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Friday, December 19, 2014

Policy puzzles of the digital nirvana

by Arjun Rajagopal, Renuka Sane, Somasekhar Sundaresan.

It has been a bad week for Uber. The effect of its automated surge-pricing during the hostage crisis in Sydney and the reaction to this, have exacerbated the publicity surrounding the alleged rape of an Uber customer in Delhi by a driver who was listed on the company's app, and the litigation it faces in San Francisco over not conducting effective background checks on criminal records of drivers. In India, the outrage has been accompanied by bans in New Delhi and calls to ban or suspend Uber in other states.

This is not the first time, or the first geography in which Uber has run into trouble. It has been criticised over its sexism, ethics and bro culture and over its record on passenger safety. The app has been recently banned in Spain and Thailand and has run into trouble with authorities in several other countries, mostly for being at odds with the traditional, regulated taxi companies.

Uber does not have a taxi license in Delhi. It is not a radio taxi service. It does not own the cars or employ the drivers. Fine print on its website suggests that it disclaims the suitability, safety or ability of third-party providers. Uber claims to not be a transportation provider, and only connect riders to drivers through its app. Yet, it claims that its service is a safe and secure one, adopting standards that go way beyond local standards that regulatory authorities may prescribe.

These claims allow one to litigate against Uber with allegations of misleading customers with particular standards of safety when in fact there were none. This is the stuff class action suits are made of. Indian customers could potentially be creative and sue Uber in the US, where control over its operations is headquartered.

However, the furore also raises larger questions on what the appropriate legal or regulatory response should be to such aggregators, and where the liability lies when things go wrong.

Is more required? Liabilities for information aggregators

A defining feature of the early 21st century is businesses becoming powered by software and synonymous with services delivered online. Technology platforms, or aggregators, purely facilitate the sale between buyers and sellers. In this sense, they are neither originators of the product, nor distributors linked to specific manufacturers. Often touted as disruptive innovators, such businesses tread thin on requirements under the licensing and regulatory systems even while competing with similar services provided by the traditional licensed players. This regulatory arbitrage raises important questions on the obligations of such aggregators.

The fundamental question that governments need to ask themselves is what, if any, obligations should be placed on businesses such as Uber. Should a market aggregator be responsible for the quality, or safety of a product that is sold on its technology platform? There are well reasoned views on both sides.

The analogy with a financial exchange

We might make an analogy between Uber and an electronic stock exchange, in which case the exchange aggregates information and enables transactions. The quality of the product being sold (i.e. whether the shares represent a "good" investment) is not guaranteed by the exchange. The transaction is guaranteed. Under this analogy, Uber's job is simply to ensure that double booking of cabs never occurs, and that payment transfers occur reliably and seamlessly.

The analogy with a retailer

We might also make an analogy between Uber and the owner of a neighborhood mall. While a case may be made against regulatory intervention to make the mall owner responsible for quality of the goods and services, there would also be a case for the mall owner being obliged to ensure safety and security in the mall premises, and being liable for a customer injuring themselves on a broken step. Besides, if the mall owner knows that sale of some goods needs a license (for example, alcohol), and turns a blind eye, it would beg the question if the owner can effectively defend against a charge of aiding and abetting a violation of the licensing of sales.

The puzzle

Where does an aggregator fall, on the spectrum? This will determine what aspect of the customer interface the aggregator is held responsible for. For example, companies may make business decisions on where on the safety spectrum they lie, and charge a premium for it. Over time there may emerge expensive aggregator companies and cheap aggregator companies and customers take a call on how much they are willing to pay for what quality of service. Regulators could step in and prescribe minimum standards - in much the same way, product warranties across jurisdictions are spelt out. Rules about information disclosure could help consumers make better decisions.

At the point of entry into the cab, the consumer is held hostage to that cab, and must trust that certain minimum safety and service standards are met. In fact, such requirements were the reasons for entry regulations in the traditional cab industry. The onus for these then lie in the State capacity that gives commercial licenses, and does police verification checks. This requires the State machinery to work, and is independently an issue apart from that of requiring anything of a technology platform that merely brings together buyers and sellers.

Conclusion: Another kind of activism

The problem then, is two-fold. First, there is the tragedy of poor State capacity in preventing and prosecuting crime, which incentivises simply banning certain activities. This is a generic problem that bedevils the working of the Indian economy in numerous contexts. The solution to this issue can only be a long and hard one: of improving the functioning of our public institutions.

The other problem to address is the poor methods for shaping, regulating or nudging commercial conduct. While India is a common law country and action for tort indeed can shape commercial conduct, the problems in delivering timely justice under common law has led to regulators occupying the commercial space in many sectors. However, regulatory interventions with clarity of thought on what can and cannot be done by commercial parties, leaves much to be desired even in sectors that have been regulated for decades. When Uber began its coverage of India, no transport regulator raised as much of a whisper about the status of its regulatory compliance and whether at all intervention was warranted. Now, at the first sight of a crime, the same regulators are quick to consider imposing a complete ban.

Common law remedies coupled with penalties and damages offer recourse to the affected parties, and hit offenders where it hurts: on their balance sheets. Predictable regulations would not only make service providers answerable to society but also would make regulators answerable to the service providers. Is it a substitute for criminal prosecution of heinous crimes? Certainly not. But it is a useful complement. Regulatory activism is not just about ensuring effective prosecution, it also means bringing companies to book if they are lying about what they are providing.

There is an expectation that `software will eat the world', that lightweight businesses like Uber will come to dominate the whole world. Perhaps conditions of State capacity in India will prove to be a bottleneck, both in respect of problems such as obtaining law and order, and in terms of navigating the subtle questions of public economics and coming out with the right answers.


  1. Banning as a control measure has been common and oft used by wings of government that feel that they have to do 'something' or else they would be seen as abdicating their responsibility or it provides them a garb of acting in public interest by taking action against the perpetrator. Does the contract between Uber and taxi driver allow for a principal-agent vicarious responsibility to visit the parent?
    We see similar 'banning' responses in the financial markets when certain commodities are banned from futures trading when the prices rise very high and the government is uncomfortable. But one has not seen such allegedly public welfare oriented measures when onion or tomato prices hit Rs80 a kilo in the form of say instant procurement through imports and flooding of markets. A more nuanced form of this banning exists in the HFT world of order-trade ratios (OTR )where the SEBI has directed that a 15 minutes ban on trading will be imposed on the broker only if it does not heed earlier warnings to reducing the OTR levels to less than 500:1.
    Arbitrariness of a measure of intervention by the State, including failure to intervene in some cases, may need to be measured on some uniform scale for a better understanding even if on hindsight.

  2. Excellent article.

    What the govt does can be summed up as follows: as soon as a crisis hits it, it looks to transfer the blame as soon and as credibly as possible. To illustrate, a fire dept official will go to the site of fire and first see which building norm/fire norm was violated and then examine prevention or analysis of the event.

    In the Uber episode, the end responsibility of safety rests with police but Delhi Police has skirted the issue and nobody is questioning their role into the issue.


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