Uber faces NZ lawsuits amid claims of unprofitability and lawbreaking

by Donna Chisholm / 19 July, 2017
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Uber has brought big changes to the way many get around their city, but its future is uncertain following claims that it’s not only unprofitable but also breaking the law. 

Cheap rides could become a thing of the past as Uber comes under attack both here and overseas. The scandal-plagued ride-hailing company, which has shaken up the taxi industry around the world, is facing claims that its success is a mirage and its model is based on breaking the law.

In New Zealand in coming weeks, two damages claims by drivers left out of pocket by what they say is Uber’s lawbreaking will be tested in the district court.

In the US, business analysts say Uber’s model is based on two unsustainable tactics – subsidising fares and slashing driver incomes. They predict the cut-price rates that enabled Uber’s spectacular growth in its quest for global domination of the ride-hailing market cannot and will not last.

Last month, Harvard Business School associate professor Benjamin Edelman, who studies and teaches the economics of online markets, called for regulators to shut down the company, saying its cultural dysfunction stemmed from the very nature of its competitive advantage: “Uber’s business model is predicated on lawbreaking. And having grown through intentional illegality, Uber can’t easily pivot toward following the rules.”

Harvard associate professor Benjamin Edelman.

Yes, its app had brought cheap fares and improvements to the taxi business, but its biggest advantage was in using ordinary cars with no special licensing, Edelman said. This way, it avoided commercial insurance and registration, special licences, background checks and commercial inspections.

“This use of non-commercial cars was unlawful from the start. Uber succeeded in making lawbreaking normal and routine by celebrating its subversion of the laws. Having built a corporate culture that celebrates breaking the law, it is surely no accident that Uber then faced scandal after scandal. How is an Uber manager to know which laws should be followed and which ignored?”

New Zealand Transport Agency (NZTA) operations manager Kate Styles has been emphatic: “We have been really clear with Uber that the new way they have been operating is illegal.”

After the recent resignation of Uber’s messianic chief executive, Travis Kalanick, the investors pumping billions into the loss-making company are pinning their hopes on an Amazon-like turnaround. But business analysts are sceptical about that happening.

Former Uber CEO Travis Kalanick. Photo/Getty Images

The Kiwi connection

In New Zealand, Uber has recruited about 4000 drivers and now operates in Auckland, Wellington and Christchurch, with plans to launch in Hamilton and Tauranga before the end of the year.

One of the two Kiwi damages claims is being brought by Arden MacDonald, who, when Uber was already 18 months old here, decided to try his luck as a driver. The Auckland-based Virgin Australia flight attendant, tired of the physical stresses of full-time flying, signed on in September 2015. “In essence, they were legal then,” he says.

At the time, the company required drivers to get a passenger or “P” endorsement on their licence, at a cost of about $1600 for extensive background checks, and to pass an area-knowledge test and two NZ Qualifications Authority standards. Drivers also had to have commercial insurance.

But even at the start, MacDonald says, the appearance of legality was superficial. Uber enabled drivers like him who hadn’t been taxi drivers previously and therefore didn’t have a Passenger Service Licence to “rent” them from licence holders – something that, unknown to MacDonald, they couldn’t legally do.

After driving in his spare time for about four months, MacDonald decided to go part-time with the airline and increase his Uber hours. “The whole point was flexibility and lifestyle – that’s what sold me on the concept.”

He drove for a maximum of six hours a day but managed to take home an extra $500 a fortnight by juggling the roles. “I was making pretty good money. I was happy.”

He upgraded his Audi to a limo-style Škoda Superb and turned out in a sharp black suit and tie. He quickly topped Uber’s user ratings. “People ordered a cheap Uber and suddenly they got black leather, a long wheelbase and a guy in a suit.”

Taking damages claims: Arden MacDonald. Photo/Ken Downie

In April 2016, “the shit hit the fan” when Uber unilaterally cut per-kilometre fare rates. Apparently without telling all its drivers, the company announced it was reducing the rate by 27%, from $1.85 to $1.35, and dropping the requirement for drivers to have a P endorsement. Driving vehicles for hire without a P endorsement is illegal, and advocates for Uber drivers say the rate cut is a breach of contract.

