Road Warrior

Lyft stalls NYC launch amid legal squabbles

Lyft CEO on regulatory hurdles facing ride-sharing apps

John Zimmer steps onto a New York City sidewalk and beelines straight for the fenced-in corner parking lot. "This is what we're trying change," he says, motioning to the rows of cars stacked atop hydraulic lifts. "Eighty percent of [car] seats are empty at all times, and it leads to an incredible loss of productivity due to traffic—$80 billion here in the U.S."

Zimmer thinks Lyft, the ride-sharing start-up he co-founded, can address that lofty goal. Like its larger competitor Uber, Lyft enables customers to "e-hail" a ride using an app and provides an on-demand, cash-free alternative to traditional taxis and black car services. Since kicking off two years ago, the San Francisco-based company has expanded to 67 markets, and this spring it raised $250 million in funding from likes of Andreessen Horowitz and Alibaba.

But for all the attention it's drummed up from investors, government regulators in New York are far from impressed. Friday night was supposed to kick off Lyft's debut in the Big Apple, one of the world's largest taxi markets. The company planned to offer two free weeks of rides to attract customers in Brooklyn and Queens. As of Thursday evening, it had recruited 500 drivers—10 times the amount a launch typically attracts—and 75,000 New Yorkers had already tried to download the app.

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Now it's not happening. Lyft's launch is on hold indefinitely, and until Monday at the very least.

"We agreed in New York State Supreme Court to put off the launch of Lyft's peer-to-peer model in New York City, and we will not proceed with this model unless it complies with New York City Taxi and Limousine regulations," the company now says. "We will meet with the TLC beginning Monday to work on a new version of Lyft that is fully-licensed by the TLC, and we will launch immediately upon the TLC's approval."

The brakes come on the heels of New York state's request for a temporary restraining order, filed in State Supreme Court Friday. According to the New York state attorney general's office, a judge granted an injunction.

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"We pursued this action only after repeatedly offering to work with Lyft in order to ensure that its business practices complied with the law," said state Attorney General Eric Schneiderman and Superintendent of Financial Services Benjamin Lawsky, in a joint statement. "Instead of collaborating with the state to help square innovation with statute and protect the public, as other technology companies have done as recently as this week, Lyft decided to move ahead and simply ignore state and local laws. Lyft's arguments are a disingenuous attempt to disguise old-fashioned law-breaking that jeopardizes public safety."

A Lyft customer gets into a car on January 21, 2014 in San Francisco.
Getty Images

At this point, a delay is not necessarily surprising. Both the city and state have been publicly opposing the company's ride-share model, which enlists regular peer-to-peer drivers providing their own cars, since services were announced earlier this week. While the company claims to vet its fleet, neither drivers nor vehicles have been screened or licensed by the city; nor, says the state, do they have acceptable insurance coverage.

On Tuesday, the state Department of Financial Services issued a "cease and desist" letter, citing multiple violations tied to state insurance laws, and demanding that Lyft, which already operates in Rochester and Buffalo, halt operations until "its programs comply with New York law."

On Wednesday, the city's Taxi and Limousine Commission called it "an unauthorized service" that has not screened its drivers for the proper safety requirements nor acquired a license to dispatch cars to pick up passengers. The TLC has promised to fine Lyft drivers up to $2,000 and in some cases, confiscate vehicles until rules are followed.

"They can call it ride-share, peer-to-peer, but it's nothing more than an illegal cab the city fought against for decades and for good reason: the safety of passengers," Meera Joshi, chair and CEO of the city's Taxi and Limousine Commission, told CNBC on Friday.

Initially, Lyft was not to be deterred. The company didn't officially call off its launch until less than three hours before the app was set to go live and drivers were ready to start.

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Lyft has argued that the TLC's rules don't apply, as the company doesn't technically employ its drivers and rides will technically be free.

"For our launch, we are delaying the business aspect of what we're doing so we can continue productive conversations with the city," Zimmer told CNBC Thursday. "After that we have a donation model so that at the end of the ride there's a suggested amount that you see and it's up to you to leave whatever fee is right for that trip." In other words, Lyft has been planning to display market-rate fares to riders but not enforce them to pay those sums, skirting the city's for-hire rules. It's a payment model the company uses in other markets as well.

It also issued its own safety commitment, outlining policies for driver drug tests and criminal background checks, acceptable vehicles and insurance coverage. When the conflict with the TLC first erupted, it promised drivers that it would cover costs associated with a regulatory standoff and even though the startup has become synonymous with car grill-adorned fuzzy pink mustaches, it's been offering a smaller, more discreet version to be placed inside cars as an alternative.

But Friday evening's developments throw all of that into question. If history is any indicator, Lyft may have to abandon its ridesharing platform to operate in New York. Uber, which recently slashed its local prices 20 percent, has been operating in New York since 2012. Initially, it too faced pushback from local officials as it sought to implement its own model. Since then, Uber, valued at $17 billion in a recent round of fundraising, has worked with the TLC to ensure that all of its transportation options fall under city requirements. It doesn't use its peer-to-peer model in New York and employs only professionally licensed drivers.

In fact, the last two start-ups to attempt ridesharing here both had to abandon it when regulatory hurdles became too high. RelayRides and SideCar Technologies each suspended local services in 2013. SideCar did so after a court ruling indicated that even free rides would violate city laws relating to taxis and limousines. (Sound familiar?)

In the meantime, Lyft still planned to celebrate its "upcoming" launch on Friday evening as scheduled. Just don't expect to see those pink mustaches on city streets anytime soon.

—By CNBC's Morgan Brennan

Follow Road Warrior on Twitter at @CNBCtravel.