Antitrust and Unfair Competition Law

Ninth Circuit Rules That State-Action Immunity Does Not Protect Seattle’s Ridesharing Collective Bargaining Ordinance From Preemption By Section 1 Of The Sherman Act

Harrison (Buzz) Frahn, Michael R. Morey, Lauren Ditty (Summer Associate)
Simpson Thacher & Bartlett LLP

On May 11, 2018, the Ninth Circuit reversed the U.S. District Court for the Western District of Washington’s dismissal of the Chamber of Commerce of the United States of America’s (the “Chamber’s”) federal antitrust claims against the City of Seattle in Chamber of Commerce of the United States of Am. v. City of Seattle, 890 F.3d 769 (9th Cir. 2018). The suit arose from a recently enacted Seattle ordinance that allows independent-contractor drivers to collectively bargain with rideshare app companies like Uber and Lyft for the rideshare fees that the companies impose on the drivers. The Chamber alleged, inter alia, that Seattle’s ordinance was preempted by Section 1 of the Sherman Act because the ordinance sanctioned price-fixing of the rideshare fees by private cartels of independent-contractor drivers. Seattle moved to dismiss on the basis that the state-action immunity doctrine protected the ordinance from preemption by Section 1 of the Sherman Act. The District Court agreed with Seattle, and the Chamber appealed.

The Ninth Circuit held that the state-action immunity doctrine did not protect the ordinance from preemption by Section 1 of the Sherman Act because: (1) the State of Washington had not “clearly articulated and affirmatively expressed” a state policy authorizing price-fixing of rideshare fees, and (2) the State of Washington did not “actively supervise” the anticompetitive policy imposed by the ordinance. Given that Seattle’s ordinance was the first municipal ordinance of its kind in the United States, the Ninth Circuit’s decision has the potential to impact future state and municipal attempts to unionize independent-contractor drivers in the rideshare industry. Seattle sought rehearing or en banc review on June 25, 2018.

Background

Rideshare companies like Uber and Lyft provide smartphone apps that allow riders to request rides from independent-contractor drivers. Chamber of Commerce, 890 F.3d at 776. To receive ride requests through the app, drivers enter into non-exclusive contracts with various rideshare companies and pay licensing fees to the companies for the ride-referral services that the companies’ apps provide. Id. These licensing fees are a percentage of riders’ paid fares––after a driver completes a ride, the rideshare company that referred the ride to the driver takes a cut of the total ride fare and remits the remainder to the driver. Id.

On December 14, 2015, Seattle passed Ordinance 124968 (the “Ordinance”), which authorized collective bargaining between “driver coordinators”—like Uber and Lyft—and their independent-contractor drivers for the “nature and amount of payments to be made by, or withheld from, the driver coordinator to or by the drivers.” Id. at 778 (quoting Seattle, Wash., Municipal Code § 6.310.735(H)(1)). Under the Ordinance, a city-approved “qualified driver representative” can represent “qualifying drivers”—independent-contractor drivers who have driven at least 52 trips originating or ending within Seattle’s city limits—in negotiations with “driver coordinators” like Uber and Lyft. Chamber of Commerce, 890 F.3d at 777. Once the qualified driver representative reaches an agreement with a driver coordinator on the price of the service fees that the qualifying drivers must pay the driver coordinator, they submit the agreement to the director of Seattle’s Department of Finance and Administrative Services for approval. Id. at 778. The director then considers whether “the substance of the agreement promotes the provision of safe, reliable, and economical for-hire transportation services and otherwise advances the public policy goals set forth in [the Seattle Municipal Code] and in the Ordinance.” Id. The agreements are not enforceable unless the director approves them. Id. The Ordinance was the first municipal ordinance of its kind in the United States, and went into effect on January 22, 2016. Id.

