Role of the State Attorney General in the

By Alan Wong

The ubiquity and power of has led to an interesting phenomenon that continues to shake up the global economy. Various new technology companies have risen on the premise that their technology, usually through the use of a application, can allow for an average person to essentially start a with their existing resources. Some of the most prominent and successful applications include and for “ridesharing” and the renting of temporary lodging through . Early precursors include online marketplaces such as EBay and . This phenomenon has been dubbed with various names such as the “sharing economy”1 and “collaboration consumption.”2 (This article will use the term “sharing economy” for the sake of simplicity and the author’s personal belief that it best describes the phenomenon being discussed.)

As the sharing economy continues to rise and become more prominent, various questions and concerns have been prompted by traditional , government at all levels, and consumers of the sharing economy. Within the United States, the expansion of the sharing economy and concerns of it have mainly been addressed at the state and local level, with little input from the federal government. Due to this localized nature, state attorneys general are placed in a unique position where they can control, regulate, and address the sharing economy.

For the most part, such local responses have been reactionary in nature rather than proactive.

1 See The Rise of the Sharing Economy, The Economist, (March 9, 2013), http://www.economist.com/news/leaders/21573104-internet-everything-hire-rise-sharing-economy. 2 See Xavier de Lacaros Aquise, The Rise of Collaborative Consumption and the Experience Economy, (Jan. 3, 2014), http://www.theguardian.com/technology/2014/jan/03/collaborative- consumption-experience-economy-startups.

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Part I of this paper will delve deeper into the concept of the sharing economy. This will explore some of the unique characteristics that differentiate it from a more traditional business model. Part II will then discuss some of the issues and concerns that have arisen as a result of the sharing economy’s unique business model. Finally, the last section will look at the potential role of the state attorney general in the sharing economy, examine previous actions made by state attorneys general in this area, and discuss whether there is a proper role for state attorneys general. Ultimately, while the sharing economy purports to utilize a unique business model, the many traditional tools of the attorney general can be and have been successfully adapted to regulate the sharing economy.

I. What is the “Sharing Economy”?

It is first important to note that the sharing economy is an ethereal and ambiguous term that can encompass a great many kinds of services. This article will only address companies and services that enables individuals to essentially set up their own personal business under the unifying brand of a technology company. To best understand this concept of the sharing economy, it might be helpful to list some of the most prevalent businesses that allow for this sort of activity. Uber is a popular ridesharing company that allow consumers to use their smartphones to hail a ride, often bypassing the traditional need to hail a taxi or call a service.

Airbnb is a service that allows consumers to rent rooms and housing, in circumvention of a traditional hotel or sublet. Throughout this article, Uber and Airbnb will often be cited as examples for illustration purposes due to their immense popularity, market share, and valuation which have generated various written works and legal actions. Other similar services include

Instacart for grocery deliveries, Getaround for car rentals, and the now defunct Homejoy for house cleanings. As explained below, while each of these companies may offer different

2 services, they all operate on a similar premise and model that have made them profitable, but also the target of many traditional businesses and interests. While not discussed within this article, the sharing economy can also apply to the concepts of platforms such as

Kickstarter, which allows individuals to act as investors in a project, and information sharing platforms such as Yelp, which allows individuals to share their reviews of restaurants.

The sharing economy operates on a rather simple presence. As part of one’s personal life, people are often in possession of items and skills that could potentially be monetized and brought into the global market. Unfortunately, starting a traditional business can be costly due to the need for initial investment.3 This creates a high barrier of entry that prevents many people from engaging in the global market. Furthermore, the somewhat poor survival rate of small businesses, along with high initial investment, can make the creation of a traditional small business a risky proposition. The United States Small Business Administration states that

“[a]bout half of all new establishments survive five years or more and about one-third survive 10 years or more.”4 In response to these difficulties, the sharing economy utilizes technology to provide the backend support that allows for service providers to connect with consumers. This backend support can eliminate many of the barriers to entry into the market by handling issues such as branding and the processing of transactions. Furthermore, the sharing economy is also able to attract individuals who are looking for short term work and are not seeking to start a long term business.

3 See Caron Beesley, How to Estimate the Cost of Starting a Business from Scratch, U.S. Small Business Administration (Jan. 26, 2015), https://www.sba.gov/blogs/how-estimate-cost-starting-business-scratch (estimating average start-up cost as approximately $30,000 and micro-businesses requiring several thousand dollars). 4 Frequently Asked Questions, SBA Office of Advocacy, https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf.

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Within the sharing economy, there are three main groups that engage within the transaction. First, there is the technology company that creates the platform that enables the service. This is usually based on the premise that there is an untapped market for a certain service. While the company itself does not seek to directly provide the service, it creates a platform that connects consumers with service providers and processes the transactions. As a result of providing this backend support, the company will usually charge an additional fee5 or take a percentage commission from the transaction.6 The second involved party are the independent contractors, individuals or groups that have the means of providing the service and will do so for compensation. Finally, there are the consumers that are seeking the service and are willing to pay for said service.

A silly hypothetical may help to illustrate this relationship. A technology company believes that there is a market for the hourly rental of pets as there are many people who love animals but are unable to own a pet for various reasons. Thus, the company creates a and smartphone application where pet owners as independent contractors are able to create profiles for their pets and set an hourly rental fee. A consumer is then able to browse these profiles in their local area and engage in a transaction with one of these independent contractors.

