Betwixt and between: regulating the shared economy.

• Author: Stemler, Abbey

Introduction I. The Disruptive Evolution of the Sharing Economy A. The Driving Forces Behind the Sharing Economy 1. Modern Trust 2. Technology 3. Economic and Cultural Pressures B. Benefits of the Sharing Economy C. Drawbacks of the Sharing Economy D. Case Study: Airbnb and Uber 1. Airbnb 2. Uber II. Defining the Sharing Economy A. Defining the Sharing Economy 1. Platforms 2. Microbusinesses 3. Excess Capacity 4. High-Powered Information Exchange B. The Sharing Economy's Current Regulatory Landscape III. A New Economy, A New Framework A. Platform Regulation to Prevent Fraud and Promote Safety B. Platform Regulation to Generate Tax Revenue C. Platform Regulation to Allocate Risk D. Platform Regulation to Ensure Fair Competition Conclusion "Innovation, by its nature, does not always fit within existing structures."

--Turo CEO, Andre Haddad (1)

INTRODUCTION

Airbnb, Uber, Eatwith, and other sharing economy (2) platforms facilitate short-term rentals, transportation, meals, and even pet-sharing. The platforms in the sharing economy use technology to connect people who have private excess capacity to those who want to purchase it. Rather than staying in a hotel, customers can stay in a spare bedroom through Airbnb; rather than hiring moving companies, customers can get help moving via TaskRabbit; rather than going to a restaurant, customers can have a meal prepared for them in someone's home via Eatwith.

TIME Magazine listed the sharing economy as one of the ten ideas that will change the world, (3) and Forbes estimates that the revenue flowing through the sharing economy surpassed $3.5 billion in 2013, with growth exceeding twenty-five percent per year. (4) At that rate, peer-to-peer sharing has moved beyond a fringe movement and into a disruptive economic force. Look only to Airbnb, which at six years old had a valuation of $13 billion, (5) much higher than the Hyatt hotel chain ($7 billion), (6) and Uber, which at four years old had a valuation of $40 billion, greater than Hertz, (7) Avis, (8) and Enterprise (9) combined. (10)

Companies using this relatively new business model have faced innumerable legal challenges. In some places, platforms are simply banned from operating; (11) in others, supply-side users (12) or the platforms themselves are fined. (13) The reason for the difficulty and uncertainty is that the sharing economy is in a "betwixt and between space"--it does not fit within existing legal frameworks. Platforms view themselves as online companies regulated by Internet law, though they execute mostly in the offline world. (14) Furthermore, sharing economy platforms are facilitating transactions that have always been legal but are now executed on such a large scale that the potential for harm to the public is very real. What are the rules when the lines blur between giving a friend a ride to the airport and operating as a professional driver?

This Article argues that existing laws cannot effectively regulate the sharing economy because the sharing economy is uniquely comprised of individuals profiting from their personal excess capacity. These individuals operate microbusinesses, which cannot, without devastating consequences, be regulated like traditional businesses. This Article proposes a shift in liability rules to mitigate the harm caused by market defects in the sharing economy.

This Article is divided into four parts. Part I outlines the evolution of the sharing economy, its benefits, and two sharing economy platforms, Airbnb and Uber. Part II defines the sharing economy and describes the current regulatory environment governing it. Part III proposes a method to achieve many of the goals of regulation in a manner that balances protection of users, consumers, and existing businesses with the need to support innovation and microbusiness. The Article concludes with recommendations for further research.

1. THE DISRUPTIVE EVOLUTION OF THE SHARING ECONOMY

   Humans have always exchanged goods and services. However, new sharing economy markets enabled by technology and the free flow of information present a new form of market that is difficult to conceptualize. (15) The sharing economy is a disruptive force that facilitates exchanges involving underutilized assets, from spaces to skills to things, for monetary gain on a scale that would not be achievable without modern technology. (16) This system facilitates localized production, cooperation, and the proliferation of microbusinesses, (17) which allows consumer needs to be met by a large cross-section of society. (18) This ease of access is made possible by platform companies, which are the businesses that broker the transactions. (19)

   1. The Driving Forces Behind the Sharing Economy

      The sharing economy in its current form began making waves at the turn of the century. (20) There are three interconnected forces that gave rise to the sharing economy: modern trust, technology, and economic pressure.

