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SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK

TRI-CITY, LLC; and ENDOR CAR AND Index No.: __________


DRIVER, LLC,
Hon.
Petitioners,
VERIFIED ARTICLE 78 PETITION
v.

NEW YORK CITY TAXI AND LIMOUSINE


COMMISSION and MEERA JOSHI, in her
official capacity as Chair, Commissioner, and
Chief Executive Officer of the New York City
Taxi and Limousine Commission,

Respondents.

Petitioners Tri-City, LLC and Endor Car and Driver, LLC (collectively, “Petitioners”), by

and through their undersigned attorneys, for their Verified Petition, allege as follows:

INTRODUCTION

1. Petitioners bring this lawsuit to challenge an arbitrary and capricious law passed

by the New York City Taxi and Limousine Commission (“TLC”) that threatens to harm drivers

and riders alike by reducing driver earnings, raising rider prices, and undermining competition in

the for-hire vehicle (“FHV”) industry.

2. On August 8, 2018, the New York City Council passed Local Law 150 of 2018,

which directed the TLC to pass rules establishing a “method for determining the minimum

payment that must be made to a for-hire vehicle driver.” In response to this directive, on

December 4, 2018, the TLC passed a rule (the “Minimum Payment Rule”) requiring that FHV

bases which on average dispatch ten thousand or more trips per day must pay drivers a minimum

amount for each trip based on a formula set out in the rule. The Minimum Payment Rule applies
to only four companies in New York City, all of which are technology and ridesharing

companies, including Petitioners’ parent, Lyft, Inc. The formula codified in the Minimum

Payment Rule gives the largest company an automatic and perpetual advantage over smaller

companies.

3. The stated purpose of the rule—to increase overall driver earnings (and in part to

reduce congestion)—is laudable. But the actual rule passed by the TLC cannot stand, because it

is affected by an error of law and lacks a rational basis in the record. As a threshold matter, the

requirement that driver earnings be calculated on a per-trip basis (the “Per-Trip Calculation

Requirement”)—to the exclusion of a per-week calculation option—is in direct conflict with

Local Law 150. Local Law 150 expressly provides that any FHV minimum earnings rule passed

by the TLC cannot prevent payments to FHV drivers from being calculated on a weekly basis.

The Minimum Payment Rule does precisely that, and should be vacated on that ground alone.

4. Furthermore, there is no support in the administrative record before the TLC for

requiring the calculation of driver earnings on a per-trip basis to the exclusion of a per-week

calculation option. The study published in July 2018 by Dr. James A. Parrott and Dr. Michael

Reich (the “P&R Study”), the TLC’s sole purported support for the Minimum Payment Rule at

the time the rule was passed, does not analyze the appropriate temporal period for calculation of

minimum earnings, and to the extent it even references such a period, the study contemplates that

the appropriate temporal period for the calculation is a week or a month—not a trip. The Per-

Trip Calculation Requirement was essentially plucked out of thin air by the TLC, with no

support from Parrott and Reich and no analysis of its effects.

5. On January 16, 2019—over six weeks after the TLC passed the Minimum

Payment Rule—the TLC issued a post-hoc supplemental report by Parrott and Reich (the

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“Supplemental Report”) that makes some reference to a per-trip calculation method. But that

report, apart from being outside the administrative record, does not provide any support for the

requirement either; in fact, Parrott and Reich continued to peg their analysis to weekly numbers,

not even incorporating the Per-Trip Calculation Requirement they purported to analyze.

6. Further, both the P&R Study and the Supplemental Report are plagued by

deficiencies, mistakes, and incorrect assumptions that render the analysis incapable of supporting

the Minimum Payment Rule or its Per-Trip Calculation Requirement. As explained in detail in

the report submitted in connection with this petition by Dr. Catherine Tucker1, the Sloan

Distinguished Professor of Management Science at MIT Sloan at the Massachusetts Institute of

Technology, Parrott and Reich’s analysis is not based on sound economic methodology,

containing errors as fundamental as the ignoring of core tenets of supply and demand. Riddled

as it is with flaws and inaccurate assumptions, Parrott and Reich’s work is inherently unreliable

and cannot support the TLC’s rulemaking.

7. The Minimum Payment Rule and its Per-Trip Calculation Requirement are also

not rationally related to the TLC’s stated purpose in passing the rule. Indeed, the rule likely will

result in decreased overall gross driver compensation, an outcome predicted even by Parrott and

Reich’s own report when the deficiencies in it are corrected. In short, while increasing driver

earnings is a worthy objective (and one Petitioners do not challenge), the rule the TLC actually

passed is not reasonably designed to achieve that goal. The rule, moreover, is likely to

encourage shorter trips in areas of high demand, thus increasing congestion in the City and

defeating the purported secondary purpose of the rule.

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The Expert Report of Dr. Tucker (the “Tucker Report”) is attached to the Affirmation of Sara
L. Shudofsky In Support of Petitioners’ Article 78 Petition and Application For A Temporary
Restraining Order and Preliminary Injunction (“Shudofsky Aff.”) as Exhibit (“Ex.”) A.

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8. Finally, the rule passed by the TLC arbitrarily treats companies differently based

on how often drivers on the platform have a rider in their vehicle (referred to as the “utilization

rate”). Instead of setting an industry-wide utilization rate that will at all times apply equally to

each of the four ridesharing companies, the rule allows any company to use its own company-

specific utilization rate. That approach was adopted without any study or analysis by the TLC of

its likely effects. In the TLC’s haste to pass the Minimum Payment Rule, it adopted an approach

that will give the largest company with the biggest market share a built-in and perpetual

advantage over companies with lower utilizations, helping that company undercut its competitors

on price, with the inequality compounding over time. The utilization rate component of the

driver pay formula, adopted without any study of these potentially devastating anti-competitive

effects, was the product of arbitrary rulemaking.

9. Because the Minimum Payment Rule directly conflicts with local law, is based on

a deficient study that does not support the rule, its Per-Trip Calculation Requirement, or its

utilization rate component, and is not reasonably related to the goal it purports to achieve, the

Court should, for all the reasons discussed below, declare that the rule was affected by error of

law and passed arbitrarily and capriciously, and vacate it.

PARTIES

10. Petitioners Tri-City, LLC and Endor Car and Driver, LLC are wholly owned

subsidiaries of Lyft, Inc. (“Lyft”), a technology company headquartered in San Francisco,

California. Petitioners are each licensed as a black car base by the TLC, but they operate under

the same public-facing trade, business, or operating name—Lyft—and collectively dispatch over

the ten thousand trips per day required to come under the Minimum Payment Rule.

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11. Respondent New York City Taxi and Limousine Commission is an administrative

agency of the City of New York created and operating pursuant to Chapter 65 of the New York

City Charter. See NYC Charter § 2300. The TLC’s principal office is located at 33 Beaver

Street, New York, New York 10004.

12. Respondent Meera Joshi is the Chair of the TLC, as well as a Commissioner and

its Chief Executive Officer, and was so at the time the TLC promulgated the Minimum Payment

Rule. Chair Joshi’s principal office is located at 33 Beaver Street, New York, New York 10004.

JURISDICTION AND VENUE

13. This court has subject matter jurisdiction to decide this petition pursuant to

CPLR § 7803, as the Minimum Payment Rule was a final determination of the TLC and this

Petition challenges that determination as arbitrary and capricious and as affected by error of law.

14. Venue is proper in New York County Supreme Court pursuant to

CPLR §§ 506(b) and 7804(b) because the challenged determination occurred in New York

County and Respondents’ principal offices are in New York County.

FACTS

A. THE FHV INDUSTRY GENERALLY

15. The TLC regulates the taxi and FHV industries in New York City, which largely

consist of the following segments: medallion taxis or yellow cabs; street hail liveries or green

cabs; and FHVs. Although all segments are regulated by the TLC, each must comply with a

unique set of regulatory requirements.

16. Petitioners, though wholly owned subsidiaries of a technology company, are both

regulated by the TLC as part of the FHV industry, which consists of for-hire bases, for-hire

vehicles, and for-hire drivers. See 35 R.C.N.Y. § 59B-03.

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17. “A For Hire Base can be any of the following: (1) A Black Car Base, (2) A Livery

Base (or Base Station), (3) A Luxury Limousine Base.” See 35 R.C.N.Y. § 59B-03(f).

18. Petitioners are licensed to operate in New York City as black car bases.

19. All rides provided by the FHV industry “must be arranged through a TLC-

licensed base and performed by TLC-licensed drivers in TLC-licensed vehicles.” Current

Licenses, NYC.GOV, http://www.nyc.gov/html/tlc/html/industry/current_licensees.shtml.

20. Unlike the medallion taxi segment, FHV rides must be pre-arranged, see 35

R.C.N.Y. §§ 59B-03(c), (m), (p), and FHV bases have the discretion to set their own rates of

fare.

21. Recently, the FHV industry has been further segmented by the creation of a new

licensing category for High Volume For-Hire Services. While the TLC has yet to issue any High

Volume For-Hire Service licenses, any business “that facilitates or otherwise connects

passengers to for-hire vehicles by pre-arrangement, including through one or more licensed For-

Hire Vehicle Bases, using a passenger-facing booking tool, and that dispatches or facilitates the

dispatching of ten-thousand (10,000) or more trips in the City per day” will be required to obtain

a High Volume For-Hire Service license from the TLC. See 35 R.C.N.Y. § 51-03.

22. Currently, the only businesses that will be required to obtain such a license are

four technology and ridesharing companies operating in New York City, including Petitioners’

parent, Lyft.

23. These technology and ridesharing businesses have enjoyed an enormous amount

of popularity since entering the New York City market and now account for more than 80% of

all FHV trips, approximately 50% of which serve riders in the outer boroughs—areas of the City

almost completely neglected by the medallion taxi industry. See NYC TAXI & LIMOUSINE

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COMMISSION, 2018 TLC FACTBOOK 1, 5 (2018),

http://www.nyc.gov/html/tlc/downloads/pdf/2018_tlc_factbook.pdf.

24. Further, approximately 25% of rides fulfilled by FHV bases affiliated with these

technology and ridesharing companies are shared rides—a form of carpooling in which multiple

riders heading in the same direction share the same vehicle. Id. at 9.

25. Since entering the New York City market, ridesharing businesses, such as Lyft,

have provided tens of thousands of New Yorkers with earning opportunities and access to

transportation that otherwise would not have been available to them.

B. PETITIONERS’ BUSINESS MODEL

26. Petitioners, as is typical of any black car base, operate under a business model

pursuant to which their affiliated drivers own, lease, or rent the vehicles the drivers use, and the

drivers are independent contractors—not employees.

27. As independent contractors, drivers have the flexibility to set their own work

schedules, choose where to drive, decide which rides to accept, choose their own cars, and

contract with other companies, including as drivers affiliated with other rideshare companies.

Indeed, approximately half of all drivers are multi-app users that network with riders using more

than one ridesharing platform. P&R Study at 21, n. 17 (attached to Shudofsky Aff. as Ex. B).

