Key Compliance Issues for Enterprises in the “Sharing Economy”

Frank Qian & Zhuoya Wang

The authors received recent interviews from two media outlets regarding bike-sharing and jewel sharing (please refer to “Why is it so Hard to Get Your Deposit Back from a Bike-sharing Company? Where Did it Go? Has it Become a Financing Firm?” at（http://t.cn/RHRKi6T）, and “The Sharing Economy”: at（http://t.cn/R9aYCQH）

I.The Current Status of Sharing Economy

Shared bikes, shared cars, shared jewels, shared umbrellas and shared sleeping compartments….all of them form part of the “sharing economy”, one of the keywords which has attracted the most attention in 2017 in the heady days of “InternetPlus”. Entrepreneurs compete to name their projects with something “shared” to get a slice of the pie of the exploding sharing economy. Under the fanciful illusion, however, entrepreneurs and investors are facing a rather bleak reality: sleeping compartments that have been sealed up, umbrellas that were never returned and users of shared bikes finding it difficult to get their deposits back.

In the face of the practical problems that have begun to surface in the thriving sharing economy, central and local governments have been soliciting comments from the public and introducing departmental rules or regulations to guide the sharing industry into healthy development. For example, on August 1st, 2017 the Ministry of Communications and nine other ministries jointly issued the Guiding Opinions on Incentivizing and Regulating the Development of Internet Bike Rentals. A week later, on August 8th, the Ministry of Communications and the Ministry of Housing and Urban/Rural Development jointly issued the Guiding Opinions on the Promotion of the Healthy Development of Microbuses and Minibuses. Before these moves, road transport management departments in a number of cities including Beijing, Shanghai, Guangzhou and Shenzhen successively issued regulations or drafts for commentary on bike-sharing. Hence, corporate compliance under a “sharing” business model is no longer empty talk -- regulations are gradually being put into place.

In our opinion, sufficient and effective compliance review is of vital importance to effective promotion of the sharing business model. Every business should carefully consider the following questions before joining the surging sharing economy: i) What is the core legal issue in the sharing business model? ii) What kind of problems may emerge during its operation? iii) How do I prevent these problems? The authors will state their views on these questions while citing some of the latest regulations.

II.Characteristics of the Sharing Business Model to A Legal Eye

The current market is saturated with various “sharing” startup projects. By its nature, “sharing” is neither a conventional economic concept nor a legal one[1]; it is recreation of certain pre-existing concepts of specific traditional commercial activities.

Consider bike-sharing as an example. Bicycle companies are actually offering rental services to consumers by way of sharing: the two parties establish a lease relationship to “share” the bike, in which the consumer pays a certain amount of money as a deposit and prepaid expenses to acquire the right to use the bike within a certain period of time. By contrast, another emerging shared commodity, jewelry, adopts the model of “exchanging goods for rights”: the consumer needs only to share a piece of unused jewelry, instead of paying the deposit and rental, to acquire the right to use another piece of jewelry of equal value. But umbrella sharing is neither lease nor exchange: users are tacitly permitted or even encouraged to take the umbrellas home after paying a certain amount as a deposit and use fee to “share with family and friends”. It is apparent that umbrella sharing is not as near to the “sharing” economy as other within the trade: it is actually the unmanned sale of umbrellas under the guise of “sharing”.

In conclusion, the various sharing business models exhibit different legal characters. Consequently, enterprises should formulate targeted rules to manage the legal risks behind each of them. There are several general issues concerning sharing economy compliance that need attention, however.

Ⅲ. Primary Problems and Solutions in the Sharing Business Model:

1. Asset Management:

1)   “Although it only takes a second to top up your account, it takes forever to get your money back.”

With various apps and mobile payment software widely applied, most businesses in the sharing industry ask users to pay a deposit and a certain prepaid amount before delivering their services. Users, however, already find it a lot easier to pre-pay than to get their money back, and this problem has aroused wide concern.

