United States: FTC Report On Sharing Economy Cautions Regulators Not To Impede Innovation

David Kully is a partner in Holland & Knights Washington, D.C. office.

Nicholas Melzer is a partner in Holland & Knights Los Angeles office

Michael Boardman is an Associate in Holland & Knights Los Angeles office

HIGHLIGHTS:

  • The Federal Trade Commission (FTC) recently released a report discussing the economic and regulatory implications of the growth of "sharing-economy" companies such as Uber, Lyft and Airbnb.
  • The FTC applauds the disruptive innovation brought by these businesses and the significant consumer benefits that have emerged through competition with traditional suppliers of similar services.
  • Through its report, the FTC signals that it will continue to be an advocate against regulatory efforts to protect incumbent businesses from competition and innovation offered by companies in the sharing economy.

In 1942, economist Joseph Schumpeter observed that the "creative destruction" of innovation often drives economic growth in market economies as companies continuously introduce new products or services, or new ways to produce or supply products or services, to meet the demands of consumers. On Nov. 17, 2016, the Federal Trade Commission (FTC) released a report titled "The 'Sharing' Economy: Issues Facing Platforms, Participants & Regulators" that highlights how consumers have benefited from the creative destruction introduced by new businesses such as Uber and Airbnb. The report also analyzes economic and regulatory issues facing participants in these newly disrupted markets.

Though it purports "not to support or oppose any particular business model" (Report, p13) or "to identify areas for [FTC] investigation and enforcement" (p15), the FTC report likely will be cited for years to come as a source of competition and regulatory policy guidance in the sharing economy. In the report's first paragraph, the FTC endorses Schumpeter's creative destruction as "a major driver of long-term consumer welfare gains" (p1) and reiterates its belief that regulators should not automatically subject new businesses such as Uber and Airbnb to the same regulations applicable to the traditional businesses with which they compete (p52). It recognizes the "inherent tension" between the competitive benefits that sharing- economy businesses can provide and their potential to impose some consumer harms (p14), and notes the FTC's past efforts to convince regulators to intervene with narrowly tailored rules only when necessary "to protect consumers and the public or to serve some other legitimate public goal" (p7).

Businesses in or anticipating entry into the sharing economy should take note of the FTC's report. Companies reasonably can expect that the FTC will be an advocate for them against efforts by states or municipalities to insulate incumbent businesses from the competition and creative destruction that new entrants might cause. However, new businesses should be sensitive to the privacy and consumer protection concerns that are likely to draw the attention of the FTC and other regulators.

Discussion

The central subject of the FTC's report (and its 2015 workshop on the sharing economy) is "how regulators can pursue legitimate regulatory goals such as those relating to health, safety, or consumer protection, while avoiding regulations that may unnecessarily chill innovation, entry, and competition" (p51). The FTC advocates for balancing these "competing goals by limiting regulation to targeted measures no broader than needed to achieve the regulatory goals" (p64). But it also observed the existence of a variety of competing viewpoints on the subject. Some competitors in the sharing economy favor establishing a level regulatory playing field for traditional businesses and new entrants to avoid giving certain competitors an unfair advantage (p55-56). Others have expressed concerns about regulatory capture by incumbent businesses pushing protectionist policies or establishing an unfortunate "Brother, May I" scenario under which new entrants have to request permission from competitors to compete in new ways (p56). Still others have noted the need for "a regulatory approach flexible enough to allow adaptation to novel and potentially unforeseen situations" (p57), as well as a general caution against "preemptive regulation" that might impede innovation (p57-58).

In analyzing the challenges facing participants and regulators, the report focuses on two of the fastest-growing and most disruptive sectors of the sharing economy: for-hire transport (companies such as Uber and Lyft) and short-term lodging (companies such as Airbnb). The FTC observes that for-hire transport platforms have "had a dramatic impact on competitive conditions" in the transportation sector (p68) and that the hotel sector is struggling to adapt to the proliferation of rooms available through companies such as Airbnb. Some have lost a significant amount of business, while others have started using the Airbnb platform to advertise available rooms (p71). Unsurprisingly, traditional businesses in these sectors have been vocal in their criticism of startups such as Uber and Airbnb, requesting that these new businesses be subject to the same or similar regulations as the traditional enterprises in order to "level the playing field" (p71).