28. Drivers dispatched by Petitioners’ bases utilize the Lyft Platform, an online

smartphone application platform that connects users seeking rides with independent contractor

drivers seeking to provide rides.

29. As contractually agreed upon, drivers using the Lyft Platform are entitled to a

Driver Fare. See Lyft Driver Addendum ¶ 1, LYFT (Nov. 28, 2018),

https://www.lyft.com/terms/driver-addendum. The Driver Fare for a completed ride consists of a

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base fare amount plus incremental amounts based on the actual time and distance of the ride

(respectively herein, the “time rate” and the “distance rate”), as measured by Lyft. Id.

30. The “base fare” is the initial fare paid to a driver when a ride starts. The base fare

for Lyft in New York City for standard vehicle types varies based on when a driver applied to the

platform: $1.832 for drivers who applied before 12 am January 1, 2016 and $1.7175 for drivers

who applied after that date.

31. The “time rate” is the fare paid to a driver per minute of the ride. The time rate

for Lyft in New York City for standard vehicle types varies based on when a driver applied to the

platform: $0.256 per minute for drivers who applied before 12 am January 1, 2016 and $0.24 per

minute for drivers who applied after that date.

32. The “distance rate” is the fare paid to a driver per mile of the ride. The distance

rate for Lyft in New York City for standard vehicle types varies based on when a driver applied

to the platform: $1.264 per mile for drivers who applied before 12 am January 1, 2016 and

$1.185 per mile for drivers who applied after that date.

33. In addition, drivers on the Lyft Platform have the opportunity to earn various

incentives. Incentives available in the New York City market include the following: Prime

Time; Power Zones; Ride Challenges; Ride Streaks; and Earnings Guarantees.

34. Prime Time adds a percentage to the Driver Fare (the base fare + the time rate +

the distance rate) when the demand for rides is higher than the number of available drivers on the

road in a particular area. This serves to re-balance the market, by increasing supply and reducing

demand, through temporarily higher fares. Prime Time applies on a per-trip basis based upon

real time market conditions. See Prime Time for Drivers, LYFT, https://help.lyft.com/hc/en-

us/articles/115012926467-Prime-Time-for-drivers.

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35. Power Zones, similar to Prime Time, adds a percentage to the Driver Fare on a

per trip basis, but unlike Prime Time, Power Zones is not based on real time market conditions.

Instead, Power Zones is activated by Lyft for certain areas at Lyft’s discretion and can be used to

encourage additional drivers to service particular areas and at particular times. See Power Zones,

LYFT, https://help.lyft.com/hc/en-us/articles/115012926807-Power-Zones.

36. Ride Challenges allows a driver to earn an additional amount by completing a

certain amount of rides in a set amount of time. Both the amount of rides and the amount of time

vary depending on the incentive, as does the amount that can be earned for completing the

challenge. See Ride Challenges, LYFT, https://help.lyft.com/hc/en-us/articles/360001943867-

Ride-Challenges.

37. Ride Streaks rewards drivers for completing a certain number of trip requests in a

row. Completion of the required streak results in the payment of a bonus to the driver. See

Streak Bonus, LYFT, https://help.lyft.com/hc/en-us/articles/115015748908-Streak-Bonus.

38. Earnings Guarantees allows drivers to earn a guaranteed amount for completing a

set amount of rides in a set amount time. If the guaranteed amount is not earned during the set

time period despite the driver achieving the required number of rides, Lyft pays the driver the

difference between the guaranteed amount and the amount actually earned by the driver. See

Earnings Guarantee Promotions, LYFT, https://help.lyft.com/hc/en-us/articles/115012927247-

Earnings-Guarantee-promotions.

39. Riders are charged for applicable tolls, airport fees, state or local fees, surcharges,

or taxes required by law or agreements with third parties. Drivers do not pay these amounts. See

Lyft Driver Addendum at ¶ 4.

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40. In exchange for their use of the Lyft Platform, two fees are subtracted from the

per-trip amount paid by riders. These two fees are a Service Fee and a Platform Fee (collectively

referred to as a “commission” by Parrott and Reich). The Service Fee is a set amount retained by

Lyft for each ride that helps finance Lyft’s operational costs. See Lyft Driver Addendum at ¶ 5;

How Your Pay Is Calculated, LYFT, https://thehub.lyft.com/pay-breakdown. The Platform Fee is

a variable amount equal to the difference between the fees charged to the rider (e.g., the rider

fare) and the sum of the Driver Fare, any applicable bonuses or incentives, any applicable tolls,

surcharges, taxes or other third party fees, and the Service Fee. Id.

41. In addition, the Lyft Platform provides riders with the ability to tip drivers. 100%

of tips are passed on to the driver. Lyft Driver Addendum at ¶ 4.

42. Driver earnings per-ride therefore are equal to Driver Fare + incentives + tip. The

more rides a driver completes, the more the driver earns overall.

43. Lyft facilitates payments to drivers through a third-party payment processor,

collecting fees from both the rider and driver. See Lyft Driver Addendum at ¶ 3. Lyft remits to

the drivers the amount they are owed weekly; however, eligible drivers can opt into Express Pay,

which allows them to cash out certain earnings before their usual weekly deposit for a $0.50

transaction fee, up to five times a day. See Express Pay, LYFT, https://help.lyft.com/hc/en-

us/articles/115012923167-Express-Pay.

C. THE NEW YORK CITY COUNCIL REQUIRES THE TLC TO PERMIT


THE CALCULATION OF DRIVER MINIMUM EARNINGS ON A PER-
WEEK BASIS

44. On April 30, 2018, the NYC Council Committee on For-Hire Vehicles held a

hearing to consider the adoption of a number of bills, including Int. No. 890, which would direct

the TLC to establish a method for determining a minimum payment rule for FHV drivers

dispatched by a high volume for-hire service.

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45. As originally introduced by Councilmember Brad Lander, the bill would have

required the TLC to amend the New York City Administrative Code to “set minimum prices for

services provided by for-hire vehicle drivers who are independent contractors” at a level no less

than the higher of the minimum wage for large employers in New York City and the hourly

income for taxicab drivers over the previous five year period. See Int. No. 890 (Apr. 26, 2018)

(attached to Shudofsky Aff. as Ex. C).

46. On July 27, 2018, Int. No. 890 was amended to the form that in large part would

become Local Law 150 of 2018. See Proposed Int. No. 890-A (July 26, 2018) (attached to

Shudofsky Aff. as Ex. D). Proposed Int. No. 890-A stated, in relevant part:

The commission shall by rule establish a method for determining


the minimum payment that must be made to a for-hire vehicle
driver for a trip dispatched by a high-volume for-hire service to
such driver. In establishing such method, the commission shall, at
a minimum, consider the duration and distance of the trip, the
expenses of operation to the driver, any applicable vehicle
utilization standard, rates of fare and the cost of living in the city of
New York.

Id. at 1.

47. Just four days later, on August 1, 2018, Int. No. 890 was amended again, resulting

in the version that was signed into law by Mayor De Blasio on August 14, 2018 as Local Law

150 of 2018 (“Local Law 150”). See Local Laws of the City of New York for the Year 2018,

No. 150 (Aug. 14, 2018) (attached to Shudofsky Aff. as Ex. E). The August 1 amendment was

targeted, adding only one sentence of substance, identified in bold below:

The commission shall by rule establish a method for determining


the minimum payment that must be made to a for-hire vehicle
driver for a trip dispatched by a high-volume for-hire service to
such driver. In establishing such method, the commission shall, at
a minimum, consider the duration and distance of the trip, the
expenses of operation to the driver, any applicable vehicle
utilization standard, rates of fare and the adequacy of for-hire
driver income considered in relation to for-hire vehicle driver

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expenses. Such rule promulgated by the commission shall not
prevent payments to for-hire vehicle drivers from being
calculated on an hourly or weekly basis, or by any other
method, provided that the actual payments made to such
drivers are no less than the minimum payments determined in
accordance with the method established by the commission.

Proposed Int. No. 890-B (Jul. 31, 2018), at 1 (attached to Shudofsky Aff. as Ex. F) (emphasis

added); Ex. E to Shudofsky Aff.

48. Accordingly, the language in Local Law 150 requires the TLC to permit the

calculation of payments to drivers on both an hourly and weekly basis (or by any other methods).

Ex. E. As discussed below, the TLC ignored the weekly basis requirement in formulating and

adopting the Minimum Payment Rule.

D. THE TLC ARBITRARILY ADOPTS THE MINIMUM PAYMENT RULE


IN CONTRAVENTION OF LOCAL LAW 150 AND BASED ON A
FLAWED STUDY

1. THE TLC IGNORES THE PLAIN LANGUAGE OF LOCAL LAW


150 REQUIRING THE TLC TO PERMIT THE CALCULATION
OF DRIVER EARNINGS ON A PER-WEEK BASIS

49. On August 28, 2018, two weeks after Local law 150 was enacted, the TLC

published a Notice of Public Hearing and Opportunity to Comment on the Per-Trip Minimum

Earnings Rule. The TLC published the following formula for comment, which it described as a

“minimum per-trip payment formula”2:

NYC Taxi & Limousine Commission, Notice of Promulgation of Rules, City Record, Official

Journal of New York City (Aug. 28, 2018), at 4702 (attached to Shudofsky Aff. as Ex. G).

2
A separate formula was also published for drivers utilizing wheelchair accessible vehicles.

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50. The rule published by the TLC required a per-trip calculation consisting of $0.580

per mile to cover driver expenses (later increased to $0.631) plus $0.287 per minute driving a

rider to compensate drivers for such time (plus additional paid time off and working time without

a rider), the sum of which would be divided by “the Company Utilization Rate.” Id. The

Company Utilization Rate was specific to each ridesharing company, such as Petitioners’ parent,

Lyft, and was supposed to measure the percentage of total work time during which a driver has a

rider in his vehicle. P&R Study at 11. The formula also called for an undetermined amount to be

added for each shared ride provided by the driver. Ex. G to Shudofsky Aff. at 4702.

51. The formula was aimed at creating an estimated typical net income of $17.22 per

hour for drivers. Ex. G to Shudofsky Aff. at 4702. $17.22 an hour was selected by the TLC as

the independent contractor equivalent to the minimum wage of $15 an hour plus “the 7.65

percent ($1.32 per hour) drivers must pay in payroll taxes . . . plus 6 percent ($0.90 per hour) for

paid time off.” Id.

