Anyone who has stood in the rain trying to hail a cab understands why competition is important in the transportation market. In many American cities, outdated regulations serve to keep the number of taxis on the streets artificially low, resulting in long waits, poor service, and, in many neighborhoods, a complete inability to call or hail a cab.
Working with technology companies like Lyft and Uber, a new class of small-business owners has been working to solve these problems. Armed with little more than a smartphone and their car, a small group of entrepreneurs are driving innovation in an industry that’s been dominated by entrenched business and a regulatory framework originally drafted in the early 20th century.
In Chicago, though, taxicab corporations saw these new drivers as a threat to their bottom line, and they took to court to demand that federal judges freeze Chicago’s taxi regulations in amber in order to provide permanent economic protection for taxicab owners’ preferred business model.
But ridesharing drivers fought back and intervened in the lawsuit to fight for economic liberty and the basic principle that entrenched businesses have no legal right to economic protectionism. Three rideshare drivers partnered with the Institute for Justice (IJ) to intervene in the taxi cartel’s unconstitutional lawsuit against the city of Chicago.
The case came down to the legal question: Are cities allowed to remove outdated barriers to entry without first paying off an incumbent monopolist? In October 2016, the 7th U.S. Circuit Court of Appeals answered with a resounding yes. The same day, in another IJ case, the 7th Circuit also upheld Milwaukee’s lifting of a longstanding cap on the number of taxicabs the city would allow to operate.
In April 2017, the U.S. Supreme Court declined to hear the taxicab owners’ appeal, resulting in a final victory for transportation freedom.
Memorandum in Support of Motion to Intervene
Memorandum in Support of Motion to Dismiss
Memorandum Opinion and Order
7th Circuit appellate decision
Ridesharers Stand Up for Their Rights
The taxi owners claim that they have a federal constitutional right to have the government arrest their competitors—people like Dan Burgess, a former engineer who drives 10 to 30 hours a week for uberX, Sidecar and Lyft. He also owns Chicago Trivia Guys, a business that puts on trivia programs in bars and restaurants in the Chicago suburbs. Dan loves ridesharing because, along with his trivia business, it’s a way to connect with people. He even asks his passengers trivia questions in the car. Chicagoans appreciate him: they give him 4.8 and 4.92 starts out of five on uberX and Lyft, respectively.
Dan is a typical ridesharing driver—an ordinary guy who has found a new source of income and a new way to help others by using what he already owns. Since he typically works nights at his trivia business, ridesharing provides him with something fun and lucrative to do during the day. Night jobs are common among ridesharing drivers. Ted Liu, a trading systems specialist by night, drives during the day, as does Jim Thonippara, a former personal banker.
Jim fell in love with ridesharing and uses it as his primary source of income. He grew up in Chicago and enjoys transporting people around the great city. Ted is a Chicago native and, like Dan, a former engineer. Any passenger of Dan’s, Ted’s or Jim’s is sure to hear an interesting story or two.
Dan, Ted and Jim want to keep earning money by giving people rides, and they don’t want to be arrested for it. That’s why they have teamed up with the Institute for Justice to intervene in the taxi owners’ lawsuit against Chicago. The Institute and the drivers have moved to dismiss the lawsuit and will ensure that the city doesn’t give in to special interests and settle.
Ridesharing in Brief
Ridesharing is not a new concept. From giving a friend-of-a-friend a lift in exchange for gas money, to college “ride boards” and carpools, Americans have been sharing their cars with others for decades. In recent years, the advent of smartphones has made it a more widespread, low-cost transportation option for many city dwellers who prefer door-to-door service in a clean, new car over the hassle of hailing a cab, fumbling with cash, and bouncing around in the back of a beat-up cab that’s gone a few too many without a tune up.
Ridesharing is part of an emerging class of businesses that enable ordinary people, equipped with little more than a smartphone, to become entrepreneurs. From running errands, cooking dinner, or even going grocery shopping for someone who does not have the time, to giving them a ride home on a rainy day, the “sharing economy” has created thousands of new small-business owners in just a few years.
