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Wednesday, July 9, 2014

Inside the City’s Taxicab Wars

A big court case and new technology force industry changes

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On July 22, the city’s existing taxicab industry could be completely upended if the Milwaukee Common Council votes to eliminate the cap on permits as well as allow app-based ridesharing services, such as Uber and Lyft, to operate with the city’s blessing.

Currently, the city has offered just 420 taxicab permits, about half of which are held by companies run by the Sanfelippo family, and the app-based Uber and Lyft ridesharing services are operating in a legal gray area—even if they aren’t being ticketed by the Milwaukee Police Department.

The July 22 Common Council meeting should bring some kind of resolution to the matter. Either the city will create a new industry model that’s regulated by what the market will bear with some basic public safety oversight by the city, or it will maintain the restrictive cap and allow the traditional taxicab companies to continue to control the market while Uber and Lyft operate as self-regulated and popular but nevertheless not-entirely-legal services.

 

Creative Destruction of the Old Taxicab Industry

In many ways, the city’s taxicab wars are a perfect example of the destruction of an old highly regulated model by a new model based more on market forces and new technologies.

The same battle is being waged around the country as local and state regulators decide how to incorporate ridesharing services into their transportation mix. California legalized rideshare services last fall, the first state in the nation to do so, while other cities—such as Madison—have cracked down on them by ticketing drivers and sending stern warnings to the companies to start adhering to local ordinances.

Add to the mix two powerful business entities with millions at stake—local, traditional taxicab companies that have invested millions in permits and the new app-based ridesharing services who stand to make millions if allowed into this market space. All of this will play out in Milwaukee Common Council, which could set the stage for an all-out war in court.

Milwaukee Alderman Robert Bauman, who crafted the legislation that would eliminate the taxicab permit cap while embracing and regulating Uber and Lyft, likened the old taxicab model to the monopoly-controlled gaslight industry of the 1800s.

“And when electricity came in they did their damnedest to stave off the inevitable,” Bauman said.

That said, he wasn’t happy about Uber’s and Lyft’s decision to operate under the radar and self-regulate, with its own background checks, vehicle inspections and customer and driver evaluations. He accused the companies of being “greedy” and trying to slow down the legislation so they could continue to operate as long as possible without city oversight.

“It’s no different than McDonald’s coming in and saying, ‘We’re a big corporation and we run a professional operation and we want to protect our brand, let us inspect our own kitchens and restaurants,’” Bauman said.

Bauman said his legislation—which has nine cosponsors—would level the playing field so that taxicab drivers and those working for ridesharing services would be treated the same, with the opportunity to obtain a provisional license while city-overseen background and vehicle checks are being conducted, either by the city or a third party.

“I think it really will provide new choices, which is a great thing, and flexibility and opportunities both for people to make a little money as well as the general public having more reliable taxi options,” Bauman said. “And that cannot help but be a good thing.”

Three council members, led by Alderman Ashanti Hamilton, voted to hold the measure until July 22. Hamilton told the Shepherd he wanted the ordinance to allow the city to hire a third party to conduct its background checks, which he said would help to alleviate what could be a long wait time for licenses.

He predicted something would pass at the next meeting.

In the meantime, Bauman said the MPD would get involved.

“They’re actively putting together an enforcement strategy and I have been reassured there will be enforcement within the next couple of weeks,” Bauman said.

 

The Legal Fight

It’s been a long, drawn-out struggle for the drivers who fought in court to remove the city’s restrictive cap on taxicab permits. That tight cap caused a permit’s price to spike to $150,000 on the secondary market—huge sums that went to individual permit sellers, not the city. As a result, permits were consolidated in the hands of Sanfelippo family-run taxicab companies, All City Veteran Taxi and American United Taxi Company, which own about 160 of them. At $150,000 per permit, the Sanfelippo holdings are valued at $24 million—if the cap and secondary market remain in place.

The permit price is so steep that many if not most drivers have been shut out of the market and worked as what their attorney, Anthony Sanders of the libertarian Institute for Justice, calls “urban sharecroppers” who work for “cartels.”