The transaction is then processed by the company, which takes a modest cut for its position as middleman. The transactions is then completed between the independent contractor and consumer, with the pet being provided for the agreed upon time period and price. With very

5 See What are Guest Service Fees, Airbnb, https://www.airbnb.com/help/article/104/what-are-guest- service-fees (charging a 6% to 12% “guest service fee” to all reservation transactions). 6 See Ellen Huet, Uber Tests Taking Even More From Its Drivers with 30% Commission, Forbes (May 18, 2015), http://www.forbes.com/sites/ellenhuet/2015/05/18/uber-new-uberx-tiered-commission-30-percent/ (Uber testing a tiered commission system that takes up to a 30% commission and stating the current commission is 20%).

4 little initial investment, the independent contractor has now received compensation and could perhaps even start a business using the technology company’s platform.

As demonstrated by the above illustration, the rise of the sharing economy is directly related to the growing prevalence and power of computers and the . The internet replaces more traditional manners of advertising a service such as through a storefront and physical advertisements. This is especially helped by the continued growth of the smartphone. These technological advances work in a twofold manner to allow for the current sharing economy model. First, computing power allows for technology companies to provide real-time backend support that can lower initial investments for potential service providers and lower the barrier to entry in comparison to starting a traditional business. Second, this technology also plays the important role of middleman by connecting consumers and services providers under a ubiquitous and well-known brand. This branding also plays an important role upon consumer perception.

While consumers may be hesitant to order car service from an unknown individual operating his personal car, many consumers would not face this same qualm when entering the same vehicle if it was ordered through a ride sharing service.

This business model that derives much of its success to modern computing can be found in some of the most successful technology startups within recent history. Ridesharing companies such as Lyft and Uber are both great examples that utilize smartphone applications to connect consumers and service providers. With a few taps of a smartphone, a passenger is able to broadcast their location and hail a driver.7 After this request, local drivers are then able to accept the transaction and pick up the passenger. The application even automatically handles the

7 See How Do I Request a Ride, Uber, https://help.uber.com/h/7ef159ca-3674-4242-bc0c-b29024958b26.

5 payment for the ride, eliminating the hassle of paying after arriving at the passenger’s location.8

On the other hand, Airbnb is a great example of the sharing economy where the technology company simply creates a marketplace. Independent contractors are able to sign up on Airbnb’s website and create a profile of the rental property. Consumers are then able to browse these profiles and pick a rental property that best fits their needs, locations, and costs. These examples also demonstrate the different levels of involvement that the technology company can play, wherein the former examples show a high level of involvement in matching a passenger and driver, whereas the latter leaves the ultimate choice to the consumer.

The sharing economy is currently a smashing hit that has started to greatly impact the global markets. Consumers are quickly adjusting to a new model of obtaining services that runs counter to more traditional businesses. People are making money as independent contractors, an option that previously was not possible. Popular technology startups continue to grow and some have become highly valued. For instance, Uber was recently valued at more than $50 billion9 and Airbnb was recently valued at $25.5 billion.10 This roaring success has obviously not been without its critics. These critics have raised some serious concerns regarding the sharing economy which may be best addressed by state attorneys general.

II. Concerns and Problems with the Sharing Economy

To best understand why state attorneys general should be involved in the sharing economy, it is important to first understand the criticisms and concerns that have been levied

8 See Do I Need to Tip My Driver?, Uber, https://help.uber.com/h/1be144ab-609a-43c5-82b5- b9c7de5ec073. 9 Douglas Macmillan & Telis Demos, Uber Valued at More than $50 Billion, (July 31, 2015), http://www.wsj.com/articles/uber-valued-at-more-than-50-billion-1438367457. 10 Telis Demos, Airbnb Raises $1.5 Billion in One of Largest Private Placements, The Wall Street Journal (June 26, 2015), http://www.wsj.com/articles/airbnb-raises-1-5-billion-in-one-of-largest-private- placements-1435363506.

6 against the sharing economy. In all of the discussed criticisms below, a common theme will emerge regarding the proper role of the enabling technology company and accountability of that company. This article will focus on three main points of concern regarding the sharing economy: the apparent disconnect between the sharing economy and existing and regulations, problems that arise from the classification of workers as independent contractors, and consumer protection and accountability. A state attorney general is imbued with various powers that would allow her to address each of these issues.

A. Sharing Economy Companies Often Act as if Existing Laws and Regulations Do

Not Apply to Their Businesses

The first and most important criticism is that these sharing economy companies often skirt or flaunt local laws and regulations when they set up in a new region. As discussed within

Part I, the sharing economy often brings it in direct competition with traditional businesses such as taxis and hotels. These traditional businesses are often subject to government oversight designed to regulate the in numerous ways, usually for the protection of consumers and workers of the industry. For instance, the is under specific wage requirements for their workers in the State of New York, which were promulgated by the State’s

Department of Labor.11 When a sharing economy company enters a new market, it will often choose to ignore many of the existing laws and regulations that control the industry that the company competes within. By ignoring these existing laws, a sharing economy company may find itself at a strategic and economic advantage that allows it to quickly expand.

