By: Max Changus
During the first week of May, taxicab companies in South Florida filed a class action lawsuit seeking $1 billion in damages against Miami-Dade County. What sparked the suit was the county’s passage of an ordinance allowing Uber and Lyft, two ride sharing services, to legally operate in the county. This decision will have an immediate and drastic impact on the value of taxi permits, known as medallions, that have allowed taxi companies to maintain a monopoly over the provision of transport services for most of the last century in cities throughout the United States.
Basically, Uber and Lyft are transport service companies that undeniably operate very similarly to a traditional taxicab operation. Drivers respond to requests for transport from customers who pay fees based on the distance traveled. Most of these requests come through mobile apps, which gives the service a decidedly 21st century feel. But the underlying service otherwise appears to be a taxi for hire service, the type of which has been traditionally subject to regulation by local governments for much of the past one hundred years. However, there is one distinct difference: Uber and Lyft have not conformed to these licensing regulations. Responding to a demand from people in large cities for better transportation options, these startup companies used a mobile platform to quickly grow a dedicated client base and gain market share leading to a valuation, in the case of Uber, in excess of $50 billion.
So, what’s the problem? The rise of Uber and Lyft has seemingly damaged the position of traditional taxi companies, whose ability to provide those services was dependent on the possession of taxi medallions issued by the local government. The number of medallions was limited, causing the value of these medallions (recently issued in Miami-Dade for $20,000 to escalate quickly in value (up to as much as $350,000, or more). These medallions could be bought and sold and were a store of value for taxicab operators, serving oftentimes as assets that could be invested in for purposes of retirement. Now, these local governments have decided, not just in Miami, but in New York and other cities as well, that a company does not have to have its medallion or permit to offer what are basically taxi services, driving the value of the issued medallions down towards zero.
The lawsuit in Miami-Dade will focus on the county’s decision and the negative impact on the property interest of the medallion holders. The lawyers for the taxicab companies will argue that the county’s decision devalued their client’s property and therefore there should be sizable compensation for the taking of that property. It should be noted that a similar lawsuit in New York was unsuccessful, with the judge stating, “It is not the court’s function to adjust the competing political and economic interests disturbed by the introduction of Uber-type apps.” If other courts follow this way of thinking, it seems unlikely that the traditional taxicab companies will prevail in their efforts to be compensated for their losses in similar suits around the country, including the newest one in South Florida.
What is surprising is that most cities and counties have not attempted to maintain their control by fighting Uber and Lyft and other such companies that have challenged their authority in regulating taxicabs in their jurisdictions. In fact, officials have oftentimes been proponents of these new entrants into the transport service business. Why is this? My guess is that the taxicab business had failed to innovate and endured such a generally poor reputation among its customers, including some of these same city and county officials, that it was ripe for a hostile takeover. Uber and Lyft provided a service that people desperately wanted and the traditional taxicab companies found themselves with few allies as their business model came under attack. The fact that these companies and drivers have relied on the medallion system for their own financial purposes may not be likely to sway officials to compensate them for their impending losses.
This scenario brings up another question: will new technologies and businesses have a similar impact on other regulated industries and professions in the United States? For example, will the demand for immediate and low cost services impact the role of the states in regulating the healthcare and legal professions? Will the traditional concerns of regulators, including protection of the public, be any match for an increasing demand for immediate low-cost services by the public? With the rise of new companies such as LegalZoom and Doctor on Demand, state-licensing authorities will be soon faced with these types of questions. The answers will alter the landscape of our service economy for years to come.