Here’s how ridesharing works: Passengers use an app on their smartphone to request a ride and nearby ridesharing drivers are notified. The services that currently offer this technology in the Chicago area are uberX, Sidecar, and Lyft. The driver can then decide whether or not to accept the passenger. If the driver accepts the passenger, the passenger is notified that the driver is on his way and can track his location through the app. The passenger pays for the ride—including, for some companies, an optional tip—via credit card through the app, instead of paying the driver in the car. The driver later receives 80 percent or more of the passenger’s fare deposited directly into his bank account by his ridesharing service. Although details vary by company, the basic idea behind ridesharing is to provide comfortable, friendly rides from drivers who want to share their cars.
Ridesharing has taken off across the U.S. as people realize how efficient, convenient, and fun transportation can be. uberX is now in 24 U.S. cities, Sidecar is in 10 U.S. cities, and Lyft is in 24 U.S. cities. The popularity of ridesharing has driven demand to the point that many municipal regulators haven’t been able to keep up, and so ridesharing has become a lightning rod for controversy.
Antiquated Regulations Hold Transportation Back
City regulations make it illegal to operate a taxi business without first obtaining a special taxi medallion, which is a license to operate that can cost upward of $360,000 on the open market.
Part of the reason ridesharing companies are finding such a warm welcome is that consumers in many American cities are faced with a deeply broken transportation system.
For a century, American cities have locked themselves into transportation regulations that operate on the same theory: that competition is bad and that regulators should strictly limit the number of entrepreneurs who can start transportation businesses. The results have been unsurprising—and, from the perspective of consumers and entrepreneurs, terrible. While the 20th century saw amazing advances in countless fields, a modern consumer looking to hail a cab generally finds herself with about the same options she would have had during the Great Depression—that is: standing in traffic, arm outstretched, trying to whistle while seemingly-empty cabs whizz by looking for more lucrative rides.
Chicago’s taxi regulations are no different from most. City regulations make it illegal to operate a taxi business without first obtaining a special taxi medallion, which is a license to operate that can cost upward of $360,000 on the open market. By charging more than a third of a million dollars just for the government’s permission to be in business, Chicago has turned a multitude of small taxi businesses into an industry dominated by powerful and entrenched insiders.
Riders and Drivers Fight Back
In recent years, consumers and entrepreneurs across the country have started fighting back against anticompetitive transportation restrictions. In some places, these outdated regulations have been thrown out by judges. In April 2013, for example, a judge in Milwaukee struck down that city’s similar taxi-permit system as unconstitutional. In other places, though, entrepreneurs have refused to wait for permission from regulators and taken it upon themselves to find new ways to get people around town.
Either way, insiders who benefit from the existing regulations have not taken these innovations lying down.
Ridesharing drivers compete with taxicabs, but they are not taxicabs themselves. Thus, it makes no sense to apply taxi regulations to ridesharing drivers. Most taxi regulations were written without anything like ridesharing in mind:
Taxi ordinances generally require licensed cabs to have meters, but ridesharing technology calculates payment rates over smartphones.
Most taxis are also required to be painted certain colors and be certain types of vehicles so passengers will know which cars to hail.
Ridesharing technology doesn’t use hailing, and passengers are told over their smartphones the make, model and even license plate number of the vehicle picking them up.
There is no sense trying to saddle ridesharing drivers with these and similar regulations. True health and safety requirements for ridesharing, such as insurance and inspections, are unobjectionable but anything else is trying to force ridesharing drivers to be taxicabs, which they’re not.
The Empire Strikes Back
Wherever there’s an innovative startup company, there’s likely a politically-powerful, entrenched industry that seeks regulatory protection. True to form, Chicago’s incumbent taxi companies have struck back against ridesharing in a big way. On Feb. 6, 2014 a group of taxi corporations and allied interests sued the city in federal court, arguing that the city has violated their constitutional rights by refusing to arrest ridesharing drivers—or at least not arrest as many as they would like.