This cause of this issue can be viewed in two different lights depending on the person’s view of the sharing economy. Proponents will claim that existing laws and regulations are

11 N.Y. Comp. Codes R. & Regs. tit. 12, § 146.

7 anachronistic when applied to the new sharing economy as they were often created with the traditional model of the industry in mind. In response to an action taken against Uber by the city of Portland, Oregon, an Uber spokeswoman stated: “We believe that there are no regulations that imagine the kind of service that is made available via this technology platform.”12 Thus, because the sharing economy and its technology is so new and different, it would be unfair to apply the same rules that apply to the traditional models of the industry. As one commentator stated:

“Uber considers itself a market maker rather than a service provider. It’s a network that connects drivers to fares, more like a travel agent than an airline.”13

As a result of this process of thinking, proponents and technology companies often portray their lawbreaking as civil disobedience. For instance, Uber was recently barred from operating in Portsmouth, New Hampshire due to the company’s failure to comply with a transportation ordinance that requires proof of commercial and criminal background checks for its drivers. One Uber driver in the area has pledged to continue operating as “an act of civil disobedience.”14 In another incident, the cofounder and CEO of Airbnb was criticized after posting a tweet that appeared to compare Airbnb’s legal struggles in New York with

Mahatma Gandhi’s famed Salt March, an act of civil disobedience to protest British rule of

India.15

12 Michael Hiltzik, Uber Needs to Learn How to Play by the Rules, (Dec. 14, 2014), http://www.latimes.com/business/hiltzik/la-fi-hiltzik-20141214-column.html. 13 Annie Lowrey, Is Uber’s Surge-Pricing an Example of High-Tech Gouging?, Magazine (Jan. 10, 2014), http://www.nytimes.com/2014/01/12/magazine/is-ubers-surge-pricing-an- example-of-high-tech-gouging.html. 14 Elizabeth Dinan, Uber Driver Ignores Portsmouth , Seacoastonline.com (Sept. 23, 2015), http://www.seacoastonline.com/article/20150923/NEWS/150929582. 15 Caleb Pershan, Airbnb CEO Apologizes for Gandhi Comparison Tweet, sfist (Feb. 16, 2015), http://sfist.com/2015/02/16/airbnb_ceo_apologizes_for_gandhi_co.php.

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On the other hand, critics portray these same actions as simply the Silicon Valley technology companies flaunting the law because they believe they are above the law. Instead of addressing any local concerns before entering a market, these companies utilize the cavalier strategy of act first and ask questions later. By the time local authorities, such as the state attorney general can act, these companies will have made an enormous foothold in the market and started to build a contingent of loyal consumers. There is also a perception that these loyal consumers of the sharing economy are affluent millennials,16 a group that has sufficient resources and time to pressure local authorities. Thus, by the time that local authorities are able to react to the company’s failure to follow the law, the sharing economy company has already become entrenched in the area and able to make massive demands and possibly obtain concessions from local authorities. In response to the proponent’s claims of civil disobedience, critics compare these actions not with the civil disobedience movement, but rather with attempts in the South to nullify federal laws that promoted civil rights during the mid-twentieth century.17

No matter which side one may personally side with, the obvious issue for state attorneys general is that the sharing economy may be operating without following relevant statutes and regulations. As the chief enforcer of the state’s law, an attorney general cannot turn a blind eye when a prominent sharing economy company sets up business in the state without meeting all statutory and regulatory requirements. As discussed infra Part III.B, attorneys general possess

16 See Emily Badger, Five Myths About Uber, (Dec. 11, 2014), https://www.washingtonpost.com/opinions/five-myths-about-uber/2014/12/11/ef77b7fc-7fc9-11e4-9f38- 95a187e4c1f7_story.html; Nenad Tadic, Uber Lyft: Car Services Target Universities, USA Today (Sept. 13, 2013), http://www.usatoday.com/story/news/nation/2013/09/11/lyft-uber-for-university- students/2800477/. See also About Us, Airbnb, https://www.airbnb.com/about/about-us (“Airbnb is a trusted community marketplace”). 17 Frank Pasquale & Siva Vaidhyanathan, Uber and the Lawlessness of ‘Sharing Economy’ Corporates, The Guardian (July 28, 2015), http://www.theguardian.com/technology/2015/jul/28/uber-lawlessness- sharing-economy-corporates-airbnb-google.

9 the power to ensure the state’s sovereignty by enforcing laws and regulations under parens patriae.

B. Concerns Arising from the Sharing Economy’s Tendency to Treat Workers as

Independent Contractors

A second problem arises from the business model employed by many sharing economy companies. While a worker operates under the brand and guise of the technology company, they typically are not considered employees of the technology company. Instead, workers are treated as independent contractors. As discussed below, this treatment of workers as independent contractors creates serious complications that can adversely affect the rights and protections of both consumers and workers, whereas the technology company is able to economically benefit from this classification.

Case law revolving around the classification of workers as independent contractors is vast and can drastically change between jurisdictions. Nevertheless, it is important to note the pivotal differences between an employee and independent contractor. According to the Internal

Revenue Service (“IRS”), “[t]he general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”18 For example, this lack of control means that the employer is not responsible for providing the tools to complete the work. If the employer is able to control the services being rendered by the worker, then the IRS treats such a worker as an employee and not an independent contractor.19 In essence, an independent contractor is considered “self- employed” instead of being under the employ of the employer.

18 Independent Contractor Defined, Internal Revenue Service, https://www.irs.gov/Businesses/Small- Businesses-&-Self-Employed/Independent-Contractor-Defined. 19 Id.

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In general, an employer is obligated to “withhold income taxes, withhold and pay Social

Security and Medicare taxes, and pay unemployment tax on wages paid to an employee,”20 but this usually is not required for independent contractors. In addition, employers usually do not provide the same generous benefits, such as healthcare and pension plans, that are typically seen in the traditional employer-employee relationship. Finally, independent contractors are not protected under many related statutes such as payments under the Federal

Fair Labor Standards Act21 and state unemployment insurance. These are just some major examples that represent the differences between an independent contractor and an employee.