The FTC suggests that regulators in these industries consider similarities and differences between sharing-economy businesses and traditional suppliers in considering whether to "extend or tailor existing regulations to sharing economy participants, or if aspects of sharing economy platforms limit the need for such regulation" (p73). The report noted broad consensus on the "importance of consumer protection and public safety" in these two sectors, but also that traditional businesses and new innovators differed on the need for government regulations to protect consumers (p78-79).

Lastly, the report articulates clearly the FTC's views concerning the obligations of sharing- economy businesses to protect the privacy of their participants, and notes its authority to pursue enforcement actions under Section 5 of the Federal Trade Commission Act for violations of those obligations. The report observes that while "trust mechanisms" such as systems to rate Uber drivers or Airbnb properties "have played an important role in addressing consumer protection" concerns (p80), those mechanisms rely on the collection of information about participants and necessitate the adoption of appropriate privacy and data security measures. The FTC recognizes that "honoring consumer privacy does not mean consumers' data should never be disclosed," but believes that sharing economy businesses must "clearly and conspicuously [disclose] what information will remain private and what will not, enabling consumers to make informed decisions" (p61-62).

Takeaways

Though the FTC takes pains to repeatedly explain that the report "does not represent the views of the Commission," only those of participants in its 2015 workshop (p10, note 10), and that it "aims to synthesize and present ... information ... not to identify areas for Commission investigation and enforcement" (p15), the report still sends a message to regulators and traditional businesses facing new pressures from the sharing economy. The FTC's support for the creative destruction wrought by new technologies is crystal clear, as is its belief that nothing about the sharing economy removes it from the FTC's purview: "The opportunity to compete in the marketplace affords potential innovators the incentives to undertake the expensive, difficult, and risky process of creating and introducing innovative products and services. Preserving such opportunities has long been a core part of the [FTC's] competition mission" (p1).

The FTC recognizes that regulators face a "challenging task" of protecting the public while not chilling incentives for innovation and impeding entry, and it offers those regulators "broadly applicable principles" to help them balance "competition policy and regulatory goals" (p7). Specifically, the FTC explains that "regulators should impose requirements only when there is evidence that regulation is needed to protect consumers and the public or to serve some other legitimate public goal" and that "regulatory actions should be tailored so that they are no more restrictive than necessary to serve those goals." Consistent with those principles, the FTC has in the past "generally cautioned regulators 'not to impose legacy regulations on new business models simply because they happen to fall outside of existing regulatory schemes' " (p52). In the FTC's view, "any necessary regulations 'should be flexible enough to allow new forms of competition,' and 'narrowly tailored to the specific public policy goals that have been identified' " (p52).

The FTC report also reminds sharing-economy businesses that they are not immune from scrutiny under the antitrust laws. Specifically, the report warns that the "two-sided network effects" that make platforms such as Uber so appealing, also may create a barrier to entry, "protecting a dominant incumbent" (p26), and that vertical integration in the sharing economy could "in some circumstances result in anticompetitive foreclosure" (p28). In short, though the "sharing economy can produce disruptive innovation that greatly benefits consumers," participants "should not be permitted to engage in unfair or deceptive acts or practices simply because they are introducing innovative products or services" (p51).

Finally, the FTC cautions participants to be truthful with data and zealously guard consumer privacy (areas in which the FTC has taken keen interest in recent years). It expressly warns sharing-economy businesses of potential liability under Section 5 of the FTC Act for misrepresenting data privacy policies or failing to reasonably secure data (p62-63).

In summary, the FTC clearly has articulated its commitment to support the rapid innovation that the sharing economy has created, subject to appropriate regulation to protect legitimate government interests. The FTC will pursue its mandate of protecting consumers and encouraging competition in these rapidly changing and emerging markets by continuing its advocacy with regulators and bringing enforcement actions, if necessary. However, participants in these markets should be cognizant of the limits imposed by the antitrust laws, seek guidance where appropriate and maintain effective compliance programs aimed at minimizing consumer harm and protecting consumer privacy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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