Lower California Court Rules Prop 22 Unconstitutional

On Aug. 20, a California state Superior Court judge ruled in favor of a petition filed by a labor union and some drivers demanding that Proposition 22 be ruled unconstitutional. This decision will not affect the operations of the network firms we cover, including Uber, Lyft, and DoorDash, as Proposition 22, which defines these firms' workers as contractors, remains applicable while the ruling is appealed. While the outcome of the appeal is uncertain, we think the strong support for the ballot measure in the November 2020 election, along with the California Supreme Court’s refusal to hear the case earlier this year, could sway the outcome in favor of Proposition 22. We also expect the appeals process in California to be a lengthy one, which could favor the firms’ efforts to work with other states’ lawmakers or create similar but amended or customized ballot initiatives. We are maintaining our $69, $63, and $142 fair value estimates for Uber, Lyft, and DoorDash, respectively. We believe legal risks are more than priced into Uber and Lyft shares, both of which we view as attractive. DoorDash remains overvalued, in our opinion.

Judge Frank Roesch ruled that Proposition 22 will be very difficult for legislators to amend (requiring a seven-eighths majority), which will make it problematic for drivers to unionize. Roesch also believes Proposition 22 does not have one “common purpose” and was not about a “single subject,” which the California constitution requires. We are not certain how the higher courts will view these arguments, but we’d note that while amending may be difficult, it is not impossible, and the ballot measure was supported by 59% of California voters.

The suit was brought by California’s Service Employees International Union. It was the organization’s second effort, as its initial lawsuit filed in January with California’s Supreme Court was thrown out. The state’s Supreme Court refused to hear the case but did allow SEIU to file it in lower courts.