Procedural History

After filing an initial complaint on March 3, 2016 that was dismissed as unripe because collective bargaining under the Ordinance had not yet begun, the Chamber filed an amended complaint on March 9, 2017 against the City of Seattle and the Seattle Department of Finance and Administrative Services (collectively, “Seattle”) for enacting and enforcing the Ordinance. The amended complaint asserted, inter alia, two federal antitrust claims for injunctive and declaratory relief alleging that the Ordinance “sanctioned price-fixing of ride-referral service fees by private cartels of independent-contractor drivers.” Id. at 775. The first claim alleged that Seattle violated Section 1 of the Sherman Act by enacting and enforcing the ordinance. The second claim alleged that the Ordinance conflicted with and was preempted by Section 1 of the Sherman Act. Seattle moved to dismiss the Chamber’s amended complaint and asserted, inter alia, that both of the Chamber’s federal antitrust claims should be dismissed because the doctrine of state-action immunity exempted the Ordinance from preemption by the Sherman Act.

District Court Opinion

In analyzing Seattle’s state-action immunity defense to the Chamber’s federal antitrust claims, the District Court began with the assumption that the Ordinance constituted a per se antitrust violation because it sanctioned “collusion between independent economic actors”––here, the independent-contractor drivers––“to set the prices they will accept for their services in the market”––here, the ridesharing fees imposed by the driver coordinators. Chamber of Commerce of United States v. City of Seattle, 274 F. Supp. 3d 1155, 1162 (W.D. Wash. 2017). After making this assumption, the District Court applied the Midcal state-action immunity test to determine whether the Ordinance was protected from preemption by Section 1 of the Sherman Act. Id.at 1163; see also Cal. Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980). Under the Midcal test, anticompetitive acts by private parties are entitled to state-action immunity if: (1) the anticompetitive act is “clearly articulated and affirmatively expressed as state policy” and (2) the state “actively supervises” the policy. Midcal, 445 U.S. at 105. The District Court concluded that Seattle satisfied both parts of the Midcal test and held that Section 1 the Sherman Act did not preempt the Ordinance. Chamber of Commerce, 274 F. Supp. 3d at 1169.

First, the District Court reasoned that the State of Washington had “clearly articulated” a state policy authorizing anticompetitive regulation in the rideshare industry. Id. at 1163. In reaching this conclusion, the District Court relied on two Washington statutes that permitted local regulation of for-hire vehicles and taxicabs “without liability under federal antitrust laws.” Id. Although the statutes did not explicitly authorize collective bargaining between independent-contractor drivers and rideshare companies, the District Court concluded that the statutes authorized a “wide array of municipal regulation” in the for-hire transportation industry, including local regulation of license requirements, fees, routes, and “any other requirements adopted to ensure safe and reliable for-hire vehicle transportation or taxicab service.” Id. at 1163-65. To support its ruling, the District Court relied on the Supreme Court’s decision in S. Motor Carriers Rate Conference, Inc. v. United States, 471 U.S. 48 (1985), which held that the first prong of the Midcal test is satisfied when the State clearly intends to displace competition in a particular field with a regulatory structure. Id. at 1164-65. The District Court concluded that Seattle’s inability to point to a “specific, detailed legislative authorization” of collective negotiation of rideshare fees did not foreclose its state-action immunity defense. Id. Instead, the District Court ruled that the Washington legislature “clearly contemplated and authorized regulations with anticompetitive effects in the for-hire sphere.” Id. Therefore, the District Court concluded that Seattle satisfied the first prong of the Midcal test even though the statutes that Seattle relied on did not specifically authorize collective bargaining between rideshare companies and independent-contractor drivers. Id.

Second, the District Court determined that the ordinance satisfied the active-supervision prong of the Midcal state-action immunity test. Id. at 1169. Critically, the District Court drew no distinction between state oversight and municipal oversight in determining whether Seattle satisfied the supervisory component of the Midcal test. Id. at 1167. Relying again on S. Motor Carriers, the District Court reasoned that “[w]hen a municipal regulation allows private parties to engage in anticompetitive conduct . . . the municipality (not the state) must actively supervise the conduct.” Id. (citing S. Motor Carriers, 471 U.S. at 62). According to the District Court, Seattle satisfied the active-supervision prong of the Midcal test because the director of the Seattle Department of Finance and Administrative Services actively supervised the conduct of the independent-contractor drivers and rideshare companies under the Ordinance. Id. at 1168. The District Court saw no reason to require active state supervision of the Ordinance where there was adequate municipal supervision. Id.(emphasis added) (citing Town of Hallie v. Eau Claire, 471 U.S. 34, 46 (1985)). The District Court further stated that Seattle’s supervision of the Ordinance was not “merely a gauzy cloak of state involvement over what is essentially a private price-fixing arrangement” because the director of the Seattle Department of Finance and Administrative Services evaluated the collective-bargaining agreements between the drivers and rideshare companies before they went into effect, and the director was not permitted to “passively accept the agreement[s] proposed by the parties.” Id. at 1168-69. Because Seattle satisfied both prongs of the Midcal state-action immunity test, the District Court dismissed the Chamber’s federal antitrust claims. Id. at 1169. The Chamber appealed.