Bike-sharing business, as the pioneer of all sharing businesses, enjoys the broadest customer base. Consequently, it has got to the point where it encountered the most prominent problems in asset management. Some bike-sharing companies claim in their service terms that “the balance is not transferable”; others, while claiming that the balance is refundable, cannot provide a practical way to do so and do not offer a smooth refund process. One bike-sharing company, for example, might ask consumers to call the service department to request a refund, while more often than not the service telephone goes unanswered. It is reported that the number of complaints Shanghai Consumers Council received during the first half of this year against the service departments of bike-sharing businesses has far exceeded that of any previous year. By early March 2017, 463 complaints had been registered, much more than the total number of complaints filed in all of 2016.[2]

In our opinion, from a legal perspective, the relationship between consumers and bike-sharing businesses is one of creditor and debtor. Since consumers are pre-paying by topping up their account, the deposit and the unused balance should be refunded immediately at the customer’s request. Any business which claims that such money cannot be returned to consumers is arguably infringing the legal rights and interests of its customers. Second, even if these businesses support a refund, the difficulty of getting it can still function as a compliance risk for business development. On August 1st, 2017, the Ministry of Communications and nine other ministries jointly issued the Guiding Opinions on Incentivizing and Regulating the Development of Internet Bike Rentals (the “Guiding Opinions”). The Guiding Opinions encourage businesses to offer deposit-free rental services, and it requires them to accelerate progress toward the goal of returning the deposit as soon as the bike is returned. The forthcoming Group Standards for bike-sharing in Shanghai will require bike-sharing companies to: i) refund deposits within 7 days; ii) make telephone lines available 24/7 for complaints; and (iii) process complaints within 48 hours. In this way, sharing businesses (not necessarily bike-sharing businesses only) should pivot away from their total reliance on deposits to secure their operation, but should instead attempt to establish a user credit rating system based on market and user demand. These operators could also try to construct a multi-enterprise trans-regional credit reward and penalty system, thereby replacing the deposit model with a credit management model.

2)Supervision on Cash Flow

Another concern for asset management in the sharing business model is accounting for the money obtained by sharing businesses from user registration deposits and prepayments. Let’s look at bike-sharing businesses again. These companies have secured huge deposits and prepayments from their massive user base. Statistics show that by March 2017, Mobike had over 3 billion RMB on deposit and ofo had over 2.5 billion RMB[3]. These figures include only deposits paid by first-time users while excluding user balances. How do those businesses manage such large amounts of money? What have they done with it? Is there any latent capital security risk?

Unlike in traditional rental services, users of bike-sharing don’t automatically get back their deposit as soon as they finish using the bike. The deposit is also paid in the unit of individual users instead of individual bikes, which means that one bike may pool multiple deposits. Since users have no bargaining power over the amount of the deposit, this “one-to-multiple” compulsory transaction model is in fact a disguise of the financing process. No bike-sharing business, however, will be willing to disclose their disposal of the huge capital pool coming from user deposits and prepayments[4]. This money is probably used to support the working capital of their business, to repair and update their products or to invest in or conduct other operational activities. Mobike, for example, has joined hands with Wagas, a world-famous catering brand, to open Mobike-themed restaurants in Beijing and Shanghai. Consequently, if the investment fails, consumers may never be able to see their deposit or prepayment again – because, essentially, the risk of failure is shifted to consumers. In case of the failure to refund deposits, a bike-sharing company will suffer a loss of goodwill, and it might also face customer loss, administrative penalties and class action lawsuits. To balance this situation, the Guiding Opinions require companies to strictly segregate their own funds from deposits and prepayments obtained from users. Companies are also required to open special accounts in the jurisdiction of business registration for users’ deposits and prepayments, and they must earmark a fund for this specific purpose only. Furthermore, a bike-sharing company that intends to use deposits and prepayments for financial investment will be subject to regulatory measures imposed by administrative organs and financial supervision institutions. According to the newly released Guiding Opinions on Beijing’s Encouragement of the Regulated Development of Bike-sharing (Trial), for example, companies must open a special fund account in Beijing and must accept regulation by the Business Management Department of the People’s Bank of China for compliance with the rule which requires earmarking funds for a specified purpose only. If a company intends to cease operations, it is required to issue a public announcement, return all deposits to renters and recover all vehicles on the market.