Employers have a massive financial incentive to classify their workforce as independent contractors rather than employees. Because employers do not have to provide a wealth of benefits and are able to pass the handling of tax obligations to the independent contractor, these companies are able to save money which can be quite advantageous over competitors that utilizes employees. An older example of this can be seen in the rise of FedEx Ground, where

FedEx’s ground delivery division is now considered the only major competitor to United Parcel

Service. Much of FedEx Ground’s success can be attributed to the benefits it derives from the use of an independent contractor model for its drivers as opposed to UPS’s use of unionized drivers.22

20 Independent Contractor (Self-Employed) or Employee, Internal Revenue Service, https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self- Employed-or-Employee. 21 29 U.S.C. § 207. 22 See Lydia DePillis, How Fedex is trying to save the business model that saved it millions, The Washington Post (Oct. 23, 2014), https://www.washingtonpost.com/news/storyline/wp/2014/10/23/how- fedex-is-trying-to-save-the-business-model-that-saved-it-millions (discussing the difference in benefits and pay between FedEx Ground’s independent contractors and UPS’s unionized employees and how this difference has benefitted FedEx.).

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Due to the nature of independent contractors, this model has proven especially alluring to the sharing economy. While being an independent contractor may traditionally not be favored due to the loss of benefits, the nature of the sharing economy allows companies to create a rather compelling narrative, at least initially, to advocate for the use of independent contractors. As discussed supra, sharing economy companies often do not view themselves as a traditional business, but rather as the creator or provider of a market for others to participate in. Under this perspective, a company is not hiring workers to provide a service to consumers, but is rather providing a space where self-employed workers can provide a service to consumers.

Furthermore, sharing economy companies often paint themselves as markets that enable people to start their own business, be their own boss, and make money on their own terms.23 Thus, workers for the sharing economy are their own bosses and are self-employed. Finally, the whole concept of the sharing economy revolves around the idea that a person can monetize their own resources such as a car or spare bedroom. The independent contractor remains responsible for the maintenance, repair, replacement, and depreciation of this resource. This gives the sharing economy company a massive advantage over a traditional business such as a cab company or hotel, which most expend money for the maintenance of its fleet or room.

This powerful narrative of the sharing economy as an enabler for persons to start their own business creates an important need to ensure that these workers are well informed about the implications of becoming an independent contractor. As just one example that was mentioned supra, a sharing economy company is not responsible for handling any related tax affairs for their independent contractor. Some tax obligations required by the IRS for independent

23 See Sign Up to Drive, Uber, https://get.uber.com/drive (listing three main perks of being an independent contractor with Uber as “make good money,” “drive when you want,” and “no office, no boss.”).

12 contractors include the filing of an annual return, payment of estimated taxes quarterly, and payment of the self-employment tax as well as income tax.24

In examining the two largest ridesharing companies, Uber and Lyft, this author found that independent contractor information was lacking and hidden away from prospective drivers.

Such information is only found after digging into the ’ help sections and required advance knowledge on the subject. Ultimately, the information found acted more like a disclaimer than as actual helpful information. Uber simply states that “[a]ll Uber partners are independent contractors, so we do not withhold any taxes and partners are entirely responsible for their own tax obligations.”25 Lyft’s information may be arguably even less helpful as it states a driver may be an independent contractor “in some cases,” but always “are not considered an employee of Lyft.”26 Despite hiding away such information, both services heavily advertise many of the benefits of being an independent contractor, such as being your own boss and the ability to control your own hours, without explicitly mentioning the classification.

Thus, if a potential driver were to only use the ride sharing company’s website for information, the potential driver’s understanding of the implications of essentially starting a business would be woefully inadequate. While prominent sharing economy companies have existed long enough that a potential independent contractor is able to find resources and advice from others through the internet, there exists a role for state attorneys general to educate and help independent contractors of the sharing economy.

C. Protection of Consumers

24 Self-Employed Individuals Tax Center, Internal Revenue Service, https://www.irs.gov/Individuals/Self- Employed. 25 About Partner Taxes, Uber, https://help.uber.com/h/1bf76075-7fe3-4c15-ac58-a4bef827e017. 26 Tax Information, Lyft, https://help.lyft.com/hc/en-us/articles/213582038-Tax-Information.

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The sharing economy’s tendency to treat workers as independent contractors also plays an important part when considering the rights of the consumer. Under the Second Restatement of Torts, the general principle is that “the employer of an independent contractor is not liable for physical harm caused to another by an act or omission of the contractor or his servants.”27 As a result of this general rule, consumers should be wary about any potential issues that may arise with an independent contractor. For the vast majority of consumers, the sharing economy works well as indicated by the continuing rise of such services. Unfortunately, whether due to an accident or a bad actor, a consumer may be physically, mentally, or economically injured by the action or negligence of an independent contractor. The question is then what level of responsibility, if any, should be leveled against the sharing economy company, which provided the market and allowed for the transaction, in light of the general Restatement rule.

While such stories have not been frequent, there have occasionally been horrible consumer stories related to the sharing economy. Although it did not occur within the United

States, an Uber driver was recently convicted for the rape of a passenger in India.28 While a lawsuit was filed against Uber by the rape victim, the lawsuit was voluntarily dropped by the plaintiff with no additional details provided, such as whether a settlement was reached or not, meaning that there is little guidance for other persons who may be in similar positions.29 In the

United States, Uber was recently sued by two Jane Does claiming that they were sexually assaulted by Uber drivers and claiming that Uber does not do enough to screen and control

27 Restatement (Second) of Torts § 409 (1965). 28 India Uber Driver Guilty of Rape, BBC News (Oct. 20, 2015), http://www.bbc.com/news/world-asia- india-34578477. 29 Dan Levine, Indian Woman Who Sued Uber Over Rape Accusation Ends Lawsuit, Reuters (Sept. 1, 2015), http://www.reuters.com/article/us-uber-tech-rape-settlement-idUSKCN0R14GV20150901.

