Rideshare leasing programs present compliance issues for dealers

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Lyft, Uber, Sidecar and other such “rideshare companies”[1] are undoubtedly changing the automotive industry. The state of California and many of its cities have embraced rideshare companies, to varying degrees, with new regulations.[2] But lawmakers have not adjusted vehicle sales and finance laws to accommodate this new business model. And rideshare companies continue to innovate, most recently by establishing programs to sell or lease vehicles to their drivers through franchised auto dealerships. These programs raise several difficult legal issues for dealers who desire to participate in these programs to increase their sales performance or revenues. This article gives an overview of some of those issues.

1. New Programs, New RISC and Lease Forms

The standardized Retail Installment Contract (RISC) provided by a vendor, such as Reynolds and Reynolds, and lease agreements provided by your captive finance company (and others) are regularly updated for compliance with changes in existing California and Federal law. But in their finance and lease programs, rideshare companies often insist that dealers use their unique RISC and lease agreements. This could create problems for the dealer if the rideshare company’s forms are not legally compliant. Potential examples could include lease forms that fail to disclose the number and amount of each monthly (or weekly) payment as required by Regulation M and the California Leasing Act,[3] or an arbitration provision that is not clearly set apart in a manner sufficient for it to be enforceable under California law. Additionally, some disclosures, such as the box on a lease agreement that states “THERE IS NO COOLING OFF PERIOD,” have size requirements and must be in bold type.[4]

Additionally, California law currently recognizes only two types of purchasers; those who purchase for personal use and those who purchase for commercial use. But the rideshare driver, who buys a car (perhaps a large black luxury SUV) for both business and personal use, represents a “hybrid” purchaser, not addressed in California law, which could result in ambiguity as to whether certain consumer protection laws are available to the consumer. For example, consumer lease agreement forms typically require the lessee to check a box stating whether the primary use for the vehicle will personal or commercial. But many rideshare drivers want vehicles for both personal and commercial purposes (perhaps with no intended “primary” use). And while it is fair for a dealer to rely on a rideshare driver’s own assessment of their intended primary use, regulators or plaintiff’s lawyers may argue that a dealer “should have” known about the primary intended purpose of any given rideshare vehicle, resulting in potential liability to the dealer.

And is a rideshare driver who buys a limo-like black Escalade more intent on commercial rideshare use than someone buying a Prius? For the time being, dealers should continue ensuring that all lease agreements (even those provided by a rideshare company through a special leasing program), include a provision where the customer marks their intended primary use. The customer should always be the person who fills out this provision (to avoid an accusation that the dealership marked an undiscussed option that the consumers did not themselves choose). These are only a few potential issues with forms that rideshare companies may provide. Keep in mind that since these companies are not automotive dealers or manufacturers, they may not be fully attentive to all the disclaimers and disclosures required in RISC and lease contracts. Again, an experienced automotive attorney can help your dealership review a rideshare company’s proposed financing or leasing arrangements for compliance with Federal and California law.

2. Are Rideshare Drivers Independent Contractors or Employees?

Much litigation has surrounded the question of whether rideshare drivers are “employees” or “independent contractors” of rideshare companies. But this has not been settled in California.[5] California courts could rule either way on whether or not rideshare drivers are “employees.” And this issue could remain undecided as court decisions will undoubtedly work their way through the appellate courts and beyond. Why do dealers care?

Under some of these rideshare vehicle sales and leasing programs, the rideshare company takes money from the driver’s pay to make the monthly payment on the vehicle that the dealer sells to the driver. This raises several compliance issues under the Labor Code, including without limitation, Labor Code § 300, which details several requirements before any business can legally withhold amounts from an employee’s wages or commissions. If rideshare drivers are deemed to be employees by California courts, this could make rideshare RISC or lease agreements (or their commission withholding practices) legally invalid. Such a move could result in huge liability for dealerships, including potential rescission of sold or leased rideshare vehicles, due to their contracts being unlawful.

3. Demand Indemnity from Rideshare Companies

We never advise relying solely on another company’s indemnity obligations when your dealership is faced with a potential liability. It is always best to also limit the potential liability as much as possible by ensuring legal compliance. But given the large exposure potentially resulting from participation in a rideshare company’s leasing or sale program, strong indemnity language is highly recommended to address myriad issues ranging from TILA compliance to employment matters.

We cannot emphasize enough the importance of utilizing an experienced automotive industry attorney in considering any new financing and leasing arrangements. Several detailed legal requirements govern such transactions. Rideshare companies, though they can be valuable business partners, are not dedicated to minimizing potential liability for your dealership. Through the assistance of able legal counsel and legally compliant lease and financing arrangements, dealers should be able to minimize if not eliminate risks they might otherwise face participating in these programs.

[1] These companies are also sometimes called “Transportation Network Companies” or other titles based on their mobile applications, such as “ride-hailing apps.” For consistency, we will continue referring to Lyft, Sidecar, Uber and other such companies as “rideshare companies.”

[2] The California Public Utilities Commission, in 2013, and 2014, adopted new rules requiring certain insurance coverages and trade dress plaques in rideshare vehicles (such as the familiar Uber “U” plaque displayed on windshields). The California Public Utilities Commission currently maintains a website that gives an overview of its rideshare regulations.

[3] See, e.g. 12 Code of Federal Regulation §213.4 (c) [Regulation M]

[4] Civil Code § 2985.8(e) [California Leasing Act]

[5] One California Labor Commissioner ruling recently held that a particular driver was an “employee,” but this dispute is ongoing. See, “California Says Uber Driver Is Employee, Not a Contractor,” June 17, 2015, New York Times.