Airbnb Seeks to Turn Hosts into Shareholders

For several years, Airbnb insisted that its product is nothing more than a platform that connects hosts with guests. Several Silicon Valley companies, such as Airbnb, Uber, and Facebook, have insisted on their role as platform providers, often as a means of skirting regulations that otherwise apply to the industries they seek to disrupt. Users of these platforms are generally seen as neither employees nor customers but rather as independent contractors and consumers. Without employees or customers in the traditional sense, platform companies hold that they are not responsible for violations of regulations, payment of taxes, or civil liability and that these burdens ought to fall on their platforms’ users instead.

But, that may soon change. Airbnb has recently filed a request with the SEC to give its hosts equity stakes in the company. Federal regulation stipulates that while private companies, like Airbnb, can grant stock to employees and investors, they can’t grant stock to contractors. Airbnb has long held publicly that it wishes to align the interests of all stakeholders, including employees, hosts, guests, and investors, in the company’s business. A change in Rule 701 of the Securities Act to include “gig economy workers” would dramatically change how these workers are compensated and taxed.

By granting some stock to its hosts, Airbnb is also creating a financial incentive for hosts to boost the company’s long term financial prospects. Hosts would be incentivized to support the company’s interests when it comes to lobbying for looser regulations concerning Airbnb and hoteliers. Hearkening back to an infamous advertisement campaign that featured an African-American couple describing how Airbnb helps them meet their mortgage payments, hosts are likely even more encouraged to fight for their ability to continue making an income from the platform. Given that Airbnb “believes that 21st-century companies are most successful when the interests of all stakeholders are aligned,” this proposed change could be an integral step for all gig economy companies towards reinventing corporate governance and equity distribution in the private market.

While hosts stand to become part owners of Airbnb, there still lurks the question of whether sharing economy companies can still call their products mere platforms. Hosts would no longer be impartial, neutral users of the site but are rather investors in the company that are being compensated with not just the direct value of their rentals but with a share of the company’s overall value too. These hosts could wind up in an employee-employer relationship with Airbnb that would result in a more significant portion of the hosts’ compensation coming in the form of equity. A claim that one’s product is merely a platform would likely become a far less plausible defense in light of these changes.

The question of whether or not this new shareholder class of gig economy workers will come with voting privileges remains unanswered. Nevertheless, the SEC ultimately will have to look at whether such a change affects hosts and investors fairly while cities looking to regulate will re-evaluate whether a platform where the users are also part-owners could still be classified as a platform.

Airbnb Seeks to Turn Hosts into Shareholders

Walmart, Patagonia and Lyft Make Push to Increase Voter Turnout

As the midterm elections draw near, approximately 150 companies, including Walmart, Patagonia and Lyft, have come together to form the Time to Vote campaign. This initiative is aimed at increasing voter turnout at the midterm elections.

The companies involved in Time to Vote are taking different steps to achieve this goal. Some are focused on ensuring that their own employees go to the polls. For example, Patagonia will shut down its corporate campus and all US retail stores on November 6th to give employees time to vote. Further, Levi Strauss will give all employees at least three hours off to vote.

Other companies are focused on increasing voter awareness and accessibility to vote. For instance, Walmart created a website with election materials and information. In addition, Lyft is offering discounted rides anywhere in the United States and free rides to people in underserved communities.

Executives say the Time to Vote initiative is a nonpartisan effort aimed at increasing voter participation. However, it is impossible to ignore the symbolism in America’s current political climate. Though the Trump administration might have a business-friendly reputation, as evidenced by this year’s tax overhaul, many of the companies involved in Time to Vote have become increasingly outspoken in their opposition to President Trump’s policies.

Patagonia sued President Trump last December over the diminishment of national monuments. Further, Walmart’s chief executive, Doug McMillon criticized President Trump after he refused to condemn white supremacists following the violent protests in Charlottesville in the summer of 2017. Lyft also made a $1 million donation to the ACLU after President Trump announced his initial travel ban.

