San Francisco Is Picking a Major Fight with the Tech World—But Can It Win?

By: Bridget Clerkin March 9, 2018
A legal fight is underway at San Francisco's SFO airport regarding whether a "car sharing" service can be regulated like a rental company.

In Silicon Valley’s quest for new-age answers, nary a stone goes unturned, nor an industry undisrupted. And San Francisco is apparently sick of seeing such actions go unpunished.

The City by the Bay has sued tech start-up Turo over the right to do business at San Francisco International Airport (SFO), claiming the app-based company is reaping all the rewards of the location without following any of its rules.

First launched on the heels of Airbnb, Turo has been described as the automotive iteration of the room sharing business, offering a “vehicle sharing” service through which users can rent—or rent out—personal vehicles for a short period of time.

City attorneys believe the business model is akin to a classic car rental agency and should be regulated as such, but company officials beg to differ, insisting they’re merely providing a digital platform—and they recently doubled down on that defense by filing a lawsuit of their own. The legal argument has been deployed in the past, with varying degrees of success, by trailblazing tech firms like Uber, but with its potential to set serious precedents in a major metropolitan area, the looming courtroom battle has become the focus of an anxiously awaiting tech world.

Blinder Jabs

With more than 53 million annual visitors, SFO is one of the planet’s busiest airports. And to keep things running smoothly at the international transportation hub, officials need to run a tight ship.

That effort includes enforcing a number of regulations on the curbside companies contributing to the massive amount of traffic driving along terminal roads—a process which San Francisco City Attorney Dennis Herrera said Turo intentionally gave the slip.

The company allows its 4 million users, spread across more than 5,000 cities in the U.S. and Europe, to meet up in order to exchange car keys. Money is also exchanged—through the app—with Turo collecting 25% of each deal. In San Francisco, like in many other places the business operates, this transaction often takes place at the airport.

Turo no longer retains the right to use SFO’s 1.5 miles of roadway for commercial purposes, San Francisco attorneys say.

But after failing to renew its airport permit last summer, Turo no longer retains the right to use SFO’s 1.5 miles of roadway for commercial purposes, the city alleges. (The company supposedly misled airport officials, according to the city’s complaint, telling them it would cease operating out of the area after its license there lapsed.)

Aside from denying the airport annual permit fees—which accounted for 11.5% of the public entity’s budget for fiscal year 2016-2017—the move gives Turo an illegal “unfair advantage” over the seven traditional vehicle leasing firms found at its Rental Car Center, according to the city’s suit, allowing for the app company to offer more direct service at more competitive prices.

And while the Rental Car Center’s location—set slightly outside the main airport and primarily accessible by AirTrain, a light rail system—has led to an overall decrease in congestion at SFO, the addition of Turo’s curbside drop-offs have caused traffic to pick up along the already-busy terminal roads, the complaint contends.

Counter Punches

Turosite
Tech firm Turo sends mixed messages, calling itself a peer-to-peer car sharing service for legal purposes, but advertising itself as a rental service on its website. The exact definition could be key in a City of San Francisco lawsuit against the firm.

Turo’s lawyers took issue with this assessment, calling the city’s legal move startling, and claim to have only learned about the pending lawsuit through an official Twitter post made on behalf of the airport.

But the startup’s greatest indignity was seemingly suffered over the corporate category Herrera used to describe it. The company wouldn’t earn a competitive advantage from its operation at SFO, since the airport’s rental car agencies aren’t its true competitors, Turo attorneys said.

In a countersuit filed against the city late last month, Turo’s legal team vehemently denied its status as a vehicle leasing business, preferring the label of “peer-to-peer car sharing” service. The difference in terminology may be subtle, but it carries a heavy weight: it’s illegal to impose taxes on such peer-based companies in California without a public vote, according to the countersuit—a rule Turo alleges the city would be violating if it were to ask it for rental car fees.

The firm went on to note that it doesn’t own a physical fleet, unlike traditional rental agencies, saying the state’s legal hands were tied since its business model was comprised of private citizens sharing private vehicles. It also took a swipe at San Francisco in a blog post announcing the countersuit, saying the city was bowing to pressure from rental companies like Enterprise, which has failed to adapt to the tech age and so tried to prevent Turo from operating.

The company instead styled itself as an essential component of the modern world, offering economic opportunities for cash-strapped residents in need of a side-hustle to keep up with the astronomical costs of the increasingly affluent town—which now boasts a median home value of $1.3 million and an average monthly rent of $4,400.

Still, if the company loses its legal challenge, those inflated figures will look like mere chump change.

Total Knock-Out

Turo may have been valued at nearly $700 million after its latest round of capital funding last year, but it could take a healthy portion of that fortune to pay for its actions at SFO.

The city is seeking a maximum penalty of $2,500 per violation taking place at the airport since Turo’s permit expired last June. And with the company boasting more than 200 vehicles as available in the area, that total could be devastating. (Comparatively, SFO typically collects $18 per rental transaction from permitted companies there.)

The airport is undoubtedly a hotspot for Turo, and indeed is still listed on its website as a “top pick” for car rentals and key drop-offs. Should the city win, it would also seek to ban such advertisements.

Yet the suit has the potential to offer something even more valuable: a highly-scrutinized legal test of the “platform only” argument being employed by Turo. Should the start-up win, it could open the floodgates for a number of other disruption-minded companies to follow suit, claiming their responsibility for the apps they create stops at the edge of a smartphone. If that way of thinking prevails, the shades of gray camouflaging the corporations will certainly start to skew more black.

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