14 drivers for the protection of consumers.30 A final example is where a consumer claimed he was sexually assaulted by his Airbnb host while traveling abroad. Although he was able to send some frantic messages to his mother, the mother was not able to obtain any help from Airbnb that may have prevented the alleged sexual assault.31

As all of these examples illustrate, a consumer is usually injured by an action of an independent contractor rather than an action of the sharing economy company. While the independent contractor is primarily responsible and may be subject a criminal prosecution, a consumer’s civil action against such bad apples may lack the desired effect. First, independent contractors tend to lack the deep pockets that are usually required to obtain legal representation and to adequately compensate for the alleged wrongdoing. For instance, recent information released by Airbnb shows that the median amount of money made by hosts in New York City over the past year ranged from the low $5,000s to mid $6,000s depending on location.32 On the other hand, some sharing economy companies have been valued at the tens of billions of dollars, which creates a much more attractive target. A second major concern is the desire to bring about changes to the sharing economy company to prevent similar problems. An individual suit against a contractor may be brushed away and ignored, but a high profile lawsuit against the well-known sharing economy company can bring publicity and legal pressure that may cause the company to change its policies and technology to better protect the consumer.

30 Dara Kerr, Uber Hit with Lawsuit Over Alleged Sexual Assaults, CNET (Oct. 8, 2015), http://www.cnet.com/news/uber-hit-with-lawsuit-responsibility-for-sexual-assaults/. 31 Ron Lieber, Airbnb Horror Story Points to Need for Precautions, The New York Times (Aug. 15, 2015), http://www.nytimes.com/2015/08/15/your-money/airbnb-horror-story-points-to-need-for- precautions.html. 32 Christopher Robbins, New Airbnb Data Shows Most NYC Hosts Are Breaking the Law, Gothamist (Dec. 1, 2015), http://gothamist.com/2015/12/01/airbnb_laws_shmaws.php.

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The role of the attorney general in this area is best suited not for these high profile horror stories, but rather more mundane and smaller complaints against the sharing economy company.

The unfortunate truth is that extreme horror stories, such as those listed above, will naturally come to light, gain publicity, and be favorably resolved. Of course, there may be a role for a state attorney general if this assumption fails and such victim consumers are not properly protected. Criminal prosecutions and civil actions against the sharing economy company will probably be sufficient in bringing relief to the victim consumer while also bringing about changes within the sharing economy. Instead, state attorneys general should be concerned about the more minor and low profile complaints that may arise, where the consumer finds she has little recourse due to the nature of the business model and perhaps the small amount of money at stake.

One area of potential interests may arise from consumers who have been scammed by an individual purporting to be a service provider. For instance, one website was able to obtain a multitude of complaints against Airbnb that were filed with the Federal Trade Commission, where the vast majority of complaints alleged that they were scammed by fake Airbnb hosts that requested payment through money transfers, often for several thousand dollars.33 Unfortunately, victims of fraud are usually unable to obtain any relief from the sharing economy company, which can argue that it is powerless when the transaction occurs outside of the platform. While the sharing economy company does not process these fraudulent transaction, it nevertheless created the platform where scammers can act and may arguably be responsible for failing to have greater consumer protection tools in their platform. These complaints illustrate a problem that can occur within the sharing economy marketplace, wherein it may also create a new target for

33 Matt Novak, 22 Official Complaints from People Who Got Royally Screwed on Airbnb, Gizmodo (May 6, 2015), http://gizmodo.com/never-pay-for-airbnb-by-wire-transfer-because-its-alway-1702559921.

16 con artists and scammers. The and protection of consumers from scams as technology continues to grow is an area that state attorneys general have already embraced.

III. Relevant Powers of the State Attorney General

In response to the three main areas of concern regarding the sharing economy, a state attorney general may find that she is already in possession of the many tools needed, as they were developed over the course of dealing with traditional businesses. However, the biggest contention arises from the unique nature of the sharing economy and the companies that purport to be market creators. As discussed in supra Part II.A, sharing economy companies believe they do not follow the traditional business model of being the party that provides a service or good, but is rather a market enabler that allows others to provide a service or good. As a result of this supposed unique structure, many of the relevant laws and regulations that may apply to the traditional sense of the industry would supposedly not apply to the sharing economy company. It would then make logical sense to make an argument that the unique structure would also prevent the attorney general from employing her traditional powers to regulate the sharing economy.

This section will discuss the broad nature and power of the attorney general’s tools that allow for enforcement, and discuss some of the innovative ways in which these tools have been reshaped to target and improve the sharing economy.

A. The Omnipotent Civil Investigative Demand

One of the most potent and important source of power for state attorneys general come from the Civil Investigative Demand (“CID”), which is often colloquially but inaccurately described as a subpoena. This inaccurate comparison is apt because the CID and subpoena seem similar on their face, with one major distinction that places the CID on a higher pedestal.

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Massachusetts’s consumer protection statute is a great example of how an attorney general is empowered to conduct CIDs and the scope of such CIDs:

The attorney general, whenever he believes a person has engaged in or is engaging in any method, act or practice declared to be unlawful by this chapter, may conduct an investigation to ascertain whether in fact such person has engaged in or is engaging in such method, act or practice.34

As the plain language of the statute demonstrates, the state attorney general is empowered to issue a CID simply on the belief of wrongdoing. The Massachusetts statute then explicitly allows the attorney general to “take testimony under oath” and “examine or cause to be examined any documentary material of whatever nature relevant to such alleged unlawful method, act or practice.”35 Thus, in conducting a CID, the attorney general is essentially granted many tools associated with discovery, despite the fact that there is no official complaint or pending trial.36 Finally, it should be noted that the broad grant of power under the CID means that a sharing economy company would not be able to make its usual argument that its unique business model exempts it from the reach of traditional laws. The CID is a powerful tool that allows state attorneys general to investigate potential wrongdoing and obtain information without the formal discovery process involved in a typical lawsuit.