Regardless of whether the companies have an underlying goal of expressing disdain for President Trump or whether their efforts are truly non-partisan, the companies seem to be responding to their stakeholders’ interests. Scott Farrel, communications executive for the international PR firm Golin, said in August 2017 that, “Millennials want companies to take a stand. A measured risk needs to be taken, and whichever way you want to go, you can’t sit in the middle anymore.”

Farrel’s sentiment appears to be shared by many companies, so it will be interesting to follow the businesses involved in Time to Vote as we approach Election Day.

Walmart, Patagonia and Lyft Make Push to Increase Voter Turnout

Silicon Valley Startups: Caught in the Crossfire of the U.S.-China Trade War

President Trump has announced new tariffs on Chinese imports, further escalating the ongoing trade war between the United States and China. On September 17th, the administration released a sprawling list of Chinese products, ranging from food items to industrial machinery. In total, the slew of goods (everything from tuna to fertilizer to cranberries to steam turbines) amounts to roughly $200 billion worth of Chinese products. Each item will be subject to a 10% tariff. Importantly, the extensive list includes circuit boards, semiconductors, cell tower radios, and internet modems. A 10% tax on these items will have devastating effects throughout Silicon Valley. The Valley’s smaller tech startups will be among the first to feel the adverse impacts.

In recent years, fledgling American innovators have managed to carve out their space in the Silicon Valley market largely thanks to cheap Chinese manufacturing. By outsourcing their operations to China, these startups are able to produce goods in much larger quantities, thereby benefitting from economies of scale. Utilizing China’s cheap labor and lax regulations, smaller startups have managed to avail themselves of the advantages that come with mass-production. With these new tariffs, however, small-tech is struggling.

Under the new import restrictions, young businesses will be faced with a 10% tax when they try to import their Chinese-made products back to the Silicon Valley. There are only two ways for companies to deal with this problem: 1) absorb the extra cost by cutting into their profit margins or 2) pass the cost along to consumers, in the form of higher prices. The former option is unavailable to small startups; with thinner margins, many of these nascent companies simply don’t have the ‘wiggle-room’ to take on additional costs. And pursuing the latter option would likely mean being priced out of the market. Thus, startups who rely on outsourcing will struggle to remain afloat. If small businesses truly are the backbone of the American economy, the weight of these tariffs will likely crack some vertebrae.

The tech industry’s larger companies do not face the same existential threat. With massive margins, they are better able to absorb extra costs. Moreover, they are better equipped to reorganize their supply chains. Already, Micron has discussed shifting its production out of China, moving its factories to other low-wage countries within its global supply chain. For smaller companies with limited funds, uprooting an entire production facility is not so simple. Further, large industry titans can exercise lobbying power, thereby insulating themselves against the tariffs. For example, thanks to Apple’s successful lobbying efforts, the administration exempted the Apple Watch and Apple AirPods from the import tax. Of course, smaller startups lack the political influence to have their imports exempted. Thus, while big tech is protected by transferrable supply chains and lobbying, small businesses remain vulnerable.

Although the tariffs may not send Google and Apple plummeting into collapse, the impact on small businesses cannot be ignored. A recent empirical analysis shows that startups account for nearly all net job growth in the U.S. economy. Indeed, that data reveals that, for the past four decades, startups have been responsible for virtually all net job creation. Moreover, beyond their indispensable contributions to employment, startups are also essential to innovation. Research indicates that larger companies tend to invest in ‘incremental technologies’ (i.e. improvements upon existing technologies); this is because improving an existing device—for example, upgrading the camera on a Samsung Galaxy or equipping an iPhone with a thumbprint scanner—involves less risk and a more predictable return. Meanwhile, smaller startups are more amenable to high-risk, high-reward ventures and therefore direct their R&D towards developing groundbreaking innovations.

