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Is Sharing Illegal? In Many Cases, Yes.

Lonnie Shekhtman headshotWords by Lonnie Shekhtman

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The Rise Of The Sharing Economy

Governments have their work cut out for them in keeping pace with innovation, especially as mobile, social and cloud technologies allow for new business models that, in the eyes of regulators, threaten consumer safety and incumbent industries.

The most poignant current-day example of the tug-of-war between government and technology entrepreneurs is the legal quagmire many “sharing,” or “collaborative consumption,” companies face in the cities they operate.

The problem, at least for home- and car-sharing services, is multifaceted: they’re agitating dozens of stakeholders, operating in uncharted territories, and legally indefinable. And indefinable is hard to regulate.

You can’t talk about legal issues surrounding ‘sharing’ without talking about the industry’s ‘800-pound gorilla’: home rental service Airbnb. The company, now active in 30,000 cities worldwide, often finds itself in a precarious position as it navigates zoning laws in each city, and sometimes even neighborhood, block or building.

As a result, Airbnb’s users have run into a host of legal problems, most publicly and recently in Amsterdam, New York City and San Francisco, where many Airbnb rentals are illegal and where hosts face steep penalties and eviction . . . if caught.

The problem for sharing companies is that municipal laws are outdated, forcing regulators “to squeeze a square peg into a round hole,” according to Molly Turner, a public policy specialist at Airbnb.

“Government is usually the last one to pick up on innovations,” Turner said. Although she credited San Francisco for recognizing and dealing with the ‘sharing’ movement very quickly, she pointed to a 1980 San Francisco affordable housing law being tapped to regulate home-sharing services as an example. The law restricts the conversion of single room occupancies (a.k.a. SROs), reserved for low-income residents, to other uses.

“Policymakers don’t understand that what’s happening to Airbnb is different than before,” Turner said. “Let’s create a different kind of category. Let’s not apply standards that were created for hotel rooms or SROs to my apartment, which I rent [out] three weeks a year.”

What policymakers are justly concerned about, for example, are cases of San Francisco landlords quietly converting their rentals into illegal hotel rooms, thereby taking valuable housing stock off the market and possibly contributing to the significant hikes in rental prices in the city.

In March, the city began collecting a 15 percent hotel tax from Airbnb and other home-sharing service users. And any day now, the San Francisco Board of Supervisors will introduce legislation to clarify the rules around short-term home rentals, to protect existing housing stock, and to create a mechanism for accountability, according to Amy Chan, legislative aide to board president David Chiu.

“Anyone in San Francisco who’s renting out their home for less than 30 days is doing it illegally,” she said.

Chan explained that the new legislation will likely allow only primary residents to share their housing on the short term, and only for a certain amount of time each year. And people renting out a secondary residence on the short term will need to get a bed-and-breakfast license.

It’s unclear how the Department of Building Inspection, the enforcement agency for these issues, will catch illicit renters. Its capacity is limited, so it won’t be scouring Airbnb to identify illegal listings. Most likely, the agency will rely on complaints from rancorous neighbors.

Ridesharing fights for removal of regulatory shackles

While home-sharing services work to untangle the home-rental web, ridesharing is grappling with its own set of legal woes. For companies like SideCar, an app that connects car owners who want to make extra cash with people who need rides, this translates to $500,000 spent on legal fees in the last year, according to company co-founder Nick Allen.

“We spent a lot of time and money designing the product to fit the regulatory framework that was in place,” said Allen. “A lot of this is just the technology evolution outpaces ability of regulators to keep up,” he said.

Again, the biggest problem (besides an enraged taxi and limo industry), is that the California Public Utilities Commission (CPUC) is relying on laws that have been in place since the 1970s, classifying companies like SideCar and Lyft as limousine services. In October, the CPUC ordered the companies (plus Uber) to “cease and desist” and slapped each one with a $20,000 fine in November for operating as passenger carriers without a license.

SideCar, currently operating in San Francisco and Seattle, disagrees with CPUC’s classification: “We’re a technology provider,” Allen says. “We’re not a transportation company.”

All three companies are still operating and the fines have been waived until the CPUC brings forward new ridesharing rules in the next six months to a year. There’s a rule-making process in progress right now, which allows all interested parties to comment on ridesharing issues like jurisdiction, public safety, and insurance.

“The effects of this new business model and level of activity on public safety are unknown,” the CPUC wrote in the Rulemaking document. “The purpose of this Rulemaking is not to stifle innovation and the provision of new services that consumers want . . .”

Or is it? Some believe that safety regulations are nothing more than disguised protection rules for incumbent industries.

“Startups are the canary in the coal mine,” said Dave Phillips, EVP and General Counsel at SideCar. “When you start reactively regulating really early stage startup markets, you have a very large chilling effect on innovation.”

Phillips was general counsel at AOL and Napster, which were among the first groundbreaking internet technologies to fight onerous government regulations.

“My sense is that we’re going through a similar period, but we’re challenging very local laws because mobile is starting to enable economic activity at a very local level,” Phillips said.

“The lesson is that where you’ve got a fast-moving dynamic sector that doesn’t fit into a regulatory framework, do not rush to regulate until you understand what you’re dealing with.”

For more on sustainable business, follow me on Twitter: @kuurlyq

[Image courtesy of Vectorportal, Flickr]