I often advise startups about running what I term "marketplace" businesses. That is, companies that connect customers with other businesses on a digital platform. The key challenge for these businesses is not being seen as the entity making the sale but rather as the entity connecting two independent entities (customer and supplier). These businesses are at the cutting edge of a change in the way that business is done as we move ever more towards a world of smartphones, contracting and reduced transaction costs. Uber is the most prominent of this new breed of startups.

This past summer's case of City of Toronto v Uber Canada Inc. et al., 2015 ONSC 3572, 126 O.R. (3d) is an incredible win for this business model and should encourage anyone interested in exploring marketplaces. Why is this case important?

1. The Ontario Superior Court quotes at length from Uber's terms of service agreements. This shows the importance of drafting appropriate terms and the weight that courts will give them (despite the aside that “not necessarily definitive of the actual activity undertaken”).

2. The court accepted the argument that Uber is a “peer-to-peer” service “since the technology platform enables the connection between the customer with the service provider, but allows the 'peers' to make the final decision of whether to engage with each other or go their own separate ways.”

3. The court does not put any weight on the payment flow between the passenger, Uber and the driver.

4. The court accepted the analogy of the Yellow Pages/directory service: “Uber’s peer to peer process operates, in a sense, as a super-charged directory assistance service.”

5. The court places heavy emphasis on the human element. Since the Uber-controlled software system is “automatic”, Uber itself is not undertaking the activity (para 77). Although I would caution any client in hoping for this interpretation in a different case as this conclusion is closely related to the subject matter (interpreting the City's by-law).

This case is a great precedent for anyone operating a marketplace service that connects independent contractors with customers, especially where the ultimate business activity requires licensing. I'm sure AirBNB's Canadian counsel have carefully read through this decision.

Case Notes

A very curious part of the judgement is at paragraphs 82-85:

“[82] Pursuing the chain of events to the next level, the prospective passenger opens her smartphone and activates the Rider App. She selects a desired category of service and hits “send” to request a car. The passenger and her phone are the only players in the process at this juncture. If her phone were said to “accept” the call when she presses the send button, the phone is neither operated nor controlled by any of Uber.

[83] The request next heads out over the Internet heading towards a server in Northern California. To get there, of course, the message must pass through multiple servers and nodes on the Internet, each of which receives the message and relays it onwards towards the intended destination. None of these intermediary relay stations on the Internet knows more about what it is relaying than a pony on the Pony Express knows about the contents of the mail it carries. Each “receives” the data packet requesting a driver sent by the would-be passenger. None, however, “accepts” the data, since their intervention is purely automatic.

[84] Next the data arrives at the servers in Northern California. There is no suggestion that Uber owns or operates the servers whose owner/operator was not identified at the hearing. The servers have software systems which are able to generate data about traffic, customer demands and the like. As well, the systems are able to direct the request to the nearest driver whose Driver App indicates he or she is available.

[85] Once again, there is nothing “accepted” by the server. Like the Internet switches that preceded it, the server does no more than relay. The server may act as a smart phone directory, but it is only acting as a phone directory. No appointment is given or accepted as is the case with a human dispatcher/operator.”

I suspect the above paragraphs came about due to the able arguments of Uber's litigation counsel at Goodman's (John Keefe, Julie Rosenthal and Ryan Cookson).

Another issue in the case is that the City seems to have not added the right parties to the case as at para 103 the judge notes that “[t]he owner of the Uber App (Uber Technologies Inc.) is not before me; neither the owner nor operator of the servers in Northern California were identified.”

Even if the servers are running on AWS or bare metal provided by another company (they seem to be on Peak Hosting now), the software must be operated by Uber and the server stack is also carefully controlled by them. At best there's another company that owns the physical hardware and perhaps the virtualisation environment.