EU Court Will Resolve Uber's Identity Crisis

The ruling could slow down Uber's expansion and make other sharing economy companies more cautious.

Taxi or Tech?

Photographer: GEOFFROY VAN DER HASSELT/AFP/Getty Images

An important trial started on Tuesday at the Court of Justice of the European Union, the EU's top judicial authority. The judges are trying to determine whether Uber is a taxi company or merely a tech platform that enables customers to find drivers, and the decision, which is not likely to come before April, will serve as a precedent for other sharing-economy companies.

The first day of hearings in the case referred to the ECJ by a Barcelona court last year showed that while Uber sticks to its self-description as an enabling platform, the other parties' stances are diverse and nuanced.

The original plaintiff, the Associacion Profesional Elite Taxi, which represents Spanish taxi companies, says Uber is a transport company because customers pay it for transportation rather than a tech service. Spain as a nation backs the industry group. The Netherlands, where Uber's European holding company is incorporated, tends to agree with Uber that two services are being provided -- an intermediation one and a transport one. Ireland and France say Uber works "in the field of transportation" but is not necessarily a transport company: These countries don't want to be seen as unfriendly toward tech platforms, since France is home to the long-distance ride-sharing firm BlaBlaCar, and Ireland is the European domicile of Google, Twitter and Facebook.

This setup is typical of the European dilemma when it comes to technology-enabled business models. On the one hand, Europe wants to safeguard its labor market models that are more protective of workers than the American one. On the other hand, European countries would like to profit from the success of agile U.S. firms directly or learn from it and compete. They also want to guard labor market models that are more protective of workers than the American one.

That creates a climate of political uncertainty for the U.S. tech leaders. But the matter of the tech firms' identity as service providers or mere intermediaries can be argued on the merits, too -- something the ECJ will attempt to do.

The matter of Uber's identity as a tech company or a taxi one arose because in the former case, Uber must be allowed to operate unhindered throughout the EU, and in the case of a taxi company, a country can make it subject to an "authorization scheme." Uber began to operate in Spain in 2014 without asking the local regulators' permission, and the taxi association, whose members are subject to strict regulation, took exception to that. So with its ruling, the ECJ won't kill off the "sharing economy" in Europe -- it will simply make its evangelists subject to national regulations, whatever they may be. Some countries may decide that Uber and, say, Airbnb merely provide an "information society service." Others will treat one as a taxi operator and the other as a hotel chain. 

In a paper discussing the case, Damien Geradin of Tilburg University in the Netherlands argued that Uber is an intermediary. He wrote:

Uber does not create value by performing transport services, but by enabling direct interactions between two distinct categories of users. Like other platforms, such as eBay or Airbnb, Uber’s platform is also two-sided in that the two sides that the platforms connects (partner-drivers and riders) are linked by “indirect network effects” in that a large number of drivers benefits riders, and vice-versa. Traditional taxi companies hold none of these features.

Besides, the ECJ has already struggled with defining a transport company, and Nils Wahl, one of its Advocates General -- legal advisers whose opinions the court usually follows -- opined in 2015, "if the service in question does not mainly involve actual transport, then the mere fact that it can be linked in one way or another with transport does not in itself mean that it ought to be characterized as such." To Geradin, that means Uber is not a taxi firm because it doesn't own or lease the vehicles involved in its operation:

Unlike regular taxi services, Uber is not in the business of physically conveying people from point A to point B. Thus, while many people may consider that Uber provides transport services not unlike those offered by taxi companies in that “Uber cars” or “Uber taxis” (as they are sometimes referred to), there is no such thing as an Uber car let alone an Uber taxi.

The Spanish argument, however, is no less convincing, and not just because Uber charges customers for transportation rather than intermediation. In the U.S., there's a tendency to regulate Uber and its competitors as transportation companies, requiring that they obtain the appropriate licenses and insurance. California, for example, has created a special regulatory category of "Transportation Network Companies" for "companies that provide prearranged transportation services for compensation using an online-enabled application (app) or platform to connect passengers with drivers using their personal vehicles."

The American way of dealing with matters of tech-company identity is less bureaucratic than the European one: Regulators and judges try to go to the heart of the matter, the intent of a business model rather than its formal attributes. The 2013 Supreme Court case American broadcasting Cos. v. Aereo is a good example.

Aereo was a company that rebroadcast TV shows on demand to its subscribers. Each of them was sold an individual antenna, kept in the company's warehouse. The customer selected a program from a list on a website, that triggered the antenna to begin receiving the show, and an Aereo server streamed it to the customer with a few seconds' delay. The company's founders thought this was a legally airtight scheme to circumvent copyright laws: Aereo only sent the content to individual customers, and it didn't do so simultaneously with the original broadcast. Aereo made an argument similar to Uber's -- that it was merely enabling customers to access programming that was already publicly available. In the same way, Uber's technology provides customers access to drivers whom they otherwise couldn't get.

The Supreme Court, however, ruled that Aereo was essentially providing the same service as a cable company, just without the costs associated with producing content. The ruling destroyed the company's business.

Uber, too, provides the same service as a taxi company, only without most of the associated costs. The U.S. Supreme Court hasn't had a chance to rule on Uber's elusive nature, but there's a chance it might take the same approach as with Aereo.

Clearly, it benefits Uber to ignore local taxi regulations: Rapid global expansion is one of the few positive stories the huge money-shredder can sell to investors. Besides, the service is easy to duplicate, and many local competitors have already done so. Time is of the essence.

I'm not sure, however, that fighting tooth and nail in slow European courts meets Uber's objectives. It would probably make more sense to follow each country's regulations -- as it does in each U.S. state -- and enter foreign markets less aggressively. As it is, the outcome of the ECJ case will reverberate throughout the sharing economy -- and perhaps do some good, if other companies applying new tech to old services opt for a more considered approach.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.