52. Because the TLC’s formula was constructed on a per-minute and per-mile basis, it

could have been applied to the total number of minutes and miles over the period of a week (or

any other period of time). The rule published by the TLC, however, provides no mechanism to

calculate driver pay on a weekly basis. As stated in the Notice of Promulgation, “The policy

establishes a means for determining the minimum amount the Largest FHV Companies must pay

a driver per trip.” Notice of Promulgation, New York City Taxi & Limousine Commission

(Dec. 4, 2018), at 3 (attached to Shudofsky Aff. as Ex. H) (emphasis added). The text of the

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administrative code that the rule amends requires that the minimum payment amounts be paid

“for each trip dispatched by the Base.” See 35 R.C.N.Y. § 59B-24(a).3

2. THE MINIMUM PAYMENT RULE WAS BASED ON THE P&R


STUDY, WHICH CONTEMPLATES THAT CALCULATION OF
DRIVER EARNINGS SHOULD BE MADE ON A PER-WEEK OR
LONGER BASIS

53. The record that was before the TLC when it promulgated the Minimum Payment

Rule supported allowing driver earnings to be calculated on a weekly (or longer) basis. In other

words, it supported multiplying the per-mile and per-minute rates in the Minimum Payment Rule

over a period of time greater than a trip to ensure that payment over that set period of time met

the requirement of the payment minimum in the aggregate, rather than on a per-trip basis.

54. The TLC’s sole purported support for the Minimum Payment Rule is the P&R

Study. But nothing in the P&R Study required their per-minute per-mile formula to be applied

on a per-trip basis. In fact, the P&R Study itself contemplated that calculation of driver earnings

should be made on a per-week or longer basis. As noted at the outset of the study:

Drivers would receive a minimum payment per mile and per


minute spent transporting passengers. FHV bases would be
required to ensure that drivers to whom they dispatch trips do not
fall below these minimums over a set period of time.

P&R Study at 3 (emphasis added).

55. Later on in the report, Parrott and Reich reiterated their assumption that the set

period of time for the calculation of driver earnings would be a week or a month—and not a trip:

Generally, for a set time period (such as a week or a month),


companies will evaluate each driver’s earnings using the total trip
mileage and trip minutes for that company. If the compensation
provided to a driver falls below the minimum pay standard, the
companies will be required to make up the difference.

3
As discussed, the rule also provides for a per-hour calculation option. See 35 R.C.N.Y. § 59B-
24(a)(5).

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Id. at 36 (emphasis added).

56. Further, Parrott and Reich themselves used a “simulation” based on weekly

averages. In setting up the simulation in this manner, the P&R Study did not even consider,

much less evaluate, the potential distorting effects that the Per-Trip Calculation Requirement will

have on driver earnings and the industry as a whole.

57. While the P&R Study notes in passing that the rule proposed by the TLC is a per-

trip formula, it neither analyzes nor recommends the Per-Trip Calculation Requirement. In short,

there is simply nothing in the P&R Study that provides a basis for establishing a Per-Trip

Calculation Requirement as opposed to a payment calculation over any other time period.

3. THE P&R STUDY IS FUNDAMENTALLY FLAWED

58. Following passage of the Minimum Payment Rule, Petitioners engaged Dr.

Catherine Tucker, the Sloan Distinguished Professor of Management Science at MIT Sloan at the

Massachusetts Institute of Technology, to evaluate the P&R Study, as well as the economic

merits of calculating the Minimum Payment Rule on a per-trip basis and using a company-

specific utilization rate. Dr. Tucker’s academic specialty focuses on platform businesses such as

Petitioners’—businesses that facilitate exchanges between two or more interdependent groups,

here drivers and riders. Dr. Tucker’s report dated January 29, 2019 is incorporated into this

petition. See Tucker Report (attached as Ex. A to Shudofsky Aff.)

59. Dr. Tucker’s review and analysis of the P&R Study highlights the study’s glaring

flaws and its unreliability as the basis for the Minimum Payment Rule, the Per-Trip Calculation

Requirement, and the utilization component of the formula. In particular, Dr. Tucker reaches

five overarching conclusions:

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a. The P&R Study is unreliable, see id. at ¶¶ 12-14 (emphasis added);

b. Parrott and Reich’s own simulation, correcting for certain miscalculations and
conceptual errors, predicts that the Minimum Payment Rule will decrease
driver gross driver earnings, see id. at ¶¶ 15-17 (emphasis added);

c. The Per-Trip Calculation Requirement of the Minimum Payment Rule does not
make economic sense, see id. at ¶¶ 18-19;

d. The Per-Trip Calculation Requirement of the Minimum Payment Rule is likely to


create distortions that will hurt drivers and riders, see id. at ¶¶ 20-22 (emphasis
added); and

e. Relying on platform-specific utilization rates may have the unintended effect of


reducing competition. Id. at ¶¶ 23-27 (emphasis added).

Each is discussed in detail below.

a. THE P&R STUDY IS UNRELIABLE

60. Parrott and Reich attempted in their study to estimate certain inputs that are the

building blocks for their analysis of the Minimum Payment Rule. These inputs are drivers’

earnings, working time, and expenses. Tucker Report at ¶ 40. Parrott and Reich used these

inputs both to calculate drivers’ net earnings and to establish the expense component used in the

Minimum Payment Rule. After reviewing these inputs, Dr. Tucker concludes that Parrott and

Reich overstated expenses, leading to an underestimate of drivers’ net earnings and an

overestimate of the average per-mile expense, which directly inflates the expense component of

the Minimum Payment Rule. Id. at ¶¶ 13, 59-77.

61. The unreliability of the P&R Study is further reinforced by the flaws in the

“simulation” run by Parrott and Reich that purports to evaluate the effects of the Minimum

Payment Rule.

62. First, the “simulation” run by Parrott and Reich is not a true simulation because it

assumed outcomes, the validity of which are not tested by Parrott and Reich. Specifically,

Parrott and Reich present seven fictional scenarios in which they assume, rather than forecast,

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the changes in rider fares and rideshare company commissions that the Minimum Payment Rule

will cause. Tucker Report at ¶¶ 81-83; see P&R Study at 53-62. As a result, Parrott and Reich’s

conclusion that the Minimum Payment Rule will benefit drivers is merely imposed by the

authors without basis and is not derived from economic modelling. Tucker Report at ¶¶ 81-83;

see P&R Study at 68.

63. Second, Parrott and Reich do not even attempt to account for the effects of the

Per-Trip Calculation Requirement in the P&R Study. Tucker Report at ¶¶ 79-80. Instead, their

“simulation” is based on weekly averages that are unable to account for the market distortions

specific to the per-trip formulation. Id. An accurate simulation of the Minimum Payment Rule

and the Per-Trip Calculation Requirement would need to reflect that the changes in driver pay

caused by the rule vary depending on the trip, its distance, its time, and whether it is occurring

on- or off-peak. Id. at ¶¶ 79-80. This is because the Minimum Payment Rule and the Per-Trip

Calculation Requirement do not uniformly affect each trip performed by a driver. The effect will

vary based on the characteristics of the trip described above. Using a weekly average, as the

P&R Study did, does not account for this variability.

64. Third, Parrott and Reich’s “simulation” is mathematically incorrect and ignores

basic supply and demand principles of economics that are taught in introductory economics

classes. Id. at ¶ 89. Specifically, Parrott and Reich fail to balance supply and demand in their

simulation. Dr. Tucker illustrates this basic economic principle as follows:

[I]magine a world where, for a given level of drivers’ pay and


riders’ fare, there are 20 persons who would like a trip but only 10
drivers willing to offer a trip. In that case, only 10 trips will occur.
Similarly, in a world where there are only 10 persons who would
like a trip but 20 drivers willing to offer a trip, only 10 trips will
occur. Parrott and Reich, by contrast, would assume that all 20
trips would occur.

17
Id. at ¶ 93. In short, in a platform economy the number of trips supplied cannot exceed the

number of trips demanded, nor can demand exceed the supply of trips available.

65. Parrott and Reich ignore this principle in their “simulation” and instead calculate

the number of trips that will be provided by drivers as a result of the Minimum Payment Rule by

calculating the sum of the “Percent increase in trips provided by incumbent drivers” and the

“Percent change in demand for trips resulting from fare changes.” See P&R Study at 59, Ex.

20A, row 5. In other words, Parrott and Reich do not take the lower of the change in demand for

trips and the change in supply of trips available to determine the number of trips that will be

provided by the market, but instead add the change in the number of trips demanded to the

change in the supply of trips available, inflating the number of trips to be provided by drivers.

Tucker Report at ¶¶ 92-94. This mirrors the example provided by Dr. Tucker above. Imagine

that there are currently 10 trips demanded in the market and 10 trips supplied in the market; as

such there would be 10 trips that occur. However, also imagine that prices are predicted to go up

and so trips demanded will fall by 5, while earnings are expected to rise so trips supplied will

increase by 10. Parrot and Reich would claim that there would be an increase of 5 trips—5 lost

from demand plus 10 gained from supply—leading to a total of 15 trips. But as Dr. Tucker

explains, in a market with 5 trips demanded and 20 trips supplied, there could only be 5 trips that

occur.

66. The result of Parrot and Reich’s fundamental mistake is an inflating of the

increase in gross earnings the “simulation” predicts will occur as a result of the Minimum

Payment Rule. Accounting for this error alone (ignoring the other errors in the simulation

discussed both above and below) results in decreasing the predicted effect the rule will have on

gross driver earnings under Parrott and Reich’s Scenario G (which for the reasons explained

18
below is the most likely scenario to occur) by $345 million—from a “predicted” increase in

gross driver earnings of $335 million to a decrease in gross earnings of $10 million. Id. at ¶ 95.

67. Fourth, Parrott and Reich’s “simulation” incorrectly accounts for the authors’

own assumption regarding utilization improvement (e.g., that the Minimum Payment Rule will

incentivize rideshare companies to improve upon their utilization rate because it will decrease

the per-trip cost for each trip). Id. at ¶¶ 96-101. Improvement in the utilization rate is central to

Parrott and Reich’s claim that the Minimum Payment Rule will benefit driver earnings, while at

the same time providing the rideshare companies with the “primary means of absorbing the

effect of the pay standard.” P&R Study at 57. Nonetheless, Parrott and Reich make another

basic error that again inflates gross driver earnings. Tucker Report at ¶ 96.

68. Specifically, Parrott and Reich fail to properly account for the relationship

between their assumed increases in utilization, driver hours worked, and trip demand. Utilization

can improve in two ways, either by increasing the number of rides performed by drivers in an

hour or by decreasing the number of hours worked by drivers. Parrott and Reich ignore the latter

possibility, despite the fact that their “simulation” predicts a decrease in demand for trips ranging

from 0% to 12%. Id. at ¶¶ 97-98; see P&R Study at 59-60, Exs. 20A & 20B. For the reasons

discussed above regarding the mistaken application of supply and demand, Parrot and Reich’s

assumption that there will be an “increase in trips provided by incumbent drivers” is incorrect, as

their “simulation” predicts a decrease in trips demanded. Tucker Report at ¶ 98. Their

assumption that utilization will improve therefore can only be true if drivers drive fewer hours.

69. This means that Parrott and Reich should have accounted for the effect that

working fewer hours without increasing the amount of trips performed per-hour would have on

gross driver earnings. Instead, Parrott and Reich assumed an increase in hours worked by

19
drivers. P&R Study at 59-60, Exs. 20A & 20B, row 1. As a result, their “simulation” once again

arbitrarily inflates the predicted effect the Minimum Payment Rule will have on gross driver

earnings. Tucker Report at ¶ 101.