Although the cab companies’ lawsuit is directed against ridesharing, there’s no reason a similar lawsuit couldn’t be brought against the city for allowing or encouraging a variety of other transportation alternatives. Adding new bus lines, improving the “L” system, widening city streets to ease traffic, or even encouraging people to ride their bikes or carpool are all ways to make it easier to not have to catch a cab.
If companies like the taxi companies had their way in the past, Chicagoans would still be hailing horse-and-buggies.
All of these alternatives to cabs would be threatened if the taxi owners’ lawsuit succeeds.
At the same time that owners filed the lawsuit, they were also trying to shutdown attempts by some city officials to officially recognize ridesharing through a new ordinance that would license the practice. The city’s draft ordinance is hardly ideal for ridesharing drivers. For example, it would not allow (pdf) ridesharing at the airport or convention center. However, the taxi owners are opposed to any recognition of ridesharing at all.
If an ordinance passes that officially recognizes ridesharing—whatever it says—the taxi owners have a backup plan. Their lawsuit argues that any new ordinance would be irrelevant because ridesharing would still serve to devalue their medallions, even though it would be sanctioned under the city’s laws. That demonstrates that this lawsuit is not about the technical question of whether ridesharing drivers are violating the city’s taxi regulations, but instead, whether increased competition can be allowed under any circumstances.
There is no Constitutional Right to Have the Government Arrest Your Competitors
The problem for the taxi owners is that there is no constitutional right to be free from competition, let alone a right to force the government to arrest your competitors. The Constitution is meant to protect people from the government unreasonably restricting their right to earn an honest living. It is not a tool for entrenched businesses to shut down entrepreneurs offering a better service for a lower price.
If companies like the taxi companies had their way in the past, Chicagoans would still be hailing horse-and-buggies. Just as gas-powered taxis provided new competition for horse-drawn hansom cabs, the new technology enabling ridesharing provides new competition against traditional taxicabs and dispatch services. Taxi owners do not have a constitutional right for the government to shut down ridesharing drivers, just like typewriter manufacturers or candle makers did not have a constitutional right to force the government to shut down personal computer designers or light bulb inventors.
Other lawsuits similar to the Chicago taxi owners’ have failed. For example, in 2006 in Minneapolis, the city council decided to get rid of its cap on taxicabs entirely, only requiring new cab owners to meet neutral health and safety standards, and not forcing them to purchase a medallion from someone else. In response, the taxi owners sued, claiming that the city must pay the owners the value their medallions would have fetched before the reforms.
The Institute for Justice intervened in the lawsuit, representing a new taxi owner, Luis Paucar. IJ argued the taxi owners have no right to be compensated just because the city now allowed others like Luis to compete against them. Otherwise, the city could never remove regulations because it would have to pay-off beneficiaries of its past protectionism. The federal trial court agreed, throwing the case out, and the 8th U.S. Circuit Court of Appeals affirmed (pdf).
In short, it is no surprise that incumbent businesses in Chicago have taken to the courts in an effort to demand permanent protection from competition. And it will be no surprise when that effort fails, just as it did in Milwaukee and Minneapolis.
Lead counsel for the ridesharing drivers is Anthony Sanders, an attorney in IJ’s Minnesota Chapter, joined by IJ Attorney Renée Flaherty from IJ’s headquarters in Arlington, Va.
Founded in 1991, the Institute for Justice is the national law firm for liberty. Over its 23-year history, IJ has repeatedly won victories on behalf of transportation entrepreneurs nationwide, including:
Ibrahim v. City of Milwaukee—Just last year, the Institute for Justice successfully secured victory for a group of Milwaukee taxi drivers challenging the city’s decades-old prohibition on new taxi businesses.
Mile High Cab v. Public Utilities Commission—In early 2013, the Institute for Justice won a unanimous victory in the Colorado Supreme Court on behalf of Mile High Cab, a driver-owned taxi company that had been kept out of the market by state officials.
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