New York vs. the Sharing Economy

Last week, my mother called me, sounding worried. She had just read an article in Israel’s largest newspaper saying that Airbnb was declared illegal in New York, following the decision of a New York judge that Nigel Warren, who rented out part of his home on Airbnb, violated the illegal hotel law and should pay $2,400 as a fine.

My mom’s main concern wasn’t so much the future prospects of Airbnb, but rather if this development jeopardized the reservation my parents made on Airbnb for their upcoming visit to the city. I told her there’s no reason for concern and if anyone should be worrying, it is Airbnb, not her, as this ruling raises questions on the ability of the company to sustain its current successful business model.

And it’s not just Airbnb. Both the state and city of New York have been challenging, in the past year or so, a number of sharing economy companies and their disruptive models, including Uber, SideCar and RelayRides. So what’s going on here – is New York becoming unfriendly territory for sharing economy innovations? And even more importantly, how will these legal battles impact the sharing economy and its efforts to go mainstream?

“Innovation, by its nature, does not always fit within existing structures,” Andre Haddad, CEO of RelayRides wrote in a blog post on May 15, announcing that RelayRides will stop accepting reservations for New York vehicles until further notice. This is certainly one way to explain their legal trouble in New York. Another way is that these companies help transform people into service providers without adhering to the same rules and regulations that apply to the traditional service providers they try to replace, and the legal framework they do have in place seems to be inadequate from the regulator’s perspective.

Take RelayRides, which helps car owners provide car rental services. On the same day its CEO Haddad wrote his post, Benjamin M. Lawsky, Superintendent of Financial Services in New York State issued a cease and desist order against RelayRides due to “its repeated false advertising and violations of insurance law, which are putting the public at risk.”

Lawsky refers to RelayRides’ $1 million liability insurance policy for injury or damage to third parties that is supposed to cover vehicle owners, ensuring that “the owner’s own policy will not be involved if there is an accident while a person is renting the vehicle.” Yet, according to Lawsky, in New York it just doesn’t work that way. “New York law does not permit an insurer to exclude coverage for a renter. As a result, an owner may be personally liable for any accident that occurs while the vehicle is being rented,” he writes.

Another example is SideCar, a rideshare service whose key features, according to its website, include meeting awesome people, convenience, reliability and a having a social journey. For some reason, the New York City Taxi and Limousine Commission (TLC) failed to appreciate these benefits, and all it saw was a company that acts like a taxi or a car service without the appropriate licensing. “This is an extremely simple issue. If you are acting as a taxi or a car service, without the benefit of a license, the TLC will shut you down,” Allan J. Fromberg, deputy commissioner for public affairs at the TLC told the Wall Street Journal, referring to SideCar.

A couple of weeks ago, the court seemed to accept this approach – a New York judge ruled that Sandra Matero, who participated in SideCar’s launch program, operated an unlicensed vehicle for hire and fined her $1,500 (which was reported to be paid by SideCar).

Nigel Warren, the guy whose story got my mom worried, wasn’t that lucky. First, he received a $2,400 fine for violating New York City's illegal hotel law. Second, Airbnb didn’t pick up the tab for him.

The law Warren violated is a 2010 law that makes it illegal for New York residents to rent out a property for less than 29 days. According to CNET, it was originally aimed at landlords who bought up residential properties and turned them into hotels. Airbnb also believes this law shouldn’t apply to its users, whom it describes as “average New Yorkers trying to make ends meet, not illegal hotels that should be subject to the 2010 law.”

The City of New York apparently has a different perspective, which also takes into consideration the broader picture, including the tenants in buildings who have nothing to gain and can only lose from their neighbors' apartments available for rent on Airbnb. “It’s not the bargain that somebody who bought or rented an apartment struck, that their neighbors could change by the day,” John Feinblatt, the chief adviser to Mayor Michael R. Bloomberg for policy and strategic planning and the criminal justice coordinator told the New York Times last year.

As Airbnb itself noted, these issues are not unique to New York, but apparently a combination of powerful players with commercial interests and regulators who are willing to act and enforce laws that might not be enforced in other places make New York (both state and city) a place where disruptive sharing services are less welcome.

Although others it might see it differently, I believe Airbnb (and other sharing services) should thank New York for bringing up this issue now. Operating in the gray area of the law might be fine during startup mode, but it certainly doesn’t fit a mature business, especially one with over a $1 billion valuation.

If you’re thinking about mainstreaming your business, you need to start acting like a mature business – engage with regulators and policy makers proactively rather than reactively, look for solutions that take into consideration all parties involved rather than just your users, and finally remember that no matter how disruptive and innovative you are - if you don’t pay attention, these old-world forces can and will knock you down.

[Image credit: googlisti, Flickr Creative Commons]

Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and the Parsons The New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.