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Paul Zimmerman
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Taken for a Ride: Under-Fire Uber Pays the Price

A recent settlement between Uber and the Los Angeles and San Francisco County District Attorneys Offices presents an interesting opportunity to examine the tools available to California law enforcement to police potentially false or deceptive advertising and the different ways in which Uber and its main competitor, Lyft, responded to nearly identical complaints by government regulators.

On December 9, 2014, the District Attorney’s for the counties of San Francisco and Los Angeles brought an action on behalf of the People of the State of California against Uber Technologies, Inc. seeking relief in the form of a permanent injunction, civil penalties, restitution and other equitable relief under Business and Professions Code sections 17200 and 17500. A nearly identical lawsuit was filed against Lyft on the same date.

The allegations common to both complaints were that Uber and Lyft (1) made misleading representations to the public about the thoroughness of the background checks they ran on their drivers, (2) engaged in unlawful business practices by using apps that measured time and distance traveled that had not been certified by the California Department of Food and Agriculture’s Division of Measurement Standards, and (3) conducted unlawful operations at California Airports. Moreover,  with respect to the representations about background checks, this conduct violated California’s False Claims Act (B&P Section 17500 et seq.), and with respect to all of the claims, defendants’ conduct violated California’s Unfair Competition Law (B&P Section 17200 et seq.).

Uber in the government’s crosshairs

With respect to the Uber Complaint, the attorneys general were far more specific in identifying Uber’s alleged misconduct, stating that through the end of October 2014, Uber represented to its customers, “every ride sharing and livery driver is thoroughly screened through a rigorous process we’ve developed using industry-leading standards. This includes a three-step criminal background screening for the U.S. – with county, federal and multi-state checks that go back as far as the law allows – and ongoing reviews of drivers’ motor vehicle records throughout their time on Uber.” Uber further bolstered these statements by comparing its safety standards to the taxi industry and claiming its standards were more rigorous. “All Uber ridesharing and livery partners must go through a rigorous background check that leads the industry….screening for safe drivers is just the beginning of our safety efforts. Our process includes prospective and regular checks of drivers’ motor vehicle records to ensure ongoing safe driving. Unlike the taxi industry, our background checking process and standards are consistent across the United States and often more rigorous than what is required to become a taxi driver.”

The government claimed that Uber’s representations were untrue or misleading in violation of California law. As the government argued, “viewed separately or together, the representations are likely to mislead consumers into believing that Uber does everything it can to ensure their safety when, in fact, the centerpiece of Uber’s customer safety assurances – the background check process Uber describes as ‘industry-leading’ and touts as ‘often more rigorous than what is required to become a taxi driver’ – does not use fingerprint identification and therefore cannot ensure the information Uber obtains from a background check actually pertains to the applicant.” In contrast, the government pointed out that taxi regulators in the most popular parts of California require drivers to undergo criminal background checks using fingerprint identification technology called “Live Scan.”  Thus, the government claimed that Uber’s representations were false and misleading, because any background check systems that did not use biometric verification, such as a fingerprint, was inherently less rigorous and less safe than any background check system that used biometric verification.

Uber and Lyft pursue divergent litigation strategies

Lyft was served with a nearly identical complaint, and immediately settled. On December 15, 2014, a stipulated judgment was entered in the Lyft matter wherein Lyft agreed to 1) Pay $250,000 in civil penalties, which would increase to $500,000 if Lyft did not establish that it had complied with the other aspects of the stipulated judgment; (2) was enjoined from making false or misleading statements regarding its system of background checks, which included specific prohibitions on certain claims it could make with respect to its system of background checks; (3) mandated that Lyft work with the Division of Measurement Standards to obtain certification for its app; and (4) enjoined Lyft from conducting operations at California airports without the airport authority’s express authorization.

Uber, on the other hand, elected to litigate the dispute and demurred to each of the government’s causes of action. It appears Uber’s strategy was to see if it could quickly defeat any of the claims as a matter of law before entering into any serious settlement discussions.

In demurring to the complaint, Uber argued that the government’s FCA and UCL claims regarding its representations about safety failed as a matter of law, because they were nothing more than generalized assertions of commercial superiority that the law treats as non-actionable puffery.  Uber relied on case law holding that product superiority claims that are vague or highly subjective or that constitute mere general assertions of superiority are non-actionable.

Uber further argued that, as plead, the Uber app is not a measuring device, since it does nothing more than transmit GPS coordinates.  With respect to the balance of the complaint, Uber argued that, as plead, there was insufficient factual support for the allegations that Uber drivers were illegally operating at Los Angeles and San Francisco airports or that Uber was improperly collecting a fee with respect to any service provided at San Francisco’s airport.

While Uber quickly filed its demurrer, congestion in San Francisco Superior Court delayed a hearing on the demurrer until July 2015.  In the interim, the government pressed ahead with conducting discovery to try and identify the extent of Uber’s airport operations and the fees it collected with respect to those operations.

The demurrer was finally heard on February 11, 2016, wherein the Court overruled Uber’s legal challenge in its entirety. While the Court agreed with Uber that unverifiable puffery could not be the basis of a claim under the False Claims Act, it found that the government’s allegations identified statements made by Uber were the types of verifiable facts statements that reasonable consumers could rely upon and therefore could be a source of liability.

Once this ruling was handed down, Uber elected to settle with the attorney’s general and a stipulated judgment was entered on April 7, 2016. Pursuant to the judgment, Uber agreed to 1) pay $10,000,000 in civil penalties, which would increase to $25,000,000 if Uber did not establish that it had complied with the other aspects of the stipulated judgment; (2) was enjoined from making false or misleading statements regarding its system of background checks, which included specific prohibitions on certain claims it could make with respect to its system of background checks using language that was nearly identical to that used in the Lyft stipulated judgment;(3) mandated that Uber work with the Division of Measurement Standards to obtain certification for its app; and (4) enjoined Uber from conducting operations at California airports without the airport authority’s express authorization.

Brands take notice

We do not know whether Uber litigated the government’s claim because it thought the State’s case was weak or because it was not able to negotiate an acceptable settlement at the outset of litigation, but for whatever reason, Uber pursued a strategy of directly challenging the State’s claim that it could be held accountable for the advertising and public statements it made in connection with its system of background checks. The Court completely rejected Uber’s arguments, finding that a claim was stated based upon Uber’s representations. In the end, Uber had to pay 20 times what Lyft did to settle the claim.

The actions against Uber and Lyft illustrate the robust civil enforcement mechanism available to both consumers and the state with respect to claims made by providers of goods or services in California. In the competitive marketplace, where companies compete to capture consumers’ interest and loyalty, there is a fine line between puffery and actionable deception. Brands, marketers and advertisers should work with qualified counsel to carefully evaluate their commercial claims, or risk significant exposure.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.