MacDonald, 39, says most drivers were angry about the impact of the fare reduction on their income, but he was equally concerned about how driver numbers would potentially skyrocket if they could start driving without having to invest the time and money to get a P endorsement. Uber’s New Zealand general manager, Richard Menzies, has argued the endorsement was unnecessarily costly and time-consuming, and insists its police and driver record check was “in a number of ways a higher standard. With the passenger endorsement, you can actually come onto the road with certain criminal records in your past.” Uber doesn’t accept drivers with any criminal convictions.

MacDonald continued to drive for only a few weeks. “I started to feel like a dick. I would pull up and people would get in and go, ‘Ha, this is cheaper than wearing out my shoes.’ I thought, ‘I’m not doing this – this is ridiculous.’ I did the numbers and realised I was paying to drive. I think I was earning $11 an hour in the hand. The section they took out was the profit section.” He’s since returned to full-time flying.

He says the experience left him about $30,000 out of pocket. With the help of ProDrive advocate Peter Gallagher, MacDonald took a claim against Uber to the Disputes Tribunal for losses in income and on the resale price of his car. After four adjournments, he successfully applied in June to have the case heard in the Auckland District Court as a claim for a summary judgment for damages.

In April, the Advertising Standards Complaints Board upheld a complaint laid by MacDonald against Uber billboards. The billboards showed a woman in a room full of shelved documents, with text saying: “Background checks on every driver. We get Becky’s life story before you do.”

MacDonald said the ad misrepresented Uber’s knowledge about the background of its drivers and the legality of its background checks. The complaints board agreed the ad implied that Uber had in-depth knowledge about its drivers’ backgrounds and this could create a misleading impression for consumers. Uber is appealing.

Taking damages claims: Osanda Lunuwilage. Photo/Ken Downie

Second damages claim

Lawyers acting for ProDrive are preparing a second damages claim, for nearly $60,000, on behalf of another driver, Osanda Lunuwilage, who was left without valid insurance after he wrote off his own and two other cars in an early-morning crash on Auckland’s North Shore last December. He told an NZTA investigator in January that Uber told him only third-party insurance was required and a P endorsement for his licence was never mentioned.

Lunuwilage, 41, who came to New Zealand from Sri Lanka about five years ago, with his wife, Dilshima, and their three children, started driving for Uber last August to supplement his income as a cutter in a kitchen design firm. He bought a $20,000 2014 Honda hybrid and was driving about 20 hours a week, mainly at weekends. He says he was earning up to $750 a week in the hand.

“They never mentioned insurance at all other than third party,” he told the Listener. “If they had said we need to get commercial insurance, I would have done.”

When a friend who was also an Uber driver received a letter from the NZTA explaining they were breaking the law if they didn’t have a P endorsement, Lunuwilage took the letter to Uber. According to Lunuwilage, “They said, ‘Don’t worry, everyone got the same letter, but we’re talking to the transport minister and Uber drivers don’t need [the P endorsement].’” This appears to be confirmed by Uber’s own website, which does not mention the need for a P endorsement in its recruitment requirements.

When asked why he believed the word of the company over a letter from the Government, Lunuwilage says he thought, “If it was a new concept and it was illegal, they couldn’t operate. So many people we knew were driving for them, so we thought it must be okay. In my country, if it’s illegal, they can’t operate.”

But in Lunuwilage’s case, it was he, not the company, who was facing prosecution after the crash. He admitted driving a commercial vehicle without an appropriate licence and is to be sentenced this month. Lunuwilage has subsequently gained a P endorsement. The NZTA initially declined his application but reversed its decision last month after his lawyer explained how his infringement came “as a result of his reliance on the information and advice provided by Uber rather than a deliberate attempt to flout New Zealand law”.

Lunuwilage says the Uber experience has set him and his family back years. “I thought my whole plan for my future life was gone. I planned to buy a house this year, but I had to buy another car and I’m still paying for it on finance.”

The Listener asked Uber NZ’s Menzies for an interview for this story, but he referred us to the company’s corporate communications team in Australia. When asked repeatedly during a Morning Report interview on RNZ National in July last year whether Uber would pay the fines of drivers operating illegally, he said, “We will support all of our driver partners.”