Last spring, Milwaukee County Circuit Court Judge Jane Carroll sided with the drivers and declared the cap and the secondary market unconstitutional.

The city responded by offering 100 new permits via a lottery for $100 each. About 800 individuals sought them. Many of them went to investors who turned around and tried to sell them at a profit to drivers eager to start their own service. 

Around the same time as the lottery, Uber and Lyft entered the Milwaukee market. Uber didn’t respond to the Shepherd’s request to comment for this article, but Lyft spokeswoman Katie Dally insisted that the ridesharing service, in which individual drivers use their own vehicles to pick up passengers they connect to on the company’s app—are legal.

“There is no city code that we are violating,” Dally said.

She said the company supported “commonsense regulations that prioritize public safety and consumer choice” but was concerned about the city creating barriers to entry.

“We do think that requiring drivers to have the city conduct a background check and vehicle inspection is creating a barrier to entry,” Dally said. “That’s really our No. 1 sticking point.”

Although Uber and Lyft weren’t around when the drivers launched their original suit to remove the permit cap, attorney Sanders said their appearance in Milwaukee and the high demand for the 100 new permits likely pushed the city to rethink its new model.

“I think that probably did help the city realize that all that they were doing was enlarging the cartel by giving 100 extra permits and that was not going to be a permanent solution,” Sanders said.

Eliminating the cap altogether is his group’s ultimate goal, for legal and financial reasons.

“With that closed market gone, drivers very well might make more now, even with so many more transportation options,” Sanders said. “That’s because there isn’t going to be this illegitimate profit taken by a select number of owners.”

Sanders said he hoped the Milwaukee legislation could serve as a national model that encourages competition but still has some safety checks in place for consumers. And he’s so confident that the measure will pass that the drivers are planning a victory party in front of City Hall after the July 22 vote.

 

The Threat to the Taxi Owners

Less thrilled about the changes is Red Christensen, a Sanfelippo employee and the head of the Milwaukee chapter of the Wisconsin Association of Taxicab Owners.

“We have no problem with the free market as long as it’s regulated fairly,” Christensen said.

But Uber and Lyft are “flaunting” their status, Christensen told the Shepherd, and the city isn’t regulating those companies as stringently as they do the traditional cab companies. Since Uber and Lyft cars don’t have obvious signage—other than Lyft’s pink mustache—it’s nearly impossible for police to identify the nondescript cars and ticket them when necessary.

“They are cars for hire. What makes them any different from a taxicab?” Christensen said. “Right now there are 250 to 300 illegal vehicles running the streets of Milwaukee that are not regulated because the companies, Uber and Lyft, have flaunted to the city that they don’t have to comply. If any of the cab companies here in town chose to have that action, I think they would be towing and locking up our cabs.”

Instead of expanding the market, Christensen said the increased competition would force drivers out of business.

“I have an issue with a huge conglomerate worth billions of dollars competing against the small, local cab company just trying to make it in a depressed market,” Christensen said. “The city chooses to put all of these permits out and obviously this will cause many owners to turn their cabs in to the city because there isn’t going to be enough revenue to support them out there.”

Christensen said his group’s members would vote on whether they would sue the city for its changes in its regulatory model.

Alderman Bauman predicted that the owners would file a lawsuit, but that they don’t have much of a case if the city treats taxicab drivers and ridesharing drivers the same.

“There certainly are cab owners whose economic interests will be harmed,” Bauman said. “Whether that raises legal issues is the question.”

Alderman Hamilton said he was more concerned with providing opportunities for drivers and consumers in neighborhoods traditionally underserved by taxicabs, and less worried about protecting the taxicab companies’ revenue and assets.

“We kind of created that value by artificially limiting the number of permits,” Hamilton said.

If the owners do sue, attorney Sanders said the Institute for Justice would intervene in court to defend the new system. The group is currently representing Uber, Lyft and Sidecar drivers to defend Chicago’s new regulations against opposition from the traditional taxicab companies.

“Instead of us suing [Milwaukee] for committing an unconstitutional act, we will be defending their latest act as constitutional,” Sanders said.