For these reasons, startup growth is absolutely crucial to economic progress. Currently, Silicon Valley leads the world in startup growth. Between 2012 and 2017, the Valley produced 57 ‘unicorn’ startups (i.e. startups that grew to be worth $1 billion). Over that same time period, China produced only 46. Simply put, the Bay Area alone cultivates more successful startups than the entire nation of China. The Valley’s explosive startup growth is one of the few areas in which we outpace China by leaps and bounds. If these new tariffs undermine the growth of Valley startups, it will threaten a key pillar of our economic dominance, thus undercutting the very objective Trump seeks to achieve.

Deeply concerned by the tariffs’ impacts on our economy, some have called for legal action against the Trump administration. President Trump has been levying these tariffs pursuant to 19 U.S.C. § 2411. In a recent statement, the Consumer Technology Association (CTA) argued that President Trump and the United States Trade Representative have not conformed to the stringent requirements of the law. Specifically, the CTA alleges that President Trump has failed to meet certain statutory deadlines and, moreover, is acting outside the scope the authority conferred upon him by 19 U.S.C. § 2411.

Silicon Valley Startups: Caught in the Crossfire of the U.S.-China Trade War

Provision Designed to Protect Consumers from Unreasonable Airline Fees Dropped by Congress

The American airline industry celebrated this past Saturday as Congress decided to drop a provision that would have given the Department of Transportation the authority to determine if airline fees were “reasonable and proportional.”  Congress will be voting on the measure this week, before the September 30 deadline.

The “reasonable and proportional” fee provision had been supported by consumer groups, celebrated as a bipartisan effort.  The provision was part of a compromise between chairman of the Commerce, Science and Transportation Committee, Republican Senator John Thune (R-SD) and chairman of the Transportation and Infrastructure Committee, Representative Bill Shuster (R-PA), Democrat leaders, and Republicans in other committees.

The Trump administration’s Department of Transportation told Congress it opposed the measure, going so far as to say that many new consumer protections were deemed to be “unnecessary and wasteful.”  The Department of Transportation’s deputy general counsel, James Owens, said the provision was a “giant step backwards” and presented a risk of wider regulation that would hurt both consumers and air carriers.

Airlines make significant profits from fees that are largely seen as unreasonable by consumers.  In 2017, airlines charged passengers $4.6 billion in fees related to baggage, seat assignment, and flight changes.  Given how much they stood to lose, it is no surprise that airlines heavily lobbied against the provision.  Airlines for America, an airline trade group that represents United, Southwest, and American among others, publicly stated that the provision should be rejected, arguing that it would result in “government-mandated price controls.”

It is also worth noting that the airline industry is heavily involved in politics, having contributed $2.4 million to incumbents in Congress for the November 6 election cycle and over $12.4 million to incumbents in the last ten years.  In 2017, Airlines for America spent $8.59 million on lobbying efforts, likely due to the FAA reauthorization bill as well as the viral video of a United passenger being violently removed from his flight.

Provision Designed to Protect Consumers from Unreasonable Airline Fees Dropped by Congress

Amazon’s Trillion-Dollar Question: Monopoly or Not?

Last week Amazon became the second U.S. company in history to climb to one trillion dollars in market value. The feat underscores Amazon’s continued upward trajectory as well as the sheer magnitude of its business. Nevertheless, this unprecedented growth might bring with it an increased risk of regulatory scrutiny.

The question of whether or not Amazon should fear antitrust claims is not a new one. To date, the e-commerce and cloud computing giant has avoided such claims because its influence on market price and output have not negatively affected consumer welfare. While monopolistic companies use their dominance to inflate price, Amazon’s prices are consistently lower than those of its competitors. Consequently, Amazon does not raise substantial red flags under current antitrust doctrine.

Some scholars are calling for an alternative approach to antitrust regulation that accounts for how technology companies are disrupting traditional economic principles. Just this week, the Federal Trade Commission began a series of public hearings on “Competition and Consumer Protection in the 21st Century.” The hearings are part of the FTC’s active evaluation of its policy agenda and heightened concern for these issues.