2. Risks in Information Management

Many rental platforms named with  “sharing”, including bike-sharing and car-sharing, have integrated “real name authentication + registration of mobile number + payment of deposit” as an essential part of their registration process. The process collects user information, such as mobile number and identification; car-sharing platforms require the submission of driver’s license information. Mobike has information relating to the location and has access to the status of each bicycle whenever its services are used. Bike-sharing apps record bike-unlocking information as well as user location via GPS modules, mobile communications modules and other technical devices attached to each bike. Acquired information includes frequency of use, route, usage amount during various time periods, and even the speed and habits of their riders. Bike-sharing companies can feel assured that the user data they collected through technical means as GPS and mobile apps will facilitate the refined operation of bike-sharing. At the same time, however, users run the risk of exposure and dissemination of their personal information.[5]The Terms of Rental Service of a bike-sharing app that enjoys a considerable market share tells its users, for example: “The company is committed to the protection of user privacy. Nevertheless, if a third party with whom the company cooperates agrees to assume equal responsibility for the protection of user privacy, the company shall have the right to provide registration information on its users to such third party, and to analyze user databases and to employ such database for commercial use.”[6]Users are required to accept all of the foregoing terms as a pre-condition for using the service. Digital lease contracts for bike-sharing are usually composed of standard clauses provided by bike-sharing companies and lease terms in them are short. Compared with average lease contracts, however, bike-sharing is characterized by the fact that it is subject not only to contract law but also consumer protection law. In case of conflict between these two sources of law, the latter shall prevail.[7] Consequently, even if users have chosen to accept the privacy term in an adhesion contract, they can still resort to consumer protection law on certain standard clauses to protect their legal rights and interests.

On the other hand, the bike-sharing apps may also have technical loopholes running the risk of leakage of personal data. In a recent mid-year competition of GeekPwn 2017, an international “security geek” contest, a female hacker called TYY (pseudonym) demonstrated the process of breaking through a high-risk loophole in less than 1 minute.

In the wake of the enactment of the Cybersecurity Law (which further strengthened rules on personal data protection), as of June 1st of 2017, companies offering sharing services should be more prudent in their collection and use of personal information to prevent leakage, destruction or loss. To a certain extent they are now facing a compulsory mechanism that propels them to undertake greater responsibility of information management. If these network operators find it impossible to eliminate leakage, destruction or loss due to security loopholes or any other reason, they will have to inform potentially vulnerable users to increase their vigilance against fraudulent acts[8].

3.Safety Responsibility Issues:

1)Safety Responsibility Issues due to Product Quality:

It is inevitable that there will emerge quality issues in the products offered by sharing platforms with the pass of time. In the case of shared bikes, the main causes for quality defects that subject consumers to personal injury include inherent defects in the production/design of bicycles, wear and tear from repeated use, and third-party defects such as vandalism.[9]

At the beginning of this year, a Mr. Feng in Beijing fell from a shared bike, was injured due to brake failure and paid over 200,000 yuan for medical treatment. He sued ofo in the Beijing Chaoyang District People’s Court, alleging it offered products with quality issues and failed to fulfill its duty of ensuring users’ personal safety. This is the first lawsuit of its kind ever.[10]

Is the victim of injuries caused by defective bicycles entitled to compensation from bike-sharing companies? First of all, from the perspective of consumer interest protection, consumers are entitled to demand that operators offer goods or services that ensure personal and property safety.[11]Consequently, if a consumer suffers from personal injury or property damage due to inherent defects in a shared bike, he/she can demand that the bike-sharing operator bear the liability for damages. Second, from the perspective of the legal structure of the sharing business model, bike-sharing companies are lessors. In addition to providing qualified products, they should also fulfill their obligation of prudent management and maintenance. They should also inform and adequately alert users of matters requiring attention to ensure a safe ride.

Even with respect to quality issues of shared bikes that are not attributable to the platforms themselves (such as third-party vandalism), the victim of these issues may still claim compensation from bike-sharing platforms under contract or tort law. The platform, after compensating the user, may proceed to recover damages from the manufacturer or a third party who damaged the bike. At present, many bike-sharing platforms have secured personal accident insurance for their users, but they rarely publicize or disclose information such as detailed information about insurance category and coverage. There is also a dispute on whether the platforms should assume liability for damages yet unpaid after the insurance company has settled the claims. In the foregoing case, since ofo had secured supplemental accidental injury health insurance and personal accidental injury insurance for its users, Mr. Feng received a payment of less than 10,000 RMB from the insurance company as compensation. Mr. Feng, however, continued to press his claim against ofo, since the payment had been not enough to cover his medical expenses. We believe that when it is difficult for a platform to perform prompt and effective maintenance on all of their bikes, it is a clever move to secure insurance for their users to improve the protection of user safety and diffuse the risk of liability. But they can hardly expect to exempt themselves by purchasing the insurance: platforms are obliged to assume liability for any damages left uncovered by the insurance company.[12]

2) Safety Responsibility Issues not Attributable to Product Quality

Apart from inherent quality defects, products offered by sharing platforms may also have safety issues not attributable to the products themselves. In March, 2017, a Shanghai boy of under 12 was fatally injured while riding a shared bike. His parents sued the bike company along with other entities and won 8.78 million RMB in compensation. This is the first  child injury in China because of a shared bike, and this case once again sounded the alarm on safety liability for bike-sharing platforms. Although many apps have specifically warned that their services are off limits to children under 12, as a practical matter it is still difficult to prevent them from doing so. One possible way would be for the platform to perform R&D to allow the apps to integrate real-name authentication, which would allow them to identify the exact names and real ages of their users. Another potential solution would be to secure personal accident injury insurance for users and inform the users of the same in the registration agreement.

