Shearman & Sterling LLP | Antitrust Blog | Ninth Circuit Overturns Dismissal Of Antitrust Suit Against City’s Ordinance Allowing App-Based Drivers To Collectively Bargain<br >  
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  • Ninth Circuit Overturns Dismissal Of Antitrust Suit Against City’s Ordinance Allowing App-Based Drivers To Collectively Bargain
     
    05/22/2018
    On May 11, 2018, the United States Court of Appeals for the Ninth Circuit Court partially reversed the district court’s dismissal of claims brought by the U.S. Chamber of Commerce, on behalf of ride-share app companies, that a Seattle ordinance allowing for-hire drivers to bargain collectively violated and was preempted by the antitrust laws.  In an opinion by Circuit Judge Milan D. Smith, the Ninth Circuit held that the state-action defense did not protect the ordinance from preemption by the Sherman Act because:  (1) the State of Washington had not clearly articulated and affirmatively expressed a state policy authorizing for-hire drivers to fix the prices of their service fees when using a ride-share app; and (2) the active-supervision requirement of the state-action defense was not met.

    On appeal, plaintiff argued that the Seattle ordinance violated and was preempted by Section 1 of the Shearman Act because the ordinance sanctioned the price-fixing of ride-referral service fees by private “cartels” of independent-contractor drivers.  In reversing the district court’s decision dismissing the Sherman Act claim, Judge Milan began with principles of conflict preemption the Supreme Court articulated in Rice v. Norman Williams Co., 458 U.S. 654, 659 (1982).  In Rice, the Court explained that the ultimate inquiry of conflict preemption “is whether there exists an irreconcilable conflict between the federal and state [or local] regulatory schemes.”  Judge Milan explained that an irreconcilable conflict would exist if the city ordinance authorized a per se violation of the Sherman Act.  The ordinance would then be facially preempted, unless protected by the state action defense.  However, if the restraint in the ordinance did not fall into a per se category, it could not be facially condemned and must instead be analyzed under the rule of reason.  Here, the district court had assumed without deciding that collective bargaining between app-based drivers regarding price of referral fees was a per se violation of the Shearman Act, an assumption that the City did not challenge on appeal.  Similarly, for the purposes of the appeal, the Ninth Circuit accepted without deciding that the ordinance at issue authorized a per se violation, indicating that the parties could address which mode of antitrust analysis (per se or rule of reason) applied to the ordinance on remand.

    Turning to the issue of whether the ordinance was protected by the state action defense, the Ninth Circuit ruled that the state-action doctrine did not exempt the ordinance from preemption by the Sherman Act.  To determine whether the city’s ordinance should receive state-action immunity, Judge Milan applied the Supreme Court’s two-part test in Cal. Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980):  (1) the challenged restraint in the ordinance must be one clearly articulated and expressed as state policy, and (2) the state must actively supervise this policy if private parties are involved.  Because local municipalities and political subdivisions themselves are not sovereign, the state must clearly express in a statute its intentions to displace competition in the relevant market in order to establish the clear articulation prong of the Midcal test.  In addition, the anticompetitive effect of the ordinance must be a foreseeable result of the state policy.  To establish the active supervision prong of the Midcal test, state officials must have the power to review particular anticompetitive acts if private parties are involved in the anticompetitive restraint.

    Applying this standard, the Ninth Circuit first held that the ordinance failed the clear articulation prong of the Midcal test.  The two state statutes relied upon by the city council in enacting the ordinance did not “plainly show” that the state legislature “contemplated allowing for-hire drivers to price-fix their compensation” nor, the Court found, was “such an anticompetitive result foreseeable.”  Rather, the Court determined that the state statutes authorized political subdivisions to regulate private, for-hire transportation services in the context of licensing vehicles, establishing safety and equipment requirements, and controlling the rates charged to passengers.  The Court also noted that the state statutes were passed before the advent of ride-sharing apps.  As a result, none of the provisions authorized for-hire drivers to collectively bargain for the referral fees imposed by ride-sharing apps.  The Court further held that the ordinance failed the active supervision prong of the Midcal test because it authorized private competitors to agree on their referral fees, but did not provide any role for the state in supervising or enforcing the terms of the ordinance.  Because the city failed to establish the state-action defense to its ordinance, the Ninth Circuit reversed the dismissal and remanded the antitrust claim back to the district court.

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