In a strategic move to minimize the potential for these hearings to affect its current mode of business, Amazon released a memo asserting that its core mission aligns with that of the FTC. It said, “Our corporate philosophy is firmly rooted in working backwards from what customers want and continuously innovating to provide them better service, more selection, and lower prices.”

While a definitive conclusion may not be reached in the near-term, it is safe to say that as Amazon continues to grow beyond the trillion-dollar mark, it will also continue to garner attention from these regulators.

Amazon’s Trillion-Dollar Question- Monopoly or Not?

Theranos and Startup Culture: Vision or Fraud?

As ravaged startup giant, Theranos, begins dissolution after a series of lawsuits alleging “massive fraud” and a default on its last $65 million loan, spectators all seem to be asking the same question: how did a company fraudulently raise $700 million before finally being unmasked?

Theranos promised to revolutionize the diagnostic-lab industry by delivering one innovation: finger prick blood tests. Health care companies, venture capitalists, and even government officials poured huge investments into the company – on one occasion, $100 million was sent over a single wire transfer. As investors waited for years for Holmes to deliver, she was raking in money for a product that never even existed. Whenever investors would try to peek behind the curtains to find out more about her company’s “secret sauce,” she shrouded herself behind flagrantly vague and often outright untruthful statements.

In many ways, Theranos is the embodiment of Silicon Valley startup culture. The startup entrepreneurial spirit is selling a vision of a fictional product – a product that does not yet exist. This is how Theranos’s huge valuation was birthed and where a critical legal problem lies. With the advent of Sarbanes-Oxley Act in 2002 that promised to safeguard investors against fraud like in the Enron scandal, startup companies have purposefully opted to stay private due to the myriad of regulations imposed by the Act, such as disclosure of financial statements. The problem is, companies like Theranos, Uber, WrkRiot, and more, have often construed this to mean that they are exempt from the rules that public companies play by and thus often cross the delicate line between merely selling a visionary product and committing massive fraud.

In many ways, Theranos was exactly the case the SEC was looking for. The SEC exists in an opportune moment to not only establish a clearer distinction of that oft-straddled line while also sending a strong signal that startup companies will have to play by the rules. While investment and fraud more generally will likely always be a feature in the magical Valley, the SEC must ensure that these fictional visions are kept honest through litigation.

Theranos and Startup Culture – Vision or Fraud?

Nike Leans into Controversy and Wins Big

Nike’s stock has reached a record high a week after unveiling its new ad campaign featuring Colin Kaepernick, the former San Francisco 49ers quarterback best known for protesting racial injustice by kneeling during the National Anthem ceremony preceding NFL games.

Nike unveiled the ad on September 3rd, releasing a portrait of Kaepernick’s face overlaid with, “Believe in something. Even if it means sacrificing everything.”

Kaepernick began kneeling during the Anthem in 2016. Since, many have either vehemently denounced his form of protest or rallied to support his message. President Trump weighed in at an Alabama rally in September 2017, calling Kaepernick a “son of a bitch” and urging the NFL to fire him.

After opting out of his contract with the 49ers in March of 2017 and becoming a free agent, Kaepernick remained conspicuously unsigned despite his widely recognized talent. Kaepernick brought suit against the NFL in November in an ongoing case alleging collusion.

In the first day of trading after the ad’s release, Nike’s stock dipped nearly 3%, leading many to think Nike had bet wrong by going all in with Kaepernick. But other sports brands—including Nike’s rival, Adidas—fell by similar margins, proving an industry-wide dip. Nike’s sales have since skyrocketed, with its stock closing at a record $83.47 on Thursday.

To explain the boon, many have pointed to Nike’s young and urban customers, noting Nike’s long history of “selling rebellion.” Others, even if fundamentally aligned with Kaepernick’s message, have decried Nike’s commodification of protest.