In a statement from an Australian-based Uber spokesman, the company claimed “every Uber trip in New Zealand is insured. Driver-partners hold either commercial car insurance or car insurance backed by Uber’s US$5 million contingent liability cover. If a driver is ever in an accident, they can contact us 24/7 for information.” The company claimed Lunuwilage had never brought his insurance issues to them. “We welcome the New Zealand Government’s commitment to making the P endorsement more accessible for Kiwis by reducing compliance costs and the time associated with obtaining accreditation. In the meantime, we continue providing our safe, fast and affordable screening process that delivers the safety outcomes the travelling public want and expect.”

Gallagher says the response is disingenuous in implying Lunuwilage’s losses would be covered. On behalf of Lunuwilage, he’d twice invited company representatives to meet with a view to settling the matter but they refused to deal with him, even though he was the driver’s appointed representative, saying the matter was “personal” to Lunuwilage and could therefore not be negotiated through a third party. “Uber has never had the courtesy to respond to any correspondence.”

He says the legal claims are precedent-setting because they will expose the way Uber operates. “This company operates unlawfully and actively encourages people to break the law. If you want to look at a case that highlights all the potential adverse outcomes that could result, Lunuwilage’s is it.

“These are the first civil actions against Uber in New Zealand. It lets the courts decide what the Government has been too lily-livered to decide: the illegality of this company’s actions.”

ProDrive advocate Peter Gallagher. Photo/Adrian Malloch

The Jesse James model

Gallagher, who has been advocating for contractor drivers for nearly 10 years, says he’s never seen a company “so full of itself, that flagrantly, boastfully operates on the Jesse James model. Imagine if a foreign multinational fishing company decided that it wasn’t going to comply with our quotas or 12-mile limits or any of the other statutes and it thought the fishing was really ripe in some of these sanctuaries like Goat Island and it could make millions by extracting fish out of there.

“It’s then cautioned by the regulator, but it says it’s no problem if it’s fined, because the maximum fine is $100,000 per boat but it’s making $1 million per boat. It’s a farce. Once you accommodate unlawful conduct, all the adverse consequences follow.”

For Uber in New Zealand, however, apart from some bad publicity, there haven’t been adverse consequences so far – from the Government, anyway. Indeed, it’s even changing the laws to accommodate it and other ride-sharing companies.

The problem for Gallagher and others fighting what they see as an illegal scourge is that the public who are benefiting from Uber’s cheap rides are largely happy to turn a blind eye when it comes to understanding how those fares are set and what laws are being broken. But he hopes it’s just a matter of time before people get the message that some things are more important than a few bucks saved.

Ben Wilson, the former Uber driver who established the Uber Drivers Association after “a bunch of clandestine meetings at servos in Auckland”, says Uber will be desperate not to end up in court. He believes “they don’t have a leg to stand on; they will be really screwed”.

Initially, he says, disaffected drivers who turned up at the meetings feared they couldn’t take on Uber because they believed there was a risk of the company cutting them off and de-activing the app. “My feeling was we had to smash that culture to pieces, and sneaking around and hiding in the dark was not the way to form a union. We had to be out and proud.”

Wilson stopped driving for Uber in January but continues to head the association. He says at least 15 drivers who’ve asked for help have been referred by the police, who were prosecuting them for not having P licences. The few thousand dollars the association has raised in membership fees are being put towards the cost of the court cases challenging Uber.

So far, the NZTA says, Uber drivers have been issued 189 infringement notices, 163 official warnings and 81 prohibition notices banning them from driving commercially.

MacDonald is frustrated that the NZTA continues to target drivers while the company escapes prosecution. He asked one investigator why the regulator was “sitting on its hands” and was told it had limited ability to bring a prosecution at that level “because of staffing and resourcing”. Last year, he was told “they hadn’t quite figured it out because the company was registered in the Netherlands”.

But NZTA’s Styles says the agency’s focus is on identifying and acting when drivers are non-compliant. “We have been escalating our actions, particularly focusing on repeat offenders, as well as looking at extending prosecution to third parties, which could include Uber.”

