March 20, 2019 Feature

The Sharing Economy: State and Local Regulatory Coordination Needed

By Janice C. Griffith

For centuries, resources have been shared among private and public entities. The advent of the Internet in the 1990s greatly expanded sharing opportunities via quick and easy communication about the availability of products for use by those without ownership or possession of them. Today, we can think of the sharing economy as one facilitated by an online platform that connects entities possessing goods or service capabilities to those who desire to use these resources. The sharing economy enables those in possession of underutilized consumer goods, such as a car, to be shared on a part-time basis with another person or enterprise. The sharing economy can also maximize new resources by spreading word of their availability, and it can find a home for used resources.

The Sharing Economy and Its Impact

A number of different business models have emerged in the sharing economy. The most common platforms made possible are peer-to-peer, business-to-business, and business-to-consumer. The online platform Yerdle illustrates the peer-to-peer model by collecting unwanted items from members that are then processed and distributed to others desiring them.1 Equipmentshare operates business-to-business with an online marketplace for construction contractors to borrow construction equipment from other construction businesses seeking to rent out their otherwise idle equipment.2 The business-to-consumer model demonstrated by Zipcar car rentals3 enjoys widespread use.

The sharing economy has been marked by constant growth and complexity, arising from the numerous types of transactions and the diverse economic sectors that the sharing economy crosses. Jeremiah Owyang developed a “Honeycomb” originally showing six industries impacted by the sharing economy.4 Later he felt a need to expand the Honeycomb by adding 10 more types of economic activity involving sharing.5

The sharing economy acts beneficially by satisfying consumer wants and productively using underutilized assets, yet it also has the potential to cause harms. The sharing economy unleashes the possibility for the sharing of lower quality products and services than a publicly regulated market would provide. Homeowners who rent out space in their private residences, for example, most likely cannot provide their guests with the type of services and security that licensed hotels supply. The sharing economy can also negatively affect neighborhood social fabric and the environment. Airbnb facilitates short-term rentals in residential neighborhoods that may be disturbed by tourists who do not conform to neighborhood norms for quietness and sanitation. Airbnb also raises housing affordability issues, as the profitability of short-term rentals can lead to the displacement of permanent accommodations in high-demand cities.6 Ridesharing has dramatically increased the number of automobile trips taken over public streets in highly congested urban areas, thereby increasing traffic congestion and air pollution.7

Negative externalities caused by the sharing economy can lead to stakeholder demands for regulating it. Two sharing economy sectors—ridesharing and short-term rentals—have generated such pressure. Dockless bicycles and electric scooters generate controversy as they sometimes are dumped in inappropriate places and endanger the safety of public ways.8 The stakeholders may vary and possess entirely different interests. Consumers calling for safety requirements, quality assurance, or protection from fraud comprise one strong stakeholder group. Other stakeholders might include entrenched business interests disrupted by the sharing economy or enterprises demanding a level playing field or greater economic stability. Special interest groups may hope to achieve certain policy objectives sparked by the sharing economy, and elected officials also have a voice in determining the course of public regulation.

State versus Local Control of the Sharing Economy

Who should regulate the sharing economy? In some instances, most likely involving a few actors or limited economic output, the sharing economy may be able to regulate itself without governmental interference. Otherwise, in determining the locus of governmental regulation, the question is whether sharing economy activities primarily impact neighborhoods and localities, state regions including metropolitan areas, the states, or economies on a national or global scale. Urban areas, in particular, due to the agglomeration that increases the likelihood and success of sharing economy transactions, will feel the effects of any adverse externalities produced by the sharing economy.9 The federal government has not shown great interest in regulating the sharing economy perhaps because it is not confined to a specific industry and operates across the broad economy, making uniform, national regulation impracticable.10 If the sharing economy progresses to monopoly platform ownership, regulation on a national and international scale may be appropriate.11

The probable public regulators of the sharing economy in the United States will be either the states or local governments. Unlike republican governance forms elsewhere, metropolitan or regional governance has not taken hold in the United States.12 The lack of general purpose governments on a regional scale in the United States means that local regulation of the sharing economy will result in the imposition of diverse regulations by a large number of municipalities. This so-called political fragmentation enhances the movement to drive regulation to the state capitol. Frequently, the sharing economy will affect overlapping local, regional, and state constituencies. It then becomes necessary to decide whether the sharing transactions are better regulated at the state level or left to local control. Guidelines developed by state courts to determine whether a local activity has been impliedly preempted by the state can prove helpful in this quest.

Courts generally find that a state has impliedly taken regulatory control away from a locality under the following conditions: (1) a need for uniformity exists, (2) the activity if locally controlled generates an extraterritorial impact beyond the borders of the locality, (3) harm can occur if the activity is left to local regulation, or (4) the state has traditionally regulated the activity.13 In today’s fast-changing environment, factor (4) may be less relevant than in prior eras. In many instances, factors (1) and (2) will be the most important to consider.