Kaepernick’s protests aimed to ignite conversation about America’s structural racism. The ensuing controversy has only amplified Kaepernick’s message. Nike has taken a page from Kaepernick’s book, leaning into the controversy it is sure to have anticipated, while ultimately achieving increased visibility. Not only is the move smart business, it’s right on brand.

Nike Leans into Controversy and Wins Big

Venture Capitalists Seek “Safe Harbor” for Virtual Currencies

In the wake of further developments by the SEC, many key players in the industry are currently combining efforts to petition federal authorities to see certain virtual currencies in a “different light.” The Venture Capital Working Group is led by Andreessen Horowitz, which includes another significant VC firm, Union Square Ventures, and lawyers from Cooley LLP, McDermott Will & Emery LLP, and Perkins Coie LLP.

The primary purpose of the Group is to deter regulators from categorizing cryptocurrencies, such as Bitcoin and Ether, as securities. On March 28th, the Group met with the U.S. Securities Exchange and proposed a “safe harbor” for some cryptocurrencies.

The proposal suggests that digital tokens should generally be exempt from securities laws if they achieve “full decentralization” or “full functionality.” It adds that full decentralization could occur under several conditions, including when the token creator no longer has control of the network based on its ability to make unilateral changes to the functionality of the tokens. It can also be used, not just as a speculative investment, but for its intended purpose on a computer network.

The group notes that these definitions are only suggestions, but the “proposed safe harbor has been vetted by, and has the support of, many of the key players in the industry.” People briefed on the meeting said that regulators did not immediately embrace the safe harbor proposal.

Many entrepreneurs and law firms have been creating new ways for virtual currency projects to issue their tokens as securities and some exchanges have talked about getting registered as official securities exchanges. It is still unclear what will happen to tokens that did not register as securities but are later categorized as securities.

Furthermore, on April 26, a congressional hearing with testimony from the SECs Division of Corporation Finance took place to develop more reasonable approaches toward token sales and their classifications. The discussion marked a new attitude amongst SEC members and addressed how certain utility tokens could not be securities if purchased with no investment intention.

In the hearing, the SEC division head, William Hinman, stated:

“They can certainly imagine a token where the holder is buying a token for its utility, not as an investment; especially if it’s a decentralized network where it’s used, and not central actors where there would be information asymmetries where they would know more than token investors.”

Hinman — likely referring to the Venture Capital Working Group — replied that one of the steps that the SEC was taking was “meeting with participants that have these ideas of a token that shouldn’t be regulated as a security” and working with them on how they should be structured. Hinman pointed out that the SEC is heavily engaged with academics and other departments to better explore how everything might work, and that in the long run, the U.S. is “pragmatic” in its support of new technology.

Venture Capitalists Seek “Safe Harbor” for Virtual Currencies

U.S. Top Court Rules That Microsoft Email Privacy Dispute is Moot

Microsoft Corp. v. United States is a recent data privacy case concerning the extraterritorial reach of the Electronic Communications Privacy Act’s (of 1986) Stored Communications Act (the “SCA”).

In 2013, the US federal government issued Microsoft a warrant, asking it to turn over the email of a target who was being investigated in a drug-trafficking case. The warrant, issued by a US magistrate judge in the US District Court for the Southern District of New York, was issued under SCA. Pursuant to this warrant, Microsoft was to produce all emails and information associated with the target’s account. Microsoft denied the government’s request, arguing that the SCA precluded an extraterritorial application of a warrant for information stored on servers in Ireland.

After multiple failed attempts to block the government’s order, Microsoft appealed to the Second Circuit. A three-judge panel of the Second Circuit overturned the lower court’s ruling in July 2016, invalidating the government’s warrant. Relying on the US Supreme Court’s 2010 ruling in Morrison v. National Australia Bank, which held that the “longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States,” the Second Circuit found no mention of extraterritorial application in the SCA.