One such relevant example of the use of this power against the sharing economy occurred in New York. First, it is important to note that the State of New York actually uses the term of

34 Mass. Gen. Laws Ann. ch. 93A, § 6. 35 Id. 36 See also Minn. Stat. Ann. § 8.31 (“[T]he attorney general upon specifying the nature of the violation or suspected violation may obtain discovery from any person regarding any matter, fact or circumstance, not privileged, which is relevant to the subject matter involved in the pending investigation, in accordance with the provisions of this subdivision. The discovery may be obtained without commencement of a civil action and without leave of court.”).

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“subpoena” rather than CID.37 In 2013, the New York Attorney General launched an investigation against Airbnb on the belief that the platform allowed hosts to violate the Multiple

Dwelling Law, which prevents most residences from being rented out for less than thirty days,38 and a failure by hosts to pay a required New York City Hotel Room Occupancy Tax.39 As part of this investigation, Airbnb was subpoenaed to provide a spreadsheet with information that included all New York hosts, their listings, and gross revenue.40 After a lengthy legal battle over the subpoena, Airbnb agreed to provide the requested information with the one concession that the information was anonymized.41 As a result, the attorney general is able to continue investigating whether hosts and accommodations in New York are breaking the law, but is unable to target any violators at this point.

By analyzing this anonymized data, the New York Attorney General eventually released a report detailing the use of Airbnb in New York City in October of 2014.42 The attorney general was able to associate the anonymized information with specific buildings to determine

37 N.Y. Exec. Law § 63(12) (McKinney) (“the attorney general is authorized to take proof and make a determination of the relevant facts and to issue subpoenas in accordance with the civil practice law and rules.”). 38 Airbnb, Inc. v. Schneiderman, 44 Misc. 3d 351, 356, 989 N.Y.S.2d 786, 790 (Sup. Ct. 2014). 39 Id. at 357-358. 40 Id. at 354 (“1. An Excel spreadsheet Identifying all Hosts that rent Accommodation(s) in New York State, including: (a) name, physical and email address, and other contact information; (b) Website user name; (c) address of the Accommodation(s) rented, including unit or apartment number; (d) the dates, duration of guest stay, and the rates charged for the rental of each associated Accommodation; (e) method of payment to Host including account information; and (f) total gross revenue per Host generated for the rental of the Accommodation(s) through Your Website. The Excel spreadsheet should be capable of being **789 organized by gross revenue per Host and per Accommodation. 2. For each Host identified in response to Request No. 1, Documents sufficient to Identify all tax-related communications Your Website has had with the Host, including tax inquiries or tax document requests whether initiated by the Host or You.”). 41 James O’Toole, Airbnb to Hand Over User Data to New York Attorney General, CNN Money (May 21, 2014), http://money.cnn.com/2014/05/21/technology/social/airbnb-new-york/. 42 Airbnb in the City, Office of New York State Attorney General (Oct. 2014), http://www.ag.ny.gov/pdfs/Airbnb%20report.pdf.

19 their zoning.43 This report found that approximately 72% of short term rentals in New York City may violate the Multiple Dwelling Law,44 the City of New York may be owed more than $33 million for unpaid hotel taxes,45 and that just 6% of New York City hosts accounted for 37% of the total revenue from short term rentals.46 This information would indicate that a large portion of Airbnb rentals in New York City are used to operate illegal hotels instead of allowing a person to rent out their individual space. In response to this report, Airbnb recently released its own data in the beginning of December 2015 that confirms many of these accusations, but attempts paints Airbnb in a more favorable light by asserting less drastic numbers.47

While no further concrete actions have been taken against Airbnb, this investigation has led to a number of results that state attorneys general may find favorable. As a result of the report’s findings, the New York Attorney General and New York City regulators announced a joint enforcement initiative to investigate potential violations and shut down illegal hotels.48

This has led to a recent proposed legislation that would increase the fines for illegal hotels in

New York City.49 In addition, Airbnb also announced that it was expelling over two thousand listings when the company was negotiating with the New York Attorney General regarding the subpoena.50 Finally, Airbnb also notified over a hundred hosts that the New York Attorney

43 Id. at 4-5. 44 Id. at 8. 45 Id. at 9. 46 Id. at 10. 47 Ben Popper, Airbnb’s Worst Problems Are Confirmed by its Own Data, (Dec. 4, 2015), http://www.theverge.com/2015/12/4/9849242/airbnb-data-new-york-affordable-housing-illegal-hotels. 48 See David Streitfeld, Airbnb Listings Mostly Illegal, New York State Contends, The New York Times (Oct. 15, 2014), http://www.nytimes.com/2014/10/16/business/airbnb-listings-mostly-illegal-state- contends.html?emc=edit_th_20141016&nl=todaysheadlines&nlid=41103972. 49 Emma Whitford, NYC May Dramatically Increase Fines for Those Who Abse Airbnb, Gothamist (June 10, 2015), http://gothamist.com/2015/06/10/airbnb_fines_nyc.php. 50 Id.