At present, the tide of the “sharing” economy has gradually reached a cooling-off period, as first-tier cities have suspended launching new shared bikes onto the street and a number of bike-sharing businesses have bankrupted without returning deposits to users. In the transition from “having what others don’t have” to “having better than what others have”, sharing platform should pay more attention to legal compliance during the course of their development. This will upgrade these extensively managed businesses to a more challenging stage of refined operations.

[1]Definition of “sharing economy”: The non-gratuitous transfer to others by institutions or individuals of the right to use the unused resources they own so that the transferor obtains a return and the sharer creates value from their unused resources. Please refer to MBA Library: http://wiki.mbalib.com/wiki/%E5%85%B1%E4%BA%AB%E7%BB%8F%E6%B5%8E

[2]http://static.zhoudaosh.com/133DCF29F11AE8166A895A2C8712EFBFF9C9D1AE609E9F8B5ECC45535AAD7BA4

[3]From a Sharing Economy to a Credit Economy: Reshuffling in the Bike-Sharing Industry Gaining Speed: http://www.sohu.com/a/145106551_492585

[4]Ibid. Footnote 3.

[5]Big Data for Bike Sharing: How Can Privacy be Protected in Refined Operations? https://mp.weixin.qq.com/s?src=3&timestamp=1505697025&ver=1&signature=ua3QLd6mppeQXK6wH5-FXBJk5Ruse0wpavDTEJygXMAhscOO8jzrJu1OIvrrf0d5WLaeMjHIP6qN10c-a8-LXB5XQkNZnOj6Z7Wst7yyTGPJ*XErpp8eYw7kO7DZkhMxegQpAdbyEcbNi4hnQSachKr8d7hHHf4oZsDU9yLW4N4=

[6]Article 5 of the Terms of Rental Service of Mobike: https://wenku.baidu.com/view/22ccd9184a35eefdc8d376eeaeaad1f34693110b.html

[7]Referenced from Professor Cheng Xiao from Law School of Tsinghua University and Professor Liu Junhai from Law School of China People’s University in It Matters to All of Us: Who is Responsibile for Accidents Involving Shared Bikes?https://mp.weixin.qq.com/s?src=3&timestamp=1505703439&ver=1&signature=ErXRanTddsrzosRqOsi*UTaM7xo56r6rKI9q7OnCIN5Nz4mpeYr76Fnub1CqP0bO6V47g9mTNAZFMcrCdXLc477mzUB28AKCzW5h*N-oKhh2iRc5di05nwZJarUlxWfgRyx9CTyKLDV*XNqrpnNxFbyv2eb1Sp7GQuIglIvo9F4=

[8]Article 42 of the Cybersecurity Law of the People’s Republic of China:Network operators shall adopt technical and other necessary measures to ensure the security of the personal information they have collected and to prevent such information from being divulged, damaged or lost. If personal information has been or may be divulged, damaged or lost, remedial measures must be undertaken immediately, and the network operator must promptly inform users as required under these provisions and report the same to the competent governmental authorities.

[9]It Matters to All of Us: Who is Responsibile for Accidents Involving Shared Bikes?https://mp.weixin.qq.com/s?src=3&timestamp=1505703439&ver=1&signature=ErXRanTddsrzosRqOsi*UTaM7xo56r6rKI9q7OnCIN5Nz4mpeYr76Fnub1CqP0bO6V47g9mTNAZFMcrCdXLc477mzUB28AKCzW5h*N-oKhh2iRc5di05nwZJarUlxWfgRyx9CTyKLDV*XNqrpnNxFbyv2eb1Sp7GQuIglIvo9F4=

[10]Sohu News: ofo Encounters Lawsuit that Marks the First of its Kind in the Bike-Sharing Industry: http://www.sohu.com/a/129365285_115207

[11] Article 7 of the Consumer Interest Protection Law of the People’s Republic of China

[12]Ibid. Footnote 8.