70. Finally, Parrott and Reich ignore that rideshare companies, like all for-profit

companies, are rational profit maximizing entities and will set rider fares and commissions

accordingly. Id. at ¶¶ 84-88. This is another basic tenet of economics ignored by Parrott and

Reich in their “simulation.” Parrott and Reich assume, without any rational basis, that

companies like Petitioners will absorb the costs of the Minimum Payment Rule by lowering their

fees by approximately 50% to 80%. Id. ¶ 111; P&R Study at 59-60, Exs. 20A & 20B, row 10

(emphasis added). Dr. Tucker concludes that “Parrott and Reich’s assumption that such

decreases in commission rates are possible, let alone ‘plausible,’ lacks any basis in economics.”

Tucker Report at ¶ 112 (emphasis added).

b. PARROTT AND REICH’S OWN SIMULATION,


CORRECTING FOR CERTAIN MISCALCULATIONS AND
CONCEPTUAL ERRORS, PREDICTS THAT THE
MINIMUM PAYMENT RULE WILL DECREASE DRIVER
GROSS DRIVER EARNINGS

71. Parrott and Reich ignore as “particularly unlikely” the scenario in their

simulation—Scenario G—that is in fact most likely to occur because it results in the highest total

commissions for rideshare companies. Parrott and Reich reject this choice, at least in part,

because it will result in “eliminat[ing] the policy-related driver pay increase for all incumbent

drivers.” P&R Study at 61. That rationale, however, does not account for basic principles of

profit maximization that any rational for-profit company would follow.

72. When taking into account rational profit maximization behavior (and correcting

for the other errors described above), Parrott and Reich’s own “simulation” predicts that the

Minimum Payment Rule will most likely lead to a 10% increase in fares for riders, a fall in the

20
number of hours of work for incumbent drivers, and, as reflected in the below chart, a decrease

in gross driver earnings: .

Tucker Report ¶ 101, Ex. 6.

73. In other words, an accurate simulation of the Minimum Payment Rule’s and Per-

Trip Calculation Requirement’s effects would have revealed to Parrott and Reich and the TLC

that their calculations as to the benefits of the rule were off by over a half billion dollars and that

the rule will in fact result in increased rider fares and will not have its desired effect on driver

earnings.

c. THE PER-TRIP CALCULATION REQUIREMENT OF THE


MINIMUM PAYMENT RULE DOES NOT MAKE
ECONOMIC SENSE

74. Parrott and Reich do not provide any justification for the Per-Trip Calculation

Requirement, and the P&R Report does not analyze the effects that the Per-Trip Calculation

Requirement will have on driver earnings, rider fares, or rideshare companies. Id. at ¶ 121.

Indeed, one of the many flaws of the “simulation” run by Parrott and Reich is that it does not

21
account for the effects of the Per-Trip Calculation Requirement. Id. at ¶ 123. As a result, Dr.

Tucker concludes that “Parrott and Reich’s ‘simulation’ cannot form the economic basis for the

Per Trip Calculation Requirement.” Id. ¶ 124.

75. Further, Dr. Tucker concludes that the Per-Trip Calculation Requirement will

likely overshoot, without any basis for doing so, the Minimum Payment Rule’s target of $17.22

per-hour in average driver earnings. Id. at ¶¶ 130-132. That is the case because a per-trip

calculation does not allow for the aggregation of driver earnings over a period of time, which

would allow for certain trips to fall above and below the target amount but average out to $17.22

an hour during that time period. Id. Instead, through imposition of the Per-Trip Calculation

Requirement, every single ride will be at least at the target, without the opportunity to average

out the cost over a longer period of time. Id. There is no support in the P&R Study for

exceeding the $17.22 target specifically chosen by the TLC as the independent contractor

equivalent to the $15 minimum wage. Nor did Parrott and Reich analyze the effect that the Per-

Trip Calculation Requirement and the overshooting of the $17.22 target will have on the

industry.

d. THE PER-TRIP CALCULATION REQUIREMENT OF THE


MINIMUM PAYMENT RULE IS LIKELY TO CREATE
DISTORTIONS THAT WILL HURT DRIVERS AND
RIDERS

76. Dr. Tucker concludes that there is “no economic rationale” for the Per-Trip

Calculation Requirement, and Parrott and Reich ignored the perverse effects of such a

requirement. Id. at Section V. In particular, Dr. Tucker notes that the Per-Trip Calculation

Requirement is “likely to disproportionately affect rider fares,” resulting in a decrease in the total

number of trips and thereby harming drivers and reducing the overall efficiency of ridesharing

platforms. Id. at ¶ 142. Parrott and Reich in fact concede that an increase in rider fares will

22
result in a decrease in demand, thereby hurting drivers. P&R Study at 57 (“If passenger fares

rise, the consumer demand response is likely to reduce the number of trips demanded. Driver

trips and pay will decline accordingly”).

77. Dr. Tucker also concludes that the Per-Trip Calculation Requirement will “likely

further exacerbate congestion in areas that are already congested.” Tucker Report at ¶ 138. Dr.

Tucker reaches this conclusion because the Per-Trip Calculation Requirement of the Minimum

Payment Rule encourages drivers to provide as many trips as possible and also to drive more

slowly. That means that drivers will be incentivized to drive in areas that already have high

amounts of congestion, since drivers will experience a larger pay increase in such areas. Id at ¶¶

135-140. This effect is captured by the below chart, which highlights the change in driver fares

and incentives caused by the Per-Trip Calculation Requirement:

Id at ¶ 140, Ex. 11.

23
e. RELYING ON PLATFORM-SPECIFIC UTILIZATION
RATES MAY HAVE THE UNINTENDED EFFECT OF
REDUCING COMPETITION

78. A key feature of the Minimum Payment Rule is the utilization rate in the

denominator of the formula, selected to supposedly increase the number of trips drivers perform

per-hour (an incorrect assumption for the reasons discussed supra ¶¶ 67-69). Despite the

centrality of the utilization feature in the Minimum Payment Rule and Parrott and Reich’s

acknowledgement that there is a risk of monopolization in the rideshare industry if one of the

four companies develops “ride and driver network advantages [ ] substantial enough to deter

entry by competitors,” P&R Study at 42, Parrott and Reich never evaluate the effects that the

Minimum Payment Rule will have on competition in the industry. Id. at ¶ 155.

79. According to Dr. Tucker, such an analysis would have revealed to Parrott and

Reich that the use of a company-specific utilization rate risks reducing competition in the

industry to the detriment of both drivers and riders. Id. at ¶ 157.

80. The use of a company-specific utilization rate, as opposed to an industry-wide

utilization rate (a utilization rate that applies uniformly to all four rideshare companies subject to

the rule), risks anti-competitive effects because it gives the largest companies with a higher

utilization rate a pricing advantage over its competitors that it could use to outprice the market,

attracting more riders and allowing it to further increase its utilization rate and lock in its

competitive advantage. Id. at ¶ 166. As a result, the smaller players in the market will be

trapped in a “vicious cycle” whereby the costs of complying with the Minimum Payment Rule

will “further increase for the small platforms and decrease for the large platforms,” resulting in

decreased competition for both drivers and riders. Id.

24
81. This reduced competition is bad for everyone in the industry—drivers, riders, and

rideshare companies alike— with the exception of the one largest company that is able to lock in

its competitive advantage. As Dr. Tucker explains, this is because:

[w]ith less competition, ridesharing platforms will be less likely to


compete for drivers by offering lower commission rates or fewer
innovative driver-friendly features. Less competition between
platforms may also be detrimental to riders. With less competition,
ridesharing platforms will be less likely to compete for riders by
offering incentives or innovations that make ridesharing platforms
more attractive to riders. Fewer riders and a reduction in the
demand for trips will result in reduced earnings for drivers.

Id. at ¶ 157.

* * * *

82. In addition to the flaws identified by Dr. Tucker, Parrott and Reich themselves

admit that they failed to take into account the effects that the recently passed Congestion

Surcharge will have on the FHV market and driver wages when coupled with possible fare

increases resulting from the Minimum Payment Rule. They did so notwithstanding their

acknowledgement that the surcharge, already enacted by the state legislature, will have an

impact:

The recently enacted MTA surcharge for app services adds $2.75
per trip for vehicles entering or leaving the core Manhattan
business areas. This mandate will increase passenger fares for an
average trip by about 20 percent. The fare increase will generate
some reduction in demand for trips in Manhattan and it will likely
increase passenger sensitivity to further price increases. The
effects are not part of our analysis, as they are independent of
the proposed driver pay standard.

P&R Study at 57, n. 60 (emphasis added). While Parrott and Reich compartmentalized the

effects that the Congestion Surcharge will have on the industry from the effects that the

Minimum Payment Rule will have, drivers, riders, and bases will not have the same luxury in the

25
real world. The failure to account for how an already-passed 20% fare increase will interact with

the Minimum Payment Rule is inherently unreasonable.

4. THE TLC’S REFUSAL BEFORE PASSAGE OF THE RULE TO


COMPLY WITH LOCAL LAW 150 OR RECOGNIZE THE
FLAWS IN THE P&R STUDY

83. On September 13, 2018, Petitioners met with the TLC to discuss their concerns

with the proposed Minimum Payment Rule. Lyft submitted an overview of its concerns and

potential solutions to the TLC at the meeting, including the following:

1. Payments should be based on a weekly


aggregate, not per-ride. The proposed rules require the
minimum-pay standard to apply to each trip, regardless of
when or where it occurs. Increasing the prices on all rides,
even during off-peak hours, may result in fewer trips and
have the unintended effect of decreasing drivers’ earning
opportunities. Furthermore, the per-ride requirement could
also encourage drivers to spend more time in areas of
greater congestion.

To address these downsides, we propose an alternative that


would require the minimum pay standard to apply to
drivers’ weekly earnings. Ensuring that supply reflects
demand by varying prices during the week is critical to
achieving higher utilization rates and increased driver
earnings.

2. The TLC should use an industry-wide utilization


rate, not company-specific. Company-specific utilization
rates favor the company with the highest initial utilization
rates, and create the likelihood of a market monopoly. We
propose an industry-wide utilization rate, which would still
incentivize companies to increase utilization, without
diminishing healthy competition in the high-volume FHV
market.

26
Lyft Meeting with New York City Taxi and Limousine Commission (Sept. 13, 2018), at 1

(attached to Shudofsky Aff. as Ex. I).4 Lyft reiterated these concerns at another meeting with the

TLC held on September 19, 2018, see E-mail from Jessica Taylor, Senior Counsel, Lyft, to Chris

Wilson, Deputy Commissioner for Legal Affairs/General Counsel, New York City Taxi &

Limousine Commission (Sept. 21, 2018, 11:57 EST) (attached to Shudofsky Aff. as Ex. J), and

in its written comments submitted to the TLC before the October 3, 2018 public hearing. Lyft,

Inc.’s Comments on the Taxi & Limousine Commission’s Proposed Regulations Regarding

Driver Income & Vehicle Lease Transparency (Oct. 3, 2018) (attached to Shudofsky Aff. as Ex.