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General was requesting information about them, and that Airbnb would give this data unless prevented by a court.51

Thus, the sharing economy company may not be the ultimate end goal for the attorney general, but rather an important resource and tool in targeting the individuals who are breaking local laws through the use of the sharing economy company’s platform. This level of cooperation may ultimately be to the best benefit of the sharing economy, as it continues to view the company as merely the middleman and not the ultimate lawbreaker. On the other, independent contractors, such as those hosts contacted by Airbnb, may find this arrangement to be quite dangerous. Furthermore, the threat of an expansive and expensive CID and investigation may push the sharing economy company to become more proactive in policing its market for potential violations. This can also lead to a greater campaign by the sharing economy to educate market participants on relevant laws and regulations that need to be followed in certain jurisdiction.52

This example between Airbnb and New York demonstrates the immense power that CIDs and subpoenas may play in assisting attorneys generals in investigating and confronting the sharing economy. The attorney general started with a belief that the sharing economy company allows hosts to violate New York laws; the attorney general then issues a CID to the company to obtain relevant information and data, and the attorney general is able to analyze the information to determine whether there is a statistical likelihood that the law is being violated. This approach appears quite sensible in approaching the sharing economy. The sharing economy’s use of technology generates a vast amount of information and data that is stored by the sharing

51 Id. 52 See Help Center – New York, NY, Airbnb (Aug. 19, 2015), https://www.airbnb.com/help/article/868/new-york--ny (providing an overview of potentially relevant New York laws and regulations that hosts should be aware of.).

21 economy company. Such information can include GPS tracking from smartphones, transaction details, and personal information of the independent contractors and consumers. Unfortunately, a question remains whether other states would have the expertise and resources to engage into such an expansive investigation that a large state like New York possesses. For example, the

Airbnb report was prepared for the Attorney General’s Research Department and Internet

Bureau, divisions that may not exist in smaller or less funded offices.

B. Enforcement of State Laws and Regulations Under the Common Law Concept of

Parens Patriae

One of the greatest powers granted to attorneys general is through the common law concept of parens patriae. Within American law, parens patriae has developed into the idea that the state has standing to sue if a sovereign interest is harmed.53 The Supreme Court of the

United States has held that a sovereign interest includes “the exercise of sovereign power over individuals and entities within the relevant jurisdiction-this involves the power to create and enforce a legal code, both civil and criminal.”54 This is a broad grant of power that enables the state attorney general to ensure that local laws and regulations are being followed within the relevant jurisdiction. Thus, if an attorney general believes that a law or regulation is being broken by a sharing economy company, she can follow the traditional method of conducting an investigation and employing the use of CIDs. The incredible nature of the CID, which allows great access to the attorney general, would allow her to determine if wrongdoing is actually occurring. Finally, the concept of parens patriae allows the attorney general to seek to enforce the relevant law or regulation through the judicial system. Under a cooperative system between

53 See Alfred L. Snapp & Son, Inc. v. Puerto Rico, ex rel., Barez, 458 U.S. 592, 600-01 (1982)(providing a more in-depth overview of the traditional understanding of parens patriae.). 54 Id. at 601.

22 attorneys general and the sharing economy, this power would allow enforcement against individual violators rather than the sharing economy company.

This power can also be employed against the sharing economy. While sharing economy companies continue to argue their uniqueness, various cases and settlements have demonstrated that paren patriae is broad enough to address the sharing economy’s deficiencies in regards to the law. In 2014, Uber and the New York State Attorney General entered into an agreement to cap Uber’s surge pricing model.55 Surge pricing is when Uber increases the cost of a ride, usually by applying a multiplier to the normal rate, due to a temporary increase in demand.56

This agreement was made in light of General Business Law § 396-r which prevents services from charging an “unconscionably excessive price” during an “abnormal disruption of the market.” It is also interesting to note that this law was passed in the late 1970s in response to rising heating oil prices, yet the Attorney General was able to obtain a settlement from a supposedly different and new technology marketplace company. While the agreement was made in light of a New York State law regarding price gouging, Uber also indicated that it would make similar changes to its surge pricing model on a nationwide basis. Thus, this individual action by one state attorney general was not only able to bring a sharing economy company into compliance with a law, but also able to bring about wide reform to the way a sharing economy company operates for the benefit of consumers.

In June 2015, Lyft entered into a $300,000 settlement with the New York Attorney

General. This was a settlement of a 2014 lawsuit that claimed that Lyft allowed drivers to operate without state-approved insurance and that Lyft violated state laws when it launched in

55 A.G. Schneiderman Announces Agreement with Uber to Cap Pricing During Emergencies and Natural Disasters, New York State Office of Attorney General (July 8, 2014), http://ag.ny.gov/press-release/ag- schneiderman-announces-agreement-uber-cap-pricing-during-emergencies-and-natural. 56 What is Surge Pricing?, Uber, https://help.uber.com/h/6c8065cf-5535-4a8b-9940-d292ffdce119.

23 certain areas without prior approval or notification. The monetary settlement was for the insurance claim and Lyft also agreed to a three week notice requirement before launching its service in any new areas of New York.57 It is important to note that this settlement was obtained under New York insurance laws designed for traditional livery businesses.58 The original complaint also sought to frame Lyft as a traditional livery company and disprove Lyft’s contention that it is a marketplace by arguing that Lyft controls all aspects of the service and controls pricing.59

These two examples demonstrate that an attorney general is able to employ her traditional tools in regulating the sharing economy. Despite the sharing economy’s arguments against liability, an attorney is able to obtain monetary settlements, concessions, and agreements that brings the sharing economy company into compliance with relevant laws and regulations. While the sharing economy can theoretically argue their uniqueness and inapplicability of existing laws, the practical, actual settlements show that it may not be a successful defense.