Reasons for a Trend toward State Control of the Sharing Economy

Given the multitude of municipalities in many metropolitan areas, uniform state regulation to ensure some sort of stability in the regional sharing economy market can be persuasive. Desire for uniformity cannot be ignored for those sharing activities that affect the transportation sector, such as ridesharing. The taxicab industry was obsolete before Uber and Lyft arrived because municipal fragmentation and new forms of technology made its operation inefficient. Taxicab drivers who deliver passengers outside the borders of the municipality must drive back to their home base for the next fare, resulting in wasted fuel and productivity.

State preemption of local regulation also addresses local regulation that disrupts the marketplace or inequitably burdens market participants, especially large market segments such as the real estate industry. In the absence of state enabling legislation, courts have invalidated the imposition of local rent controls and local housing and building codes.14 In the case of the sharing economy, a state most likely wants to encourage the use of technology-driven platforms and to enhance sharing capabilities.

Certain other constraints inhibit local regulation. Political fragmentation diminishes the political power of a city to convince state legislators to favor local control. In some states, local governments may not be empowered to regulate sharing economy transactions without specific state action. They also may lack the resources necessary for regulatory enforcement due to the immense number of sharing economy operators in a particular field, such as short-term rentals. Municipalities also may fear that overregulation may cause the competition to move elsewhere and cause a race to the bottom.

A Coordinated State and Local Approach to the Sharing Economy

Municipalities and states both possess strong interests in regulation. A state should consider the impact of the sharing economy on the state economy and the need to protect its inhabitants from adverse externalities that the sharing economy can trigger on a scale reaching beyond municipal borders. A municipality must exercise its police powers to promote the public health, safety, and welfare within its locality. A coordinated state and local approach addresses both levels of governance, while a balancing test to decide which government has the strongest interests is unlikely to be workable because both interests are likely to be pervasive.15

A coordinated state and local approach to the sharing economy will encounter various impediments. Plenary power resides in the state and its legislative body,16 and state and local relationships have been largely hierarchical. Without any inherent right to exist, localities depend on state legislatures for their creation and empowerment. State legislative bodies often jealously guard their prerogatives and seek to squelch the emergence of new forms of governance that could threaten the dominance of state control. How can a coordinated state and local platform for the sharing economy be effectuated?

First, the state must accept that a uniform statewide approach will not be efficient or beneficial for sharing economy transactions that require local oversight due to their direct impact on persons living within the locality. Municipalities and their neighborhoods most likely will be better situated to understand the extent of the externalities and to fashion solutions to them. States could encourage municipalities to experiment with regulating the sharing economy without state oversight; exceptions could be made for sharing economy transactions that require uniform treatment. Many states have adopted a form of home rule based on this approach; thus a foundation already exists for permitting experimentation on a local basis.17

The implementation of sharing economy regulations on a regional basis is another approach. Municipalities comprising a metropolitan area with a regional economy could use cooperative arrangements to regulate sharing economy activities so as to achieve greater uniformity. The state could establish a separate sharing economy coordinating entity with representatives from each of the municipalities significantly affected by sharing transactions. This public body could study the pertinent sharing economy issues and propose solutions. It might recommend uniform treatment throughout a metropolitan area. Just as the sharing economy affects regional as well as municipal interests, its impact may be felt most strongly at the neighborhood level of input or governance. Coordination among neighborhood councils or other civic associations could also prove extremely helpful in tailoring regulatory responses to the sharing economy.

A metropolitan planning organization (MPO) also could be tasked with coordinating the regulation of the sharing economy in urban areas. Congress mandated the creation of MPOs to coordinate metropolitan and statewide transportation funding on the basis of region-wide transportation plans.18 Some MPOs engage in economic development and environmental protection activities as well.19 MPOs’ expertise lends itself to many sharing economy activities relating to transportation or planning on a regional basis.

If intergovernmental cooperation is found inadvisable to steer the sharing economy, the state can utilize other approaches to permit local control. State enabling legislation can set minimum standards for certain sharing economy transactions. The enabling act could explicitly authorize municipalities to supplement the minimum standards as they see fit subject to state guidelines. The state itself also could enter into agreements or memoranda of understanding with local governments as to each party’s role in regulating certain sectors of the sharing economy. Such agreements, however, could be inequitable if the state conferred certain benefits upon a municipality not granted to other local jurisdictions. Many states prohibit the enactment of special legislation that benefits one municipality for this very reason.

The successful efforts of federal governmental agencies, the states, and localities to coordinate disaster relief with respect to Hurricanes Irma and Harvey bodes well for the possibility of similar cooperative efforts in the sharing economy field. The lack of such multi-governance coordination contributed to the loss of life from Hurricane Katrina and led to changes that caused better preparation and coordination among responders to Hurricane Harvey.20 The impetus for coordination in regulating the sharing economy hardly reaches the level of urgency given to disaster relief measures but could gain currency as the sharing economy becomes a more potent force in shaping local and regional markets throughout a state.

Endnotes

1. See How It Works, Yerdle Recommerce, https://www.yerdlerecommerce.com/index.html#how-it-works (last visited Feb. 27, 2019).