K).

84. Petitioners were not the only stakeholders to voice these concerns. Via

Transportation, Inc., another ridesharing company, submitted written comments to the TLC

explaining that

A [minimum payment] standard applied to every trip would make


it difficult to effectively balance high demand areas and times
(when drivers get paid more) with lower demand areas and times,
which could lead to negative unintended consequences. For
example, Via only earlier this year started providing rides in all
parts of New York City. With no ability to even out pay across a
week or month, it will be difficult for our platform to provide rides
in less busy areas at off-peak times.

Via’s Comments on the TLC’s Driver Pay Proposal (Sept. 28, 2018), at 3 (attached to Shudofsky

Aff. as Ex. L).5

85. The TLC also received two emails (one dated August 30, 2018 and the other

September 14, 2018) from dave@metrobuggy.com concerning the Minimum Payment Rule,

4
Lyft also raised concerns regarding the proposed shared-ride bonus in the formula, emphasizing how such a bonus
was essentially a tax on shared rides and how it would be a “setback to the goal of a less-congested, more equitable
future for NYC.” Id.
5
Via also raised concerns about the impact the shared-ride bonus would have on congestion in New York City. Id.
at 2.

27
respectively entitled “Potential Problem with Parrott and Reich Methodology” and “Potential

Problem with Parrott and Reich Methodology, Part II.” Both emails discuss serious concerns

with the methodology used by Parrott and Reich, including with respect to the utilization rate

component of the rule:

The proposed Minimum Per-trip Payment Formula will drive out


of the market companies with relatively low utilization rates, such
as Juno.

E-mail from Dave, MetroBuggy, to Meera Joshi, Chairperson, New York City Taxi & Limousine

Commission (Sept. 14, 2018, 17:51 EDT) (attached to Shudofsky Aff. as Ex. M). The email also

notes that the rule “does not provide any meaningful way to alleviate traffic congestion” and that

the entire rule was a “very risky strategy.” Id. Both emails were received by Chair Joshi. See

Ex. M to Shudofsky Aff.; E-mail from Dave, MetroBuggy, to Charles Furrey, Assistant General

Counsel, New York City Taxi & Limousine Commission, and Rodney Stiles, Assistant

Commissioner for Data & Technology, New York City Taxi & Limousine Commission (Aug.

30, 2018, 14:49 EDT) (attached to Shudofsky Aff. as Ex. N).

86. At the October 3, 2018 public hearing on the Minimum Payment Rule,

Councilmember Lander, the prime sponsor of Local Law 150, testified that the proposed rule

needed to be adjusted to allow for a payment calculation structure different from the Per-Trip

Calculation Requirement in the proposed rule. Transcript of Public Hearing, New York City Taxi

& Limousine Commission (Oct. 3, 2018), at 44:23-25; 45:1-16 (attached to Shudofsky Aff. as

Ex. O). He specifically requested that the proposed rule be amended to permit the calculation of

payments on an hourly basis. Id. at 45:4.

87. At the same hearing, Chair Joshi acknowledged the presence of the above

concerns, in addition to others:

28
A few of the issues that have been raised since publication that I
want to highlight because I anticipate there will be testimony on
them and that testimony will help the Commission in forming
decisions that have to be made going forward. . . . Number three,
will a remained increase in driver pay necessarily result in an
increase in passenger fares, which could then result in declining
trips and declining pay? Number four, should drivers be paid more
for shared rides? Then, number five, will raising drivers’ pay in
shared rides require companies to raise prices and take away an
affordable service for passengers in the outer boroughs? Six,
should compliance with the minimum pay standard be judged on a
per-week or a per-trip basis?

Id. at 10:22-25; 11:1-3; 11-25.

88. Later on in the hearing, Chair Joshi engaged Lyft VP of Government Policy

Joseph Okpaku in an exchange over the Per-Trip Calculation Requirement:

MS. JOSHI: Let me ask a question. Your proposition is that


drivers should be paid -- judging whether or not drivers are paid
the right amount should be done on a weekly basis, rather than a
per-trip basis.

MR. OKPAKU: Correct. I will note that that’s explicitly noted for
consideration under Intro 890(B).

MS. JOSHI: Well, I disagree with you on that. I’ve had this --

(Applause.)

MS. JOSHI: Driver pay can be calculated on a monthly or weekly


or hourly basis and that’s --

(Applause.)

...

MS. JOSHI: So, it’s a reference to the model, such as Via’s, where
they are paid on an hourly basis. But that doesn’t speak to the
standard by which you judge compliance of a pay protection
proposal. So, we can agree to disagree, but I disagree with you on
that point. What I think is important for people to understand is
the difference between a per-trip and per-week compliance. My
concern with a per-week is that you will then have incentives
that are used to help you reach the minimum, rather than
when you’re judged on a per-trip you have to pay incentives on
top of the minimum.

29
...

MR. OKPAKU: The concern, as I said before, with having a per-


ride basis is that the reason we have so much congestion in the
central business district is because drivers are able to take a series
of very short, quick trips. That’s exactly what a per-ride structure
is going to incentivize. So, we really are concerned about the
congestion aspect, as well as --

MS. JOSHI: But there may be passenger drop-off. The price


goes up, you add congestion fees, which are going to be $2.50.
So, it’s not necessarily true that there’s going to be the same
amount of rides in the CBD.

MR. OKPAKU: To the point of raising fees though, the more


that you raise fees, the less demand there is going to be for
services overall . . . .

Id. at 103:12-25; 104:1-2; 8-23; 105:13-25; 106:1-7 (emphasis added).

89. As the above exchange reflects, Chair Joshi both displayed a misunderstanding of

the role of incentives in the ridesharing industry—failing to recognize that many incentives apply

on a per-trip basis—and conceded that the Per-Trip Calculation Requirement would lead to a

decrease in the number of trips (a result that would have major negative implications on actual

driver earnings).

90. Mr. Okpaku also expressed concern with the TLC’s selection of a company-

specific rather than industry-wide utilization rate for the denominator used in the Minimum

Payment Rule. Mr. Okpaku explained that switching to an industry-wide utilization rate would

avoid the creation of a winner-takes-all market for the four companies affected by the rule:

[A] company-specific utilization creates a winner-takes-all


scenario. Under the proposed rules as currently drafted, if two
drivers from two different companies were to provide the same
exact ride, one company would be allowed to pay their driver less
than the other company.

Essentially, what we are talking about is creating a different


minimum-wage standard for each of the four companies. This
would allow the company with the deepest pockets to take

30
advantage of an equitable situation to the detriment of the smaller
industry players. Ensuring competition between the high-volume
for-hire vehicle companies is in the best interest of both drivers
and passengers.

The TLC proposal could create winners and losers, which is


inherently inequitable.

Id. at 100:3-24.

91. After the hearing, the TLC made a few changes to the Minimum Payment Rule,

but did not provide a mechanism to calculate payments on a per-week basis as required by Local

Law 150. It did, however, provide a mechanism to calculate payments on a per-hour basis, as

also required by Local Law 150.

92. The TLC further amended the Minimum Payment Rule to include an initial

twelve-month period during which the utilization rate will be the industry-wide, as opposed to

company-specific, rate:

Initial Utilization Rate: For the twelve (12) months following the
effective date of section 59B-24 of these Rules, the Utilization
Rate for all Bases subject to subdivision (a) of this section will be
the aggregate Utilization Rate of all Bases subject to subdivision
(a), as calculated by the Commission. A Base subject to
subdivision (1) may petition the Commission to calculate a
Utilization Rate specific to the Base prior to the expiration of the
twelve month Initial Utilization Rate period, but in no event will a
Base subject to subdivision (a) of this section have a Utilization
Rate lower than the aggregate Utilization Rate of all Bases subject
to subdivision (a) for the twelve (12) months following the
effective date of section 59B-24 of these Rules.

Ex. H to Shudofsky Aff. at 30.

93. The amendment, however, does not alleviate the potentially severe effects of the

driver pay formula’s utilization component, which the TLC did not even study. First, the

industry-wide rate only applies for the first twelve months of the rule. This means that starting

February 1, 2020 the utilization rate will no longer be pegged to the industry-wide rate, and the

31
dangers posed by the winner-take-all scenario will be unchecked. Of much more immediate

urgency, however, the rule provides that even during the initial twelve-month period, a company

with a utilization rate higher than the industry-wide rate can petition the TLC to use its company-

specific rate—thereby exposing others in this four-company market to monopolistic and

inequitable forces. Id. On day one that the rule takes effect, it could thereby allow for different

utilization rates for different companies. In fact, TLC’s website already indicates that on

February 1, 2018, Via will use its own company-specific utilization rate and will be subject to

lower per-minute and per-mile minimums than the other three companies, including Petitioners.

See Driver Pay Rates, TLC, http://www.nyc.gov/html/tlc/html/industry/driver_pay_rates.shtml.

The threat to companies with lower utilization rates posed by the Minimum Payment Rule is

therefore immediate.

94. On December 4, 2018, the TLC adopted the Minimum Payment Rule by a vote of

8 to 1. Transcript of Taxi & Limousine Commission Meeting, Taxi & Limousine Commission

(Dec. 4, 2018), at 5:9-12 (attached to Shudofsky Aff. as Ex. P). The rule is set to go into effect

on February 1, 2019.

E. PARROTT AND REICH PUBLISH THE SUPPLEMENTARY REPORT

95. On January 16, 2019—over six weeks after the TLC passed the Minimum

Payment Rule—Parrott and Reich, along with doctoral students Jason Rochford and Xingxing

Yang, published a nine-page revision to the P&R Study6. The Supplemental Report contained

revisions to the expense estimates utilized in the P&R Study and, for the first time, an earnings

analysis purportedly based on applying the Minimum Payment Rule on a per-trip basis. This

after-the-fact attempt to create some kind of support for the Per-Trip Calculation Requirement is

6
The Supplemental Report is attached to the Shudofsky Aff. as Ex. Q.

32
woefully deficient; in fact, it provides no such support, suffering from the same deficiencies as

the original study.7

96. Specifically, the simulation model in the Supplemental Report uses an assumed

increase in weekly aggregate gross pay. It does not analyze how driver earnings would be

affected by the Per Trip Calculation Requirement. Accordingly, none of the simulations in either

of the two P&R reports actually incorporate the Per Trip Calculation Requirement of the

Minimum Payment Rule that they purport to analyze. The Supplemental Report, moreover,

suffers from the same core economic flaws that render the P&R Study inherently unreliable.

* * * *

97. Petitioners, having been rebuffed by the TLC in their requests to amend the

Minimum Payment Rule, commence this action seeking to vacate and annul the rule on grounds

that it is affected by an error of law and is arbitrary and capricious.