C. Advisory

Finally, attorneys general can act in a solely advisory role that can seek to educate the population. Due to the purpose and expertise of an office of the attorney general, it is in a great position to provide educational material about the sharing economy. Such information can be targeted towards both consumers and workers of the sharing economy. This concept is already widely used by state attorney generals to provide consumer advice in regards to a wide range of

57 Cecilia Kang, Lyft Agrees to Pay $300,000 Settlement for Violating New York Insurance Laws, The Washington Post (June 18, 2015), https://www.washingtonpost.com/news/the-switch/wp/2015/06/18/lyft- agrees-to-pay-300000-settlement-for-violating-new-york-insurance-laws/. 58 See People of the State of New York vs. Lyft, Inc. Summons and Complaint, New York State Unified Court System (July 11, 2014), https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=ZbvQG52K3ZGnkWpuJ4W EjQ==&system=prod. 59 Id. at 5-8.

24 topics.60 As discussed in supra Part II.C, the sharing economy can unfortunately be used by bad actors as a new platform to perform fraudulent actions. This occurs because not all consumers are the most technologically savvy and because the new systems used by sharing economy platforms can be quite radically different from the analogous traditional industry. While individual sections may need to be created for different kinds and companies of the sharing economy, a state attorney general can create literature that teaches consumers of the common scams that one should be aware of in the sharing economy. Similarly, literature can also be created for the benefit of potential workers of the sharing economy. This can provide information about both the benefits and negatives of becoming an independent contractor, especially by consolidating the negatives and potential issues that would often be excluded from the sharing economy company’s own literature.

D. Defeating the Sharing Economy’s Independent Contractor Model

While outside the scope of this paper, another possible avenue of attack would be through the elimination of the sharing economy’s use of the independent contractor model. The sharing economy’s market provider argument only lasts as long as it can continue to classify workers as independent contractors and not employees. If the sharing economy was forced to employ its workers, it would then be more akin to a traditional business, with a heavier reliance on technology, instead of being the middleman. As a result, it may be easier for attorneys general to regulate the sharing economy under current laws and regulations.

While this issue has not been employed by attorneys general in the sharing economy, there have been several recent attempts to eliminate the independent contractor model in the

60 See Consumer Education, New York State Office of the Attorney General, http://www.ag.ny.gov/internet/consumer-education; Online Scams, Illinois Attorney General, http://www.illinoisattorneygeneral.gov/consumers/onlinescams.html.

25 sharing economy. In one recent development, the Employment Development

Department found that a former Uber driver was misclassified as an independent contractor and would be entitled to unemployment insurance.61 In addition, there is also a pending class action lawsuit initiated by Uber drivers seeking to be classified as employees.62

This is also an area that many state attorneys general have previously explored in the context of traditional businesses that employed independent contractors, including FedEx

Ground.63 At the same time, these previous cases also provide a major warning sign to attorneys general. While cases against FedEx Ground’s alleged misclassification of independent contractors have resulted in multimillion dollar settlements for states,64 the independent contractor model continues to be an integral part of FedEx Ground.65 Thus, even with important victories against the use of an independent contractor model, this method may not be the best avenue of attack against the sharing economy. Furthermore, recent successes against the sharing economy through the enforcement of traditional laws, as discussed above, may mean that attorneys general do not have to attack the independent contractor model to regulate the sharing

61 Andrew Nusca, Uber Loses Another Legal Round in the Employee vs. Contractor Debate, Fortune (Sept. 10, 2015), http://fortune.com/2015/09/10/uber-california-employee/. 62 See Dan Levine, Uber Drivers Granted Class Action Status in Lawsuit Over Employment, Reuters (Sept. 1, 2015), http://www.reuters.com/article/us-uber-tech-drivers-lawsuit-idUSKCN0R14O920150901. 63 See Attorneys General Cuomo, Bullock and Milgram Announce Intent to Sue Fedex Ground Over Violations of State Labor Law, New York State Office of Attorney General (Oct. 20, 2009), http://www.ag.ny.gov/press-release/attorneys-general-cuomo-bullock-and-milgram-announce-intent-sue- fedex-ground-over. 64 See AG Coakley’s Office Recovers Over $3 Million in Taxpayer Funds Back to Commonwealth in Settlement with FedEx Ground, Attorney General of Massachusetts (July 15, 2010), http://www.mass.gov/ago/news-and-updates/press-releases/2010/ago-recovers-over-3-million-in- taxpayer-funds.html; Bullock Announces $2.3M Settlement with FedEx Ground, Montana Department of Justice (Oct. 20, 2010), https://dojmt.gov/bullock-announces-2-3m-settlement-with-fedex-ground/. 65 See Independent Contractor Opportunities, FedEx, http://www.fedex.com/us/indp/independentcontractors.html?&Locale=en (advertising various opportunities for independent contractors).

26 economy. These independent contractor misclassification settlements may still be useful in obtaining money for the state’s coffers.

IV. Conclusion

The sharing economy is a unique and recent phenomenon that is radically different from traditional businesses. Due to this uniqueness, people are changing their behaviors in regards to both consumption and employment. While the sharing economy has brought a great amount of favorable changes, various concerns and criticisms have been rightfully levied against the sharing economy and the technology companies that engage within it. A large amount of this issue results from the sharing economy’s belief that it is a market provider rather than a traditional business, which supposedly allows the companies to ignore certain laws and regulations. However, a state attorney general is able to regulate the sharing economy, despite the sharing economy’s protestation, with the various tools that have been imbued within the office, such as the issuance of CIDs and filing of suits under parens patriae. Recent developments have also shown that these tools can be effective in regulating the sharing economy despite contrary claims made by the industry.

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