Blue Bubble Taxis CEO Bob Wilkinson. Photo/Hagen Hopkins

The Uber effect

Although Uber has been “credited” with disrupting the global taxi industry, Blue Bubble Taxis chief executive Bob Wilkinson says his firm’s ride numbers have declined only about 8% in the year to June. No figures are kept on how much revenue has dropped.

Effects are different in each of the three main centres, based on who is driving.

“In Auckland and Wellington, when they launched, the criteria were pretty strict – you had to be legal. So consequently, the majority of the drivers were taxi drivers for the smaller lower-tier companies that don’t have phone rooms and rely on pick-up work. They signed up for Uber and were working alongside their existing jobs.”

But when Uber launched in Christchurch, he says, there were no lower-tier taxi companies, “so they threw the rules out of the window and said, in essence, ‘We’ll do your Ministry of Justice checks for you, just get out there.’ So a large part of the Christchurch fleet was Joe Public doing extra hours at night.” This led to the same policy being introduced within the week in Auckland and Wellington.

The value of shares in the co-operative societies that run taxi companies has also fallen. One share entitles the buyer to put one cab on the road. In most companies, the shareholders own more than one share and lease out the benefits. Sometimes, two family members will lease one cab, working maximum hours by driving it 24 hours a day for six days.

Auckland Co-op limits the shareholding to 700, meaning 700 cabs. Wellington Combined Taxis has 497 shares and 497 cabs. Pre-Uber, shares cost up to $110,000 each in Auckland. The shares are fully subscribed now, Wilkinson says, but when they are available, they sell for $80,000-90,000.

He believes Uber drivers stay in the job only about six or seven months, and that level of churn explains why Uber has to have such easy entrance rules.

Proposed law changes to make the P endorsement process cheaper and quicker are expected to be passed before the election, but it’s still not known when they’ll take effect. Wilkinson says there’ll still be vetting to ensure only “fit and proper people” get the endorsement, but the two NZQA standards and area knowledge test will go.

He agrees one of the standards, related to understanding the operating rules of a taxi driver, is now unnecessary, partly because the rules have been simplified, but says the other, about work hours, breaks and how to fill out a log book, is important. “Those rules are there for safety, but the Government, for the sake of getting the cost down, has said, ‘No, you don’t need to do that any more.’”

Wilkinson predicts the cost of a P endorsement will drop from more than $1500 to $100-150.

Gallagher says during MacDonald’s Disputes Tribunal process, Uber NZ’s Menzies said neither Uber NZ Technologies Ltd nor he personally had any authority to represent the Netherlands-registered Uber “other than in a marketing and support role”.

“The New Zealand entity now claims that no legal trading entity exists in New Zealand from which redress may be sought or against which New Zealand law may apply,” says Gallagher. “It can’t be acceptable to the Government or the New Zealand public that a global multinational can simply take the money and run.”

Timeline of trouble

2017 has been a scandal-plagued year for Uber.

February

More than 200,000 Uber users delete their accounts in response to a #deleteUber social media campaign to protest what is seen as CEO Travis Kalanick’s support for US President Donald Trump. Uber turned off surge pricing for rides to New York’s JFK Airport during demonstrations over Trump’s immigration ban.

Former Uber site engineer Susan Fowler blogs about her experiences of sexual harassment at the company and how HR blamed her when she complained. Uber launches an investigation.

A video is released of Kalanick berating an Uber driver after the driver challenged him about why he dropped prices for an Uber premium service.

Engineering executive Amit Singhal is asked to resign after failing to disclose a sexual-harassment allegation against him at his previous job.

March

Company president and marketing expert Jeff Jones quits after only six months, saying he could not continue to lead a business with which he was “incompatible”.

May

Former Attorney General Eric Holder, who investigated Uber’s workplace culture at the company’s request after Fowler’s blog, recommends widespread changes, including the reallocation of Kalanick’s responsibilities.

June

Uber’s Asia Pacific president of business, Eric Alexander is sacked after acquiring the confidential medical records of a woman in India who complained she was raped by an Uber driver.

Kalanick says he’s taking a leave of absence, then days later is forced out.

This article was first published in the July 8, 2017 issue of the New Zealand Listener.

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