ARGUMENT

A. LEGAL STANDARD

98. An Article 78 proceeding raises for review “whether a determination was made in

violation of lawful procedure, was affected by an error of law or was arbitrary and capricious or

an abuse of discretion.” CLPR § 7803(3).

99. “Administrative rules are not judicially reviewed pro forma in a vacuum, but are

scrutinized for genuine reasonableness and rationality in the specific context.” New York State

Ass’n of Counties v. Axelrod, 78 N.Y.2d 158, 166 (1991) (internal citation omitted). “The

7
In addition to being outside of the administrative record, the TLC failed to produce the Post-
Rule Revision to Petitioners notwithstanding Petitioners’ December 14, 2018 FOIL request for
“[a]ll reports, analyses, memos or other documents, including all drafts and versions of each,
prepared by Dr. James A. Parrott of the Center for New York City Affairs, New School, Dr.
Michael Reich of the University of California, Berkeley, and/or any other outside expert or
consultant retained by the TLC in connection with the [Minimum Payment Rule].” Foil Request
Form (Dec. 14, 2018), at 2 (attached to Shudofsky Aff. as Ex. R).

33
arbitrary or capricious test chiefly relates to whether a particular action should have been taken

or is justified and whether the administrative action is without foundation in fact.” Ahmed v. City

of New York, 44 Misc. 3d 228, 236 (N.Y. Sup. Ct. 2014) (internal citation and quotations

omitted). An agency’s action is arbitrary and capricious where it lacks a “sound basis in reason”

or “a rational basis” in the record. Pell v. Bd. of Ed. Of Union Free Sch. Dist. No. 1 of Towns of

Scarsdale & Mamaroneck, Westchester Co., 34 N.Y.2d 222, 231 (1974) (citing Matter of Colton

v. Berman, 21 N.Y.2d 322, 329 (1967)).

100. A regulation must be vacated and annulled if an agency promulgates a regulation

that conflicts with a local law or a statute. See, e.g., Leone v. Blum, 73 A.D.2d 252, 257 (2d

Dep’t 1980), aff’d sub nom. Delmar v. Blum, 53 N.Y.2d 105 (1981) (holding that agency

determinations must be annulled because they violated state and federal statutes). Similarly, if

an agency bases a regulation on a flawed study, the regulation must be vacated and annulled as

arbitrary and without basis in the record. See Natural Resources Defense Council v. EPA, 808

F.3d 556, 574 (2d Cir. 2015) (finding the EPA’s unwillingness to develop information as part of

the study performed by the EPA concerning a key regulatory alternative to be arbitrary and

capricious and citing Humana of Aurora, Inc. v. Heckler, 753 F.2d 1579, 1583 (10th Cir. 1985),

for the proposition that “agency action is arbitrary and capricious when based on a flawed

study”); Tex. Oil & Gas Ass’n v. EPA, 161 F.3d 923, 935 (5th Cir. 1998) (“A regulation cannot

stand if it is based on a flawed, inaccurate, or misapplied study”); see also Schur v. New York

State Div. of Hous. & Cmty. Renewal, 169 A.D.2d 677 (1st Dep’t 1991) (finding agency action

arbitrary and capricious where based on a flawed inspection report lacking relevant data).

101. Finally, it is “the settled rule that judicial review of an administrative

determination is limited to the ground invoked by the agency . . . . If those grounds are

34
inadequate or improper, the court is powerless to affirm the administrative action by substituting

what it considers to be a more adequate or proper basis.” Matter of Scherbyn v. Wayne-Finger

Lakes Bd. Of Coop. Educ. Servs., 77 N.Y.2d 753, 758 (1991) (internal citation omitted). This

includes post-hoc rationalizations not contained in the administrative record. Jan Jan Realty

Corp. v. NYC Envtl. Control Bd., 160 A.D.3d 421, 322 (1st Dep’t 2018); Molloy v. New York

City Police Dep’t, 50 A.D.3d 98, 100 (1st Dep’t 2008).

102. Here, the TLC ran afoul of these principles in adopting the Minimum Payment

Rule by, among other things: (i) failing to permit bases to calculate driver earnings on a per-week

basis, in direct conflict with Local Law 150; (ii) arbitrarily permitting the calculation of driver

earnings on a per-hour basis, but not also on a per-week basis; (iii) lacking any basis in the

record for imposing the Per-Trip Calculation Requirement to the exclusion of a per-week

calculation option; (iv) promulgating a rule that is not rationally related to the TLC’s stated goal

of increasing overall driver pay (and that will not accomplish that goal); (v) basing the rule on

the fundamentally flawed P&R Study; and (vi) adopting a utilization rate component without any

analysis of its consequences, including its potentially devastating anti-competitive effects within

the ridesharing industry. Each of these infirmities provides an independent basis for vacating the

Minimum Payment Rule.

B. THE TLC VIOLATED LOCAL LAW 150 BY PROMULGATING A RULE


THAT DOES NOT PERMIT BASES TO CALCULATE DRIVER
EARNINGS ON A PER-WEEK BASIS

103. It is axiomatic that an agency regulation cannot stand if it conflicts with a local

law or statute passed by the legislature. CPLR § 7803(3); see also Leone, 73 A.D.2d at 257.

Here, Local Law 150 expressly states that the TLC

shall not prevent payments to for-hire vehicle drivers from


being calculated on an hourly or weekly basis, or by any other
method, provided that the actual payments made to such drivers

35
are no less than the minimum payments determined in accordance
with the method established by the commission.

Ex. E to Shudofsky Aff. at 1-2 (emphasis added).

104. The plain language of the local law thereby requires the TLC to permit bases like

Petitioners to calculate pay to drivers on a per-week basis. Acting in derogation of that law, the

TLC passed a rule that does not permit bases like Petitioners to calculate pay to drivers on a per-

week basis, instead requiring that the calculation be made on a per-trip basis.

105. Prior to passage of the Minimum Payment Rule, the TLC amended the rule to

include a per-hour calculation option:

Hourly Payments. If a Base subject to this section pays


drivers on an hourly basis, the payment the Driver receives for
each hour the Driver accepts dispatches from the Base must be
at least the sum of the Per Mile Rate for all miles the Driver
transported Passengers during the hour, the Per Minute Rate
for all minutes the Driver spent transporting Passengers during
the hour, and the Shared Ride Bonus for each applicable pick
up performed during the hour.

Ex. H to Shudofsky Aff. at 29. This option allows companies to apply the per minute rate in the

Minimum Payment Rule to all minutes in an hour, and the per mile rate to all miles in an hour,

without requiring each trip to meet a minimum payment requirement. As long as the minimum

payment amount is achieved on an hourly basis (without regard to any individual trip), the rule is

satisfied. This is precisely what Petitioners asked the TLC to include in the rule, but on a per-

week, in addition to a per-hour, basis—according to the express requirement of Local Law 150.

106. The TLC’s inclusion of a per-hour calculation option is an acknowledgement by

the TLC that the NYC Council did not require a per-trip calculation. Indeed, directly to the

contrary, Local Law 150 required the TLC to permit the calculation of driver earnings on both a

per-hour and per-week basis. As a result, the Minimum Payment Rule conflicts with the

requirements of Local Law 150 and must be vacated and annulled as contrary to law.

36
C. PERMITTING CALCULATION OF DRIVER EARNINGS ON A PER-
HOUR BASIS WHILE NOT PERMITTING THE CALCULATION ON A
PER-WEEK BASIS WAS ARBITRARY AND CAPRICIOUS

107. The TLC’s failure to permit a per-week calculation option is not just contrary to

law, but also without a basis in the record and arbitrary. The TLC provided no explanation of its

failure to do so either in the promulgation of the final rule or otherwise in the record. Indeed, the

only clue to its thinking on this issue came in an off-the-cuff comment made by Chair Joshi at

the October 3 public hearing regarding the then-proposed Minimum Payment Rule. At the

hearing, Commissioner Joshi attempted to explain the language in Local Law 150 requiring the

TLC to permit the calculation of driver payments on a per-hour and per-week basis as “a

reference to the model, such as Via’s, where [drivers] are paid on an hourly basis. But that

doesn’t speak to the standard by which you judge compliance of a pay protection proposal.” Ex.

O to Shudofsky Aff. at 104:8-13.

108. Commissioner Joshi’s statement is revealing. It confirms that there was no

coherence to the TLC’s interpretation of Local Law 150. Dismissing the NYC Council’s

requirement to permit both a per-hour and per-week calculation option as a “reference to the

model, such as Via’s, where they are paid on an hourly basis” makes no sense. It ignores the fact

that the local law requires the TLC to permit not just a per-hour calculation option, but a per-

week calculation option as well. Commissioner Joshi offered no rationale, nor is there one in the

record, for permitting a calculation as to one while prohibiting a calculation as to the other.

109. The TLC’s inclusion of an option to calculate driver earnings on a per-hour basis

but not on a weekly basis has no rational basis. That choice was arbitrary (in addition to

contravening local law), and the rule should be struck on this basis as well.

37
D. THERE IS NO SUPPORT IN THE RECORD FOR REQUIRING THE
CALCULATION OF DRIVER EARNINGS ON A PER-TRIP OR PER-
HOUR BASIS TO THE EXCLUSION OF A PER-WEEK PAYMENT
CALCULATION OPTION

110. While the direct conflict between the Minimum Payment Rule and Local Law 150

is a sufficient basis upon which to vacate and annul the Minimum Payment Rule (as is the

arbitrary distinction between a per-hour and a per-week calculation), the rule should also be

struck down because there is no support in the record for the TLC’s selection of the Per-Trip

Calculation Requirement to the exclusion of a per-week calculation option.

111. First, the P&R Study contains no discussion or analysis of the effects that the

Per-Trip Calculation Requirement (or any time period for a calculation requirement) will have on

overall driver earnings, riders, congestion, or the bases (like Petitioners) that are subject to the

Minimum Payment Rule. Tucker Report at ¶¶ 79-80. Indeed, Parrott and Reich paid almost no

attention to the concept of a time period for the payment calculation, and in the few instances

where the need for such a time period was discussed, the authors never suggested that the Per-

Trip Calculation Requirement is either the optimal standard for such requirement or even a

desirable one. They certainly did not suggest that it would be necessary or even useful in

effectuating the purpose behind their payment formula. In fact, as discussed previously, Parrott

and Reich did not reference the Per-Trip Calculation Requirement in the P&R Study and instead

noted that “FHV bases would be required to ensure that drivers to whom they dispatch trips do

not fall below these minimums over a set period of time.” See P&R Study at 3 (emphasis

added). In another part of the study, Parrott and Reich actually suggested that the appropriate

standard for such calculation is not per-trip, but rather on a weekly or monthly basis:

Generally, for a set time period (such as a week or a month),


companies will evaluate each driver’s earnings using the total trip
mileage and trip minutes for that company. If the compensation

38
provided to a driver falls below the minimum pay standard, the
companies will be required to make up the difference.

Id. at 36 (emphasis added). This is precisely what Petitioners requested from the TLC, see Exs.

I, J, and K to Shudofsky Aff., and what is mandated by Local Law 150.

