The legality of Uber’s operations is questionable in many cities, and resistance has mounted from both authorities and traditional taxi drivers alike. Last week, the Virginia Department of Motor Vehicles sent Uber and Lyft cease and desist letters for operating without proper permits, and San Francisco International Airport has declared that the companies’ operations on airport property is trespassing. Taxi drivers across Europe have opposed the services with lawsuits and strikes, including a physical attack on a Uber car in Paris earlier this year.

Also unsettled is the precise legal relationship between Uber and its drivers: are the drivers employees or independent contractors, and when does that relationship end? While Uber mandates that its drivers maintain $1 million in liability insurance coverage from trip acceptance to drop-off, it remains potentially vulnerable to incidents involving its drivers who do not have an active rider but have the app open. The family of a San Francisco girl who was struck and killed by a riderless Uber driver has filed a wrongful-death suit against the company, alleging it violates California distracted driving laws.

Concerns extend to criminal activity as well: last week Los Angeles police arrested an Uber driver for allegedly kidnapping and sexually assaulting a rider.

While Uber and its investors are betting that the app will ultimately replace traditional taxi services and dominate the transportation-for-hire industry, the company’s legal headaches may only increase as it continues its aggressive expansion to more cities and countries.

–Marshall Cox

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One Response to Uber: Staggering Value and Legal Headache

  1. Thomas Hayden says:

    Perhaps Uber is just running into some of the same problems that led to the hyperregulation of taxis in the first place – liability, bad drivers, creepy drivers – and needs to be thought about in the same way as a taxi. The distinction is that these aren’t traditional taxi services, in that instead of owning taxis, they own software. The software just happens to connects drivers to riders in a more efficient manner than real taxis do.
    Though these “ridesharing” services (“sharing” being a loose term — giving someone a ride is not sharing if that someone pays you) like to consider themselves neither taxis nor private car services, customers expect to be protected from the problems associated with paying strangers to take you places the same way that they do with taxis. So though Lyft prohibits drivers from picking up customers without prearranging it to get around being called a taxi, and only accepts “donations” to get around being a private car, regulators should probably just cut around the nonsense and classify them as a new type of taxi-like entity and force them to bend to some customer-protection rules like insurance, background checks, training, etc. The regulators should welcome more efficient and trustworthy ways of thinking about taxis — and if Uber is serious about legitimacy and protecting its customers, it should be open to working with regulators to come up with sensible rules for ride-forwarding services like these.