August 3, 2014

How Ride Sharing Services Could Reshape the Transportation Industry in Kentucky

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Could Yellow Taxis Become as Rare as Black Dial Telephones?

by Douglas Brent, Attorney at Stoll Keenon Ogden PLLC

In a world where consumers can choose from a hundred different mobile handsets and a handful of voice service providers it is hard to imagine there was actually a time when the only choice for was a rotary telephone, available only from a monopoly provider. And the phone was leased, not even owned. In that bygone era, customer-owned phones were derided by the incumbent phone companies as a hazard to the “network” they controlled. The legacy model, protected by regulation, was end-to-end service from a single provider under no pressure to innovate.

Entrepreneurs broke down that model – first for equipment, later for long distance and local services – but offering consumers choices wasn’t easy. Regulators were willing to uncritically accept the “protective tariffs” that reinforced a monopoly on telephone equipment. Even the memorable “Hush-A-Phone” – an acoustic device designed to cut background noise by shielding the mouthpiece of a phone – was barred by the FCC as an encroachment on the rights of Ma Bell. It took a federal court to step in and declare “the telephone subscriber’s right reasonably to use his telephone in ways which are privately beneficial without being publicly detrimental.”[1] 

What does that have to do with taxis? Enter ride sharing services like Lyft and Uber. These companies offer mobile apps to allow someone to use their mobile telephone in a way that seems “privately beneficial,” to conveniently request a ride without having to use a conventional taxi service. But is it publicly detrimental?

The incumbents claim it is. Lyft and Uber face attacks on several fronts. Taxi owners and associations have complained to state regulators, arguing these services are un-certificated, illegal taxi services. They’ve complained to legislatures, demanding that ride sharing services conform to the regulatory model. And the entrenched interests have sued in a few places, raising a variety of claims.

The sharing services argue they aren’t providing rides; they are providing information services, facilitating transactions between 3rd parties. So just as eBay isn’t a store, Uber isn’t a taxi service, they contend.

Disruptive enterprises like these are at the brilliant intersection of the Internet, geo-location technology, social networking, and modern wireless services. Without question, technology can make for a better, perhaps more economical and environmentally friendly transportation experience. But what about Kentucky law?

The Kentucky Transportation Cabinet hasn’t said how it should classify this type of industry and, thus, is unsure of how it should be regulated, since both companies operating in Kentucky have explicitly rejected the label of “transportation provider.” The Cabinet has stated that it is currently in the “information gathering phase” on this business model, and does not want to “rush to judgment” on whether or not these kinds of companies are operating outside the law.  The City of Louisville has similarly taken no firm position on the subject, and the Lexington-Fayette Urban County Council recently voted to conduct further general study on ride-sharing programs in preparation for a deeper discussion in September when its Public Safety Committee reconvenes. Unlike some states, Kentucky’s utility commission does not regulate transportation companies. 

Detractors say ride sharing services are engaging in unfair competition if not formally made subject to the multitude of state and local licensing fees, seat taxes, employment taxes, and operating guidelines imposed upon traditional transportation providers. Against those arguments (and innuendo about safety issues stirred up by incumbents), the entrepreneurs behind these ride sharing businesses – like those behind advancements in the telecommunications industry – say they simply found a more efficient and consumer-friendly way of facilitating an essential service. 

In bypassing the traditional transportation business structure, companies like Uber and Lyft say they have built groundbreaking business models around internal regulation of passenger safety, promotion of individual entrepreneurism, and enhanced user choice. The companies also claim to have passed their fiscal savings on to consumers. If there is evidence to back such claims, policymakers must consider what would actually be gained by regulation for ride sharing businesses in light of what might be lost. Would an increase in regulations better protect the interests of the consumer? Or would it merely shield traditional service providers from changes brought on by a new era of technological advancement? 

If the lessons from the telecommunications industry are true for the public transportation sector, the industry must brace itself for competition, using the overhaul of the telephone industry in the last half of the twentieth century as its guide. The technological change that eliminated “protective tariffs” for telephone companies was spearheaded by the disruptive innovators that brought customer-owned home phones, mobile devices, and the Internet. 

Faced with modern disruptors to the status quo like Uber and Lyft, policymakers are now at a crossroads of whether to suppress efforts to challenge the “black telephones” of transportation: the taxi system. Can the entire industry flourish through uniquely tailored laws that will protect consumer interests while ensuring public safety? Wherever regulators end up on this issue, there can be no doubt that technology will again drive the evolution of a static industry. 

[1] Hush-A-Phone v. United States, 238 F.2d 266, 268 (D.C. Cir. 1956) (emphasis added).