112. Further, had Parrott and Reich actually analyzed the effects of the Per-Trip

Calculation Requirement, they would have found, as Dr. Tucker did, that such a requirement is

likely to disproportionately affect rider fares and result in a decrease in the total number of trips,

harming drivers and reducing the overall efficiency of ridesharing platforms. Tucker Report at ¶

142. This is likely to occur because the increase in driver earnings caused by the Per-Trip

Calculation Requirement is higher than the current commission rates for at least some of the

ridesharing companies. As a result, any economically rational profit-maximizing company will

increase its rider fares so as to not take a loss on such rides. Id. at ¶¶ 84-88. Even Parrott and

Reich concede that an increase in rider fares will result in a decrease in demand, thereby hurting

drivers. P&R Study at 57 (“If passenger fares rise, the consumer demand response is likely to

reduce the number of trips demanded. Driver trips and pay will decline accordingly”).

113. Parrott and Reich also would have found that, contrary to the intent of the TLC,

the Per-Trip Calculation Requirement will result in increased congestion by incentivizing

drivers to take shorter trips in areas of higher demand. Tucker Report at ¶¶ 135-140.

114. Second, there is no other support in the record for the imposition of the Per-Trip

Calculation Requirement to the exclusion of a per-week calculation option. No written

submissions or testimony at the October 3, 2018 public hearing provide a basis for such a rule.

Indeed, with the exception of Petitioners’ written submissions to the TLC concerning the need

for a per-week calculation option, see Ex. K to Shudofsky Aff., and the submissions of other

39
ridesharing companies making similar points, the written submissions to the TLC do not address

this issue at all.

115. A particularly relevant exchange concerning the Per-Trip Calculation

Requirement at the October 3, 2018 hearing occurred between Chair Joshi and Lyft VP Okpaku.

See Ex. O at 103-106. During the exchange, Chair Joshi claimed that her concern with a per-

week calculation requirement as opposed to the Per-Trip Calculation Requirement was that “with

a per-week [ ] you will then have incentives that are used to help you reach the minimum, rather

than when you’re judged on a per-trip you have to pay incentives on top of the minimum.” Id. at

104:18-23. Chair Joshi’s rationale for not including a per-week calculation option (despite being

required to do so under Local Law 150) is nonsensical. Money is fungible. There is no

difference between paying drivers via incentive or by any other method if in the end the target

amount set by the Minimum Payment Rule is achieved, and ridesharing companies like

Petitioners already utilize incentives on a per-trip basis. The Chair’s misguided take on how

incentives are used does not lend any support to the TLC’s imposition of the Per-Trip

Calculation requirement to the exclusion of a weekly calculation option.

116. Further, Councilmember Lander, the prime sponsor of Local Law 150,

emphasized the importance of allowing bases such as Petitioners to utilize incentives:

[If] we can have cars deployed in places with incentives from the
companies where we need the service then we can achieve the
goal not just of the service we have today but of improved service
for all New Yorkers especially outside the central business district
and in the outer boroughs in a way that also functions to limit
congestion and boost driver pay.

Transcript of Meeting, Committee on For Hire Vehicles (Aug. 8, 2018), at 15:14-21 (attached to

Shudofsky Aff. as Ex. S) (emphasis added). In short, not only does nothing in the record support

40
the TLC’s per-trip calculation requirement, but by limiting Petitioners’ ability to effectively use

incentives, the Minimum Payment Rule runs counter to the purposes of Local Law 150.

117. Third, the formula developed by the TLC in conjunction with Parrott and Reich

is targeted toward the TLC’s goal of establishing a minimum floor for payment to drivers of

$17.22 an hour—a figure specifically selected by the TLC as the independent contractor

equivalent of a $15 per-hour minimum wage (with some additional compensation for paid time

off). Ex. H at 3-4. But imposing the Per-Trip Calculation Requirement—unlike an earnings

calculation over a longer time period— necessarily overshoots that target. Tucker Report at ¶¶

130-32. For each single trip, a driver will be at least at the target, which means that for any

longer time period, such as a week, the driver will necessarily be above the target of $17.22 per

hour on average. Id. That is so because a Per-Trip Calculation Requirement will require that

each trip be at or above the pro-rated portion of the $17.22 minimum an hour and not allow for

the aggregation or averaging out of trips over a period of time. Accordingly, the Per-Trip

Calculation Requirement is aimed not to reach the goal but to overshoot it, and there is no

analysis in the record of the effect that will have on the industry.

118. In short, the P&R Study did not provide a reasonable analysis of the effect that the

Minimum Payment Rule will have on driver earnings, riders, and the ridesharing companies

because it completely ignored the effects of the Per-Trip Calculation Requirement imposed by

the TLC.

119. Nor does the Supplemental Report remedy the flaws in the P&R Study. As a

threshold matter, the report was published after passage of the rule and is therefore outside of the

administrative record upon which the Minimum Payment Rule was based. See Jan Jan Realty

Corp., 160 A.D.3d at 422; Molloy, 50 A.D.3d at 100. In any event, the report does not support

41
the rule. In addition to being plagued by the same flaws as the initial study, the purported new

study does not even incorporate the Per-Trip Calculation Requirement into its simulation model,

which is pegged to weekly earnings. In other words, it makes no attempt to actually analyze the

Per-Trip Calculation Requirement and accordingly can provide no support for it.

* * * *

120. For all these reasons, the Minimum Payment Rule is unsupported by the record

and is the product of arbitrary and capricious rulemaking. It was incumbent upon the agency to

conduct its diligence before passage of the rule—to learn the facts, analyze the issues, and

reasonably consider the evidence presented so as to exercise its rulemaking authority reasonably

and appropriately. The TLC did not function here consistent with its responsibility, and the

Minimum Payment Rule should therefore be annulled. See, e.g., Ahmed v. City of New York, 129

A.D. 3d 435, 441 (1st Dep’t 2015) (holding TLC rule invalid because there was no basis in the

record for a $10 million funding figure); Metropolitan Taxicab Bd. of Trade v. N.Y.C Taxi &

Limousine Comm’n, 18 N.Y.3d 329, 333 (2011) (striking down TLC rule prohibiting taxicab

lessors from collecting sales tax from taxicab lessees, in part because the TLC did “not present[ ]

any justification with any support in the record for its decision”); Trump on Ocean, LLC v.

Cortez-Vasquez, 76 A.D.3d 1080, 1083, 1085 (2d Dep’t 2010) (affirming reversal of agency

action where trial court “conclude[ed] that the [agency]’s reasoning was based upon

misapprehensions of fact and was contradicted by the evidence,” on the basis that the agency

determinations “disregarded the facts or [were] irrationally speculative”); see also Application of

Gorham, 86 A.D.2d 505, 506 (1st Dep’t 1982) (Fein, J., concurring) (overturning agency action

on basis that agency respondents “[chose] to ignore the evidence and merely rely upon their

general authority to administer” the programs it oversaw); Thomas v. Blum, 88 A.D.2d 601, 602

42
(2d Dep’t 1982) (affirming decision to overturn agency’s denial of public assistance due in part

to there being “no evidence that [the] agency ever investigated or offered to investigate”

petitioner’s claims).

E. THE MINIMUM PAYMENT RULE AND THE PER-TRIP


CALCULATION REQUIREMENT UNDERMINE THE TLC’S STATED
GOAL OF RAISING OVERALL DRIVER PAY

121. The Minimum Payment Rule is also arbitrary and capricious because it

undermines the TLC’s stated goal of raising overall driver pay. As recognized by the TLC’s

own study, it cannot be assumed that a mandate to establish minimum per minute and per mile

rates will increase overall driver earnings, which do not accrue in a vacuum separate from the

laws of economics. The P&R Study itself recognizes that an “effective pay policy” must prevent

a reduction in driver trips per hour and that “[i]f passenger fares rise, the consumer demand

response is likely to reduce the number of trips demanded” and thus the earnings opportunities

for drivers. P&R Study at 49, 57. When the errors in Parrott and Reich’s “simulation” are

corrected, it predicts that the Minimum Payment Rule will in fact reduce the number of trips

demanded and result in increased passenger fares. Tucker Report at ¶¶ 96-101.

122. While drivers could make more money per-trip under the Minimum Payment

Rule, they likely will be worse off overall because the per-trip and per-hour payment calculation

requirement hampers Petitioners’ ability to dynamically price trips based on rider demand (e.g.,

by providing lower cost fares during off-peak times), resulting in increased trip costs and lost

rides. Dr. Tucker concludes that the Per-Trip Calculation Requirement will “disproportionately”

affect rider fares for certain trips—likely shorter distance trips—leading to a decrease in the total

number of trips. Id. at ¶ 142.

123. In sharp contrast, a per-week payment calculation option would provide bases

with the flexibility needed to account for both peak and off-peak ride periods, lessening the

43
impact of the rule on riders and keeping off-peak trip demand stable. Dr. Tucker concludes that

a per-week calculation option would give the industry “the flexibility to find the least disruptive

way of changing driver payments and passenger fares to cover the cost” of the Minimum

Payment Rule because, unlike the Per-Trip Calculation Requirement, a per-week calculation

option would not impose payment increases on trips without regard for which trips have a high

enough level of demand to support such an increase. Id. at ¶ 154.

124. Finally, the P&R Study, by its own admission, also failed to analyze the likely

combined impact on fares of the proposed earnings rule and a congestion surcharge per trip

imposed by the state beginning in 2019. P&R Study at 57, n. 60 (“The effects are not part of our

analysis”). The failure to account for how an already-passed 20% fare increase will interact with

the Per-Trip Minimum Payment Rule is inherently arbitrary.

125. At bottom, there is no rational relationship between the stated goal of the rule—

increased overall driver pay—and the imposition of a per-trip calculation, which will only

hamper the achievement of that goal.

F. THE MINIMUM EARNINGS FORMULA PROMULGATED BY THE TLC


IS BASED ON THE FLAWED P&R STUDY

126. Independent from the infirmities specific to the Per-Trip Calculation

Requirement, the Minimum Payment Rule is arbitrary and capricious in that the sole basis in the

record for the formula at the heart of the rule is the fundamentally flawed P&R Study. That

study, fatally deficient as it is, cannot support the rule. See Natural Resources Defense Council,

808 F.3d at 574 (finding the EPA’s unwillingness to develop information as part of the study

performed by the EPA concerning a key alternative to a regulation promulgated by the agency to

be arbitrary and capricious and citing Humana, 753 F.2d at1583 (10th Cir. 1985) for the

proposition that “agency action is arbitrary and capricious when based on a flawed study”); Tex.

44
Oil & Gas Ass’n, 161 F.3d at 935 (“A regulation cannot stand if it is based on a flawed,

inaccurate, or misapplied study”); see also Schur, 169 A.D.2d at 677 (finding agency action

arbitrary and capricious where based on a flawed inspection report lacking relevant data).