Ninth Circuit Opinion

The Ninth Circuit reversed the District Court’s dismissal of the Chamber’s federal antitrust claims. Like the District Court, the Ninth Circuit applied the Midcal state-action immunity test to determine whether Section 1 of the Sherman Act preempted the Ordinance. But the Ninth Circuit ultimately found both prongs lacking.

The Clear-Articulation Test

The Ninth Circuit first determined that the State of Washington had not “clearly articulated and affirmatively expressed” a state policy authorizing private parties to price-fix the fees that independent-contractor drivers pay to companies like Uber or Lyft in exchange for using the companies’ ride-referral services. Chamber of Commerce, 890 F.3d at 782. In teeing up its application of the clear-articulation test, the Ninth Circuit explained that the “inquiry …is a precise one. ‘The relevant question is whether the regulatory structure which has been adopted by the state has specifically authorized the conduct alleged to violate the Sherman Act.” Id. (emphasis in original) (quoting Cost Mgmt. Servs., Inc. v. Wash. Nat. Gas Co., 99 F.3d 937, 942 (9th Cir. 1996)). The Ninth Circuit also clarified that “[t]he relevant statutory provisions must plainly show that the state legislature contemplated the sort of activity that is challenged, which occurs where they confer express authority to take action that foreseeably will result in anticompetitive effects.” Chamber of Commerce, 890 F.3d at 782 (emphasis in original) (internal quotation marks omitted) (citing Hass v. Or. State Bar, 883 F.2d 1453, 1457 (9th Cir. 1989)).

In applying the clear-articulation test, the Ninth Circuit found that the statutes that Seattle relied on to support its state-action immunity defense––Wash. Rev. Code. §§ 46.72.001, 46.72.160, 81.72.200, and 81.72.210––did not “plainly show” that the State of Washington “contemplated” allowing independent-contractor drivers to price-fix their compensation, and that such an anticompetitive result was not foreseeable. Chamber of Commerce, 890 F.3d at 783–87.

The first statutes that the Ninth Circuit grouped together and analyzed (Wash. Rev. Code. §§ 46.72.001 and 81.72.200) provided, in relevant part, that “it is the intent of the legislature to permit political subdivisions of the state to regulate for hire transportation services without liability under federal antitrust laws.” Id.at 783. The Ninth Circuit held that these statutes were insufficient to invoke state-action immunity in light of Supreme Court precedent holding that “a State may not confer antitrust immunity on private persons by fiat,” id. (quoting F.T.C. v. Ticor Title Ins. Co., 504 U.S. 621, 633 (1992)), nor “validate a municipality’s anticompetitive conduct simply by declaring it to be lawful,” id. (quoting Town of Hallie, 471 U.S. at 39). Moreover, the Ninth Circuit reasoned that the plain language of these statutes merely focused on providing “privately operated for hire transportation services”––not regulating the fees that independent-contractor drivers pay driver coordinators for using their ride-referral app services. Id. In other words, the Ninth Circuit found that “[n]othing in the statute[s] evinces a clearly articulated state policy to displace competition in the market for ride-referral service fees charged by companies like Uber, Lyft, and Eastside.” Id. at 784.