In June 2017, the US Department of Justice appealed to the Supreme Court, arguing that the Second Circuit’s decision allows large, data-laden companies to deny law enforcement officials with requested information stored on servers outside the US and warned that such prohibitions could hamper criminal investigations. The Supreme Court granted certiorari in October 2017 and the case, United States v. Microsoft Corp., was heard on Feb. 27, 2018.

The Supreme Court’s ruling was to be expected by June 2018, but in the time between the oral arguments in February and the expected decision in June, Congress passed the Clarifying Lawful Overseas Use of Data Act (the “Cloud Act”) on March 22, 2018. The Cloud Act allows US judges to issue warrants with an extraterritorial reach to obtain data such as the one at issue here; if the warrant’s scope conflicts with foreign law, then companies have means to object under the Cloud Act.

In response to the Cloud Act, the DOJ requested that the Court vacate the case and remand it to the Second Circuit. On April 17, 2018, the Court issued a per curium that per the passage of the Cloud Act, the case was rendered moot, vacating the case and remanding it.

While it may seem strange, Microsoft actually backed the Cloud Act. In its support for the Cloud Act, Microsoft stated that legislators, rather than the courts, are best situated to resolve such extraterritorial disputes, in that comprehensive legislation as opposed to “repeated court visits and legal battles” is proper. Microsoft’s hope is that legislation such as the Cloud Act will motivate “governments to move forward quickly to put new international agreements in place…a set of agreements that create an accepted model and establish clear international legal rules that satisfy law enforcement and privacy advocates alike.”

U.S. Top Court Rules That Microsoft Email Privacy Dispute is Moot

Starbucks Response to Arrest of Two Men

A Philadelphia Starbucks manager called the police after having a disagreement with two patrons waiting for a friend. The episode unfolded after one of the men was refused access to the restroom since neither of the pair made a purchase. After the two men were asked to leave and refused to do so, they were arrested on charges of disturbance and trespassing. The men were freed later that night and the charges against them were dropped.

The two men, Rashon Nelson and Donte Robinson, are entrepreneurs that were at the Starbucks that afternoon to discuss a project which they had apparently been working on for months. The men claimed that the project was in its final stages and could potentially “change [their] lives.”

The arrest of the two men, both black, was captured on video and generated millions of views within days. The video reveals the two men being placed in handcuffs after being approached by police. Also appearing in the video is the friend they were waiting for, who is white, questioning the police’s intentions for the arrest, asking, “Is it because they’re black?”

Shortly after the video went viral, the hashtag “#Boycottstarbucks” started trending on Twitter. Shortly after that, Howard Shultz, Starbuck’s Executive Chairman, said that he felt “ashamed,” adding that he “had no doubt in [his] mind” that the police were called because the men involved were black. Starbuck’s new CEO, Kevin Johnson, also called the ordeal “reprehensible” and arranged to fly to Philadelphia to personally apologize to the two men.

In the aftermath of the incident, Starbucks announced that it will be closing more than 8,000 of its locations in order to train some 175,000 of its employees on racial bias. The closure will occur on May 29th and according to Schultz “will cost millions of dollars,” which he nonetheless views as “an investment in our people and community.”

Notwithstanding the appropriateness of Starbucks’s swift response, which many figures in the PR world applauded, one has to question, was the hideous event, at its core, really a Starbucks problem? Whether or not Starbucks’s response was sincere or merely a product of excellent crisis management, the company undoubtedly made the right call by going above and beyond just issuing a statement. With the plethora of instances of people of color being wrongfully arrested, many of which are captured on video, is it really that shocking that something like this could happen at a Starbucks? Black people shouldn’t be arrested for being black. The Starbucks arrests should serve as a wakeup call that a lot more than training Starbucks employees needs to be done in order to curtail these sadly not so unfamiliar occurrences.

Starbucks Response to Arrest of Two Men