127. Here, the P&R Study is flawed for a multitude of reasons.

128. First, the study lacks a “sound economic methodology” and contains

“fundamental mistakes that lead Parrott and Reich to reach erroneous conclusions.” Tucker

Report at ¶¶ 38-39. For example, the P&R Study erroneously estimates key inputs to its

analysis, including driver gross earnings, working time, and expenses. Id. at ¶ 39.

129. Second, the “simulation” (which is in fact not a simulation but a set of assumed

outcomes, the validity of which were not tested) did not take into account the Per-Trip

Calculation Requirement, a core component of the TLC rule.

130. Third, Parrott and Reich relied upon flawed assumptions in putting together their

“simulation” to examine the impact of the Minimum Payment Rule on drivers, riders, and the

ridesharing companies. Id. at Section IV.C. The simulation ignores basic economic principles

regarding supply and demand by predicting that riders will purchase fewer trips, while at the

same time drivers supply more trips. Id. at ¶¶ 92-94. Nonetheless, in all of the scenarios

considered in the P&R Study, Parrott and Reich predict that drivers are likely to increase the

number of hours they work and receive more trips per hour, while they also predict that demand

for trips will drop if rider fares increase (as they do in all but one scenario considered by the

study). This conclusion is impossible, as it would mean that the number of trips supplied is

greater than the number of trips demanded. When demand is properly accounted for (including

its effect on utilization, explained supra ¶¶ 64-73), gross driver earnings actually decrease under

45
the scenario in the P&R Study—Scenario G—that a rational profit maximizing company is most

likely to choose. Id. at ¶ 101.

131. Finally, equally flawed is the P&R Study’s assumption that it is rational to

require industry members like Petitioners to simply absorb the costs of the rule. Parrott and

Reich suggest that Petitioners will need to lower their fees by approximately 50% to 80%. P&R

Study at 59, 60. Dr. Tucker concludes that the P&R Study’s assumption that “such decreases in

commission rates are possible, let alone ‘plausible,’ lacks any basis in economics.” Tucker

Report at ¶ 112. Further, Parrott and Reich “dismiss entirely” the scenario in their study in

which ridesharing companies maximize their profits (scenario G)—a scenario that assumes the

highest commission rates for ridesharing companies, but at the same time assumes the highest

increase in rider fares (a 10% increase) and a decrease in driver earnings. Id. at ¶ 101; see also

P&R Study at 61. As Dr. Tucker explains, it was unreasonable to simply dismiss this scenario,

since it is most in line with ride-sharing firms’ profit-maximizing incentives. Though Parrott and

Reich dismiss it, their own “simulation” predicts that the most likely outcome of the Per Trip

Minimum Payment Rule will be a steep rise in rider fares, a fall in available hours of work for

incumbent drivers, and no benefit to drivers in the form of higher earnings.

G. THE SELECTION OF A COMPANY-SPECIFIC UTILIZATION RATE


WITHOUT ANY ANALYSIS OF ITS CONSEQUENCES, INCLUDING ITS
POTENTIALLY DEVASTATING ANTI-COMPETITIVE EFFECTS ON
THE RIDESHARE INDUSTRY, WAS ARBITRARY

132. As discussed supra, before passage of a rule an agency is required to learn the

facts, analyze the issues, and reasonably consider the evidence presented so as to exercise its

rulemaking authority reasonably and appropriately. See, e.g., Metropolitan Taxicab Bd. of

Trade, 18 N.Y.3d at 333 (striking down TLC rule prohibiting taxicab lessors from collecting

sales tax from taxicab lessees, in part because the TLC did “not present[ ] any justification with

46
any support in the record for its decision”). Here, the TLC failed to consider the devastating

effects the selection of a company-specific utilization rate will have on drivers, riders, and

ridesharing companies. Tucker Report at Section VI.

133. Had they undertaken an analysis, it would have found, as Dr. Tucker notes, that

the use of company-specific utilization rates protects “large incumbents” by ensuring that “their

smaller rivals have higher per trip costs,” and thus increased operating expenses. Id. at ¶ 156.

This hurts competition in the industry by allowing a large incumbent to cut prices (due to lower

operating costs) to a level that the smaller companies may not be able to match, which in turn

causes the smaller companies to lose riders and their utilization rates to decrease still further,

creating an even greater disparity in the industry. Id. at ¶ 166.

134. Dr. Tucker depicts the above as a “vicious cycle” that will result in “increasing

market concentration” and thus reduced competition. Id. This reduced competition will be

detrimental to the entire industry—drivers, riders, and rideshare companies—except for the large

company that is able to leverage its competitive advantage. Less competition means less

competition for drivers and, as a result, less competition to reduce rideshare company

commissions. It also means less competition for riders and increased fares, which in turn means

lower demand for rides and less work and reduced earnings for drivers. Id. at ¶ 157. In other

words, only a single player in the market will benefit under this scenario.

135. To the extent the TLC did recognize the anti-competitive effects of the Minimum

Payment Rule, its amendment to the rule just prior to passage, establishing an industry-wide

utilization rate for the first twelve months the rule is in effect, is woefully insufficient. First, the

application of the industry-wide rate during the initial twelve-month period is at best a temporary

fix that does not remedy the anti-competitive effects that will be inflicted after this period ends.

47
Second, even during the initial twelve-month period, companies with utilization rates higher than

the industry-wide rate can petition the TLC to use their rates. Indeed, one of the four companies

subject to the rule—Via—has already done so. Companies with lower utilization rates

accordingly remain at risk, facing the threat of a serious competitive disadvantage as a result of

the company-specific utilization component of a Minimum Payment Rule whose effects were

never considered by the agency.

FIRST CAUSE OF ACTION


(For Judgment Pursuant to CPLR §§ 7803(3) & 7806)

136. Petitioners repeat and reallege the allegations made in paragraphs 1 through 135

above as if fully set forth in this paragraph.

137. Imposing the Per-Trip Calculation Requirement to the exclusion of a per-week

calculation option directly conflicts with Local Law 150 and its requirement that the TLC “not

prevent payments to for-hire vehicle drivers from being calculated on an hourly or weekly

basis.” Ex. E to Shudofsky Aff. at 1 (emphasis added).

138. For at least this reason, the Minimum Payment Rule is affected by an error of law

and Petitioners are entitled to a judgment under CPLR § 7806 vacating and annulling it.

48
SECOND CAUSE OF ACTION
(For Judgment Pursuant to CPLR §§ 7803(3) & 7806)

139. Petitioners repeat and reallege the allegations made in paragraphs 1 through 138

above as if fully set forth in this paragraph.

140. The TLC’s adoption of the NYC Council-required per-hour calculation option but

not the similarly required per-week calculation option was arbitrary and without basis in the

record.

141. For at least this reason, the Minimum Payment Rule was enacted in an arbitrary

and capricious manner and is neither rational nor reasonable in this context. Petitioners are

entitled to a judgment under CPLR § 7806 vacating and annulling it.

THIRD CAUSE OF ACTION


(For Judgment Pursuant to CPLR §§ 7803(3) & 7806)

142. Petitioners repeat and reallege the allegations made in paragraphs 1 through 141

above as if fully set forth in this paragraph.

143. The record does not support the imposition of the Per-Trip Calculation

Requirement to the exclusion of a per-week payment option. The P&R Study is completely

devoid of any analysis of the effects that the Per-Trip Calculation Requirement will have on

driver earnings, FHV bases, and the industry in general.

144. Further, the record beyond the P&R Study is similarly devoid of support for the

Per-Trip Calculation Requirement to the exclusion of a per-week calculation option. No written

submissions or testimony at the October 3, 2018 public hearing provide a basis for such a rule.

145. For at least these reasons, the Minimum Payment Rule was enacted in an arbitrary

and capricious manner and is neither rational nor reasonable in this context. Petitioners are

entitled to a judgment under CPLR § 7806 vacating and annulling it.

49
FOURTH CAUSE OF ACTION
(For Judgment Pursuant to CPLR §§ 7803(3) & 7806)

146. Petitioners repeat and reallege the allegations made in paragraphs 1 through 145

above as if fully set forth in this paragraph.

147. The Minimum Payment Rule will not result in an increase in overall driver pay.

There is therefore no rational relationship between the purpose of the rule and the means selected

to achieve that purpose. For at least this reason, the Minimum Payment Rule was enacted in an

arbitrary and capricious manner and is neither rational nor reasonable in this context. Petitioners

are entitled to a judgment under CPLR § 7806 vacating and annulling it.

FIFTH CAUSE OF ACTION


(For Judgment Pursuant to CPLR §§ 7803(3) & 7806)

148. Petitioners repeat and reallege the allegations made in paragraphs 1 through 147

above as if fully set forth in this paragraph.

149. The Minimum Payment Rule, based as it was on the fundamentally flawed P&R

Study, has no support in the record, rendering its imposition arbitrary and capricious. For at least

this reason, the Minimum Payment Rule was enacted in an arbitrary and capricious manner and

is neither rational nor reasonable in this context. Petitioners are entitled to a judgment under

CPLR § 7806 vacating and annulling it.

SIXTH CAUSE OF ACTION


(For Judgment Pursuant to CPLR §§ 7803(3) & 7806)

150. Petitioners repeat and reallege the allegations made in paragraphs 1 through 149

above as if fully set forth in this paragraph.

151. The TLC’s adoption of the utilization rate component of the driver pay formula

was without support in the record. No analysis was done of its likely effects, including its

severely anti-competitive effects within the ridesharing industry. For at least this reason, the

50
Minimum Payment Rule was enacted in an arbitrary and capricious manner and is neither

rational nor reasonable in this context. Petitioners are entitled to a judgment under CPLR § 7806

vacating and annulling it.

PRIOR APPLICATION

152. No prior application has been made for the relief requested herein.

TRIAL DEMAND

153. Petitioners demand an evidentiary hearing on all causes of action so triable.

RELIEF REQUESTED

WHEREFORE, Petitioners respectfully request that this Court enter an Order:

A. Issuing a judgment pursuant to CPLR § 7806 vacating and annulling the Minimum

Payment Rule, codified at 35 R.C.N.Y. §§ 59B-24, in its entirety;

B. Holding an evidentiary hearing to resolve any material factual disputes;

C. Ordering Respondents to pay Petitioners their costs, fees, and disbursements incurred

in connection with this action pursuant to CPLR § 8101; and

D. Granting such other and further relief as the Court deems just and proper.

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Dated: January 30, 2019
New York, New York
Respectfully submitted,

ARNOLD & PORTER KAYE SCHOLER LLP

By: /s/ Sara L. Shudofsky


Sara L. Shudofsky
Harry K. Fidler
Kevin T. Sullivan
Kaitlyn Schaeffer
250 West 55th Street
New York, New York 10019
(212) 836-8000 (Telephone)
(212) 836-8689 (Facsimile)
sara.shudofsky@arnoldporter.com
harry.fidler@arnoldporter.com
kevin.sullivan@arnoldporter.com
kaitlyn.schaeffer@arnoldporter.com

Attorneys for Petitioners Tri-City, LLC and Endor


Car and Driver, LLC

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