The next two statutes (Wash. Rev. Code. §§ 46.72.160 and 81.72.210) fared no better. The Ninth Circuit found that these statutes focused on the regulation of for-hire vehicle services and provided in relevant part that “[c]ities … may license, control, and regulate all for hire vehicles operating within their respective jurisdictions.” Id. at 784 (emphasis added) (quoting Wash. Rev. Code. §§ 46.72.160). The Ninth Circuit concluded that the regulatory powers granted to Washington cities by these statues, such as “[r]egulating entry into the business of providing for hire vehicle transportation services” and “[r]egulating the routes and operations of for hire vehicles,” referred specifically to for-hire vehicles––not the fees that Uber and Lyft charge independent-contractor drivers for using their ride-referral app services. Id. at 784-85. Accordingly, the Ninth Circuit found these statutes to be inapposite to the specific anticompetitive practices sanctioned by the Ordinance. See id. at 785 (analogizing to Medic Air Corp. v. Air Ambulance Authority, 843 F.2d 1187, 1189-90 (9th Cir. 1988), which distinguished between the market for ambulance services and the market for dispatching ambulances in applying the clear-articulation test to find that state-action immunity did not shield the ambulance service market from preemption by Section 1 of the Sherman Act).

The Ninth Circuit rounded out its analysis on the clear-articulation prong of the Midcal test by noting that “Uber and Lyft did not exist when the Washington statutes were enacted,” and that the “very concept of digital ridesharing services was probably well beyond the imaginations of lawmakers two to three decades ago.” Chamber of Commerce, 890 F.3d at 787 (noting that Wash. Rev. Code. §§ 46.72.001 and 46.72.160 were enacted in 1996 and §§ 81.72.200 and 81.72.210 1984 were enacted in 1984).

For these reasons, the Ninth Circuit held that the Washington legislature had not “clearly articulated and affirmatively expressed” a state policy authorizing the anticompetitive practices sanctioned by the Ordinance. The Ninth Circuit then proceeded to analyze the second prong of the Midcal state-action immunity test: whether the state actively supervises the anticompetitive policy.

The Active-Supervision Requirement

The Ninth Circuit concluded that Seattle failed to satisfy the active-supervision prong of the Midcal test. The Ninth Circuit first explained that when a “state or municipal regulation [of] a private party is involved, …active state supervision must be shown, even where a clearly articulated state policy exists.” Id. at 788 (quoting Town of Hallie, 471 U.S. at 46). Moreover, the Ninth Circuit clarified that “[t]he Supreme Court has stated repeatedly that active supervision must be ‘by the State itself.’” Id. at 789 (emphasis added) (citing Midcal, 445 U.S. at 105, and N. Carolina State Bd. of Dental Examiners v. F.T.C., 135 S. Ct. 1101, 1112 (2015)).

In contrast, Seattle argued that it satisfied the active-supervision prong because, under the Ordinance, the director of the Seattle Department of Finance and Administrative Services evaluated the collective-bargaining agreements between the drivers and rideshare companies before they went into effect, and the enforceability of the agreements was subject to the director’s approval. Seattle further asserted that the Supreme Court used the term “State” in the opinions relied on by the Ninth Circuit “as shorthand for the State and all its agents, including municipalities,” and therefore the city director’s supervision of the Ordinance was sufficient. Chamber of Commerce, 890 F.3d at 789.

The Ninth Circuit disagreed and stated that “[t]he City cites no controlling authority to support its argument.” Id. In rejecting Seattle’s arguments, the Ninth Circuit focused on “the specific distinction the Supreme Court has drawn between cities, which are not sovereign entities, and states, which are,” and held that State––not municipal––supervision was required for Seattle to satisfy this prong of the Midcal test. Id. Accordingly, Seattle’s attempt to rely on municipaloversight of the anticompetitive acts sanctioned by the Ordinance was insufficient and incorrect as a matter of law. Chamber of Commerce, 890 F.3d at 789. And because “[i]t [was] undisputed that the State of Washington plays no role in supervising or enforcing the terms of the . . . Ordinance,” the Court concluded that Seattle failed to satisfy the active-supervision prong of the Midcal test. Id.

Having found that Seattle failed to satisfy the two requirements under the Midcal state-action immunity test, the Ninth Circuit remanded the case to the District Court for further proceedings.

Conclusion

The Ninth Circuit’s decision in Chamber of Commerce has the potential to impact future state and municipal attempts to unionize independent-contractor drivers in the rideshare industry, especially given that Seattle’s collective bargaining ordinance for independent-contractor drivers was the first municipal ordinance of its kind in the United States. Seattle filed a Petition for Rehearing or Rehearing En Banc on June 25, 2018, and the Chamber of Commerce’s response to the Petition is due in early August.

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