      1. Modern Trust

         Many companies in the sharing economy facilitate behaviors that previously would have seemed unthinkable or foolish. People are hopping into strangers' cars (Lyft, Sidecar, Uber), welcoming others into their spare rooms (Airbnb), and dropping off dogs at unfamiliar houses (DogVacay, Rover). The sharing economy requires individuals to trust complete strangers. Trusting strangers is not only an economic breakthrough; it is also a cultural one "enabled by a sophisticated series of mechanisms, algorithms, and finely calibrated systems of rewards and punishments." (21)

         Notably, the concept of facilitating economic relationships by sharing with strangers is not a newly developed concept; it is, rather, a return to an older one. Before the Industrial Revolution, sharing was common. It was acceptable to borrow someone's tool, horse, or spare bed, because Americans tended to cluster in small towns and farming communities, where people built tight-knit relationships over the course of many years. (22) In this system, there were natural incentives to treat people well, because if you developed a bad reputation, no one would want to share with you. (23)

         This economic system started to change around the mid-nineteenth century. When Americans moved from small towns to cities, people could no longer rely on interpersonal relationships or cultural norms to safeguard their transactions, because they did not know, and often had never met, the people with whom they were doing business. (24) The result, Lynne Zucker has argued, was the destruction of trust. (25)

         As a result of this trust shift, formal systems sprang up as proxies for the trust that citizens had lost in one another. Between (1870) and (1920), a series of laws were enacted to establish a framework of rules and backstops designed to produce trust. These included many permissions-based systems of licensing, inspecting, and permitting. (26) "Through institutionalizing socially created mechanisms for producing trust," Zucker writes, "the economic order was gradually reconstructed." (27) The combination of laws and facilitators replaced the "casual, intimate, interpersonal form of trust" of small towns. (28)

         The problem, however, with this "institutionalized trust" is that it is incredibly burdensome. Think about the hoops an entrepreneur starting a simple granola company has to jump through just to prove to the government that it is "ready" to operate: find or build a commercial kitchen, secure a food establishment license, secure a business license, secure a tax identification number, complete food safety and sanitation training, comply with Food and Drug Administration regulations and Department of Agriculture regulations regarding labeling, etc. (29) These regulations are designed to ensure that the granola manufacturer will provide safe food, inform the public about its product, pay necessary taxes, etc. All of these ends are worthy and give consumers a strong sense that the food they eat is safe. (30)

         Peer-to-peer companies do not need such a complicated series of regulations or assurances to build trust, because they create and utilize what this Article calls "modern trust." Modern trust is built on a feedback loop system of ratings and reviews, as first utilized effectively by eBay." (31) In 1995, eBay developed a highly successful online platform where individuals create accounts to enable the buying and selling of items through an online auction process. (32) eBay creator, Pierre Omidyar, recognized the vast potential of the Internet and the absence of a virtual secondhand market. (33) While some of eBay's success could certainly be attributed to luck, (34) there is no doubt that eBay tapped unrealized potential. (35) There were two needs identified: first, the need for a place where people could buy and sell directly from one another online, and second, the need for peer-reviews and community enforceability. (36)

         Mr. Omidyar and his eBay team quickly discovered the truth of these needs when it became apparent that community members might behave in a fraudulent, or simply lazy, manner. For example, in 2002, a few short years after eBay's launch the United States National Fraud Information Center reported that eighty-seven percent of complaints involved online auction transactions. (37) In addition, in 2000, the Federal Trade Commission (FTC) received more than 25,000 complaints for web-based auction fraud, an increase from only 100 complaints in 1997. (38)

         Trust had to be systematically "built in" to eBay. Therefore, Omidyar's team created a mechanism for a feedback loop that allowed buyers and sellers to rate one another. (39) They also "began monitoring the activity across the eBay marketplace, flagging potentially problematic sellers or buyers, providing its own payment options, and eventually guaranteeing every purchase. (40) In so doing, eBay created a new system that served as a trust proxy. The new system did not require people to trust one another, because people could rely...