2. See Equipmentshare, Wefunder, https://wefunder.com/equipmentshare (last visited Feb. 27, 2019).

3. See Zipcar, http://www.zipcar.com/ (last visited Feb. 27, 2019).

4. See Jeremiah Owyang, Framework: Collaborative Economy Honeycomb, Web Strategy LLC (May 5, 2014), http://www.web-strategist.com/blog/2014/05/05/framework-collaborative-economy-honeycomb-osfest14/.

5. See Jeremiah Owyang, Honeycomb 3.0: The Collaborative Economy Market Expansion, Web Strategy LLC (Mar. 10, 2016), http://www.web-strategist.com/blog/2016/03/10/honeycomb-3-0-the-collaborative-economy-market-expansion-sxsw/. The 16 startup areas are as follows: worker support, learning, wellness and beauty, municipal, money, goods, health, space, food, utilities, mobility services, services, logistics, vehicle sharing, corporations and organizations, and analytics and reputation. Id.

6. See Nicole Gurran & Peter Phibbs, When Tourists Move In: How Should Urban Planners Respond to Airbnb?, 83 J. Am. Planning Ass’n 80, 80 (2017).

7. See generally Bruce Schaller, The New Automobility: Lyft, Uber and the Future of American Cities (2018). By the end of 2018, it is projected that the for-hire ridership sector, including taxis, will grow to 4.74 billion trips in the United States on an annual basis, surpassing projected trips through local bus ridership (4.66 billion). See id. at 1.

8. See Nellie Bowles & David Streitfeld, Electric Scooters Are Causing Havoc. This Man Is Shrugging It Off, N.Y. Times (Apr. 20, 2018), https://www.nytimes.com/2018/04/20/technology/electric-scooters-are-causing-havoc-this-man-is-shrugging-it-off.html; Caroline Christie, Dockless Bikes, the Latest Tech Disruption, Are Ending Up in Volcanoes and Trees, Document (June 26, 2018), http://www.documentjournal.com/2018/06/dockless-bikes-the-latest-tech-disruption-are-ending-in-volcanoes-and-trees/.

9. See Nestor M. Davidson & John J. Infranca, The Sharing Economy as an Urban Phenomenon, 34 Yale L. & Pol’y Rev. 215, 238–41 (2016) (arguing that the sharing economy should be regulated at the municipal level of governance because it generates highly localized externalities).

10. See Bryant Cannon & Hanna Chung, A Framework for Designing Co-Regulation Models Well-Adapted to Technology-Facilitated Sharing Economies, 31 Santa Clara High Tech. L.J. 23, 71 (2015).

11. See E. Glen Weyl & Alexander White, Let the Right “One” Win: Policy Lessons from the New Economics of Platforms 22–23 (Coase-Sandor Inst. for Law & Econ., Working Paper No. 709, 2014), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2524368.

12. In some states, however, counties may exercise general governmental powers over larger geographical areas than the typical municipality. Many countries divide subnational governments into regional or provincial spheres in addition to local governments. See, e.g., S. Afr. Const., 1996, ch. 3, § 40(1), http://www.justice.gov.za/legislation/constitution/SAConstitution-web-eng.pdf (providing that the South African Republic is “constituted as national, provincial and local spheres of government which are distinctive, interdependent and interrelated”); Constitute Project, Spain’s Constitution of 1978 with Amendments through 2011, at 35 (2011), https://www.constituteproject.org/constitution/Spain_2011.pdf?lang=en.

13. See City & County of Denver v. State, 788 P.2d 764, 773 (Colo. 1990) (upholding a municipal residency requirement for employment).

14. See, e.g., Old Colony Gardens, Inc. v. City of Stamford, 156 A.2d 515, 517 (Conn. 1959) (holding that the City’s general grant of police powers included in its charter did not empower the City to impose rent controls); City of Miami Beach v. Fleetwood Hotel, Inc., 261 So. 2d 801, 807 (Fla. 1972) (finding that the City was not empowered to enact a rent control ordinance without specific state authorization).

15. Some courts employ a balancing test, weighing state and local interests against each other, to decide whether state implied preemption is justified. See City & County of Denver, 788 P.2d at 768 (upholding local residency requirement for employment).

16. The United States Constitution makes no mention of local governments or governance.

17. This form of home rule is called “legislative” home rule. Daniel R. Mandelker et al., State and Local Government in a Federal System 90 (8th ed. 2014).

18. See 23 U.S.C. § 134(d)(1).

19. See, e.g., About Us, Del. Valley Regional Plan. Commission, https://www.dvrpc.org/About/ (last visited Feb. 27, 2019); About SRPEDD, Se. Regional Plan. & Econ. Dev. District, http://www.srpedd.org/about-srpedd (last visited Feb. 27, 2019).

20. See Dave Philipps, How Lessons from Hurricane Katrina Saved Lives in Houston, N.Y. Times, Sept. 8, 2017, at A9.

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By Janice C. Griffith

Janice C. Griffith is a professor of law at Suffolk University Law School. She is one of the authors of State and Local Government in a Federal System (8th ed. 2014).