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States v. Startups: When Laws and Innovation Clash, Who's to Blame?

By William Peacock, Esq. on March 04, 2013 | Last updated on March 21, 2019

Square is a pretty nifty product. It’s a simple quarter-sized device that plugs into your iPhone or other smartphone and allows you to swipe a credit card for payment. The small business, such as a food truck, can now accept credit cards with little to no effort, and Square gets a small percentage of the transaction.

Uber is another nifty product. It’s a smartphone app that uses your GPS to hail the nearest cab or car service. In New York City, getting a cab is as simple as standing on the street corner and waving. In most other major metropolitan areas, it can be much more difficult and involve much more waiting. Uber also uses the GPS to set rates, auto-pay the driver, and auto-tip the driver.

What do the two have in common? Headaches over state laws.

According to TechCrunch, Square ran afoul of Illinois' "Transmitters of Money Act," which states:

"No person may engage in this State in the business of selling or issuing payment instruments, transmitting money, or exchanging, for compensation, payment instruments or money of the United States government or a foreign government to or from money of another government without first obtaining a license under this Act."

It seems pretty clear that the law applies to Square -- they hand out card swipers (payment instruments), transmit money between businesses and consumers, receive compensation, etc. Yet, they apparently don't yet have a license to operate in the state.

Also per TechCrunch, Uber is butting heads with local laws. This is unsurprising, considering they've argued with taxi regulation agencies and unions in nearly every state they've entered. This time it was the District of Columbia, which had issues with the auto-tipping and Uber's prior use of its own black Towncars instead of yellow cabs (it has since added the cab feature).

You could blame the states for the constant clashes. Outdated and inefficient regulations are killing innovation.

You might also want to address the issue of legal counsel, in-house or outside. When you are entering into a new marketplace, shouldn't it be a matter of due diligence to research the regulations of each new market before jumping in? While it is certainly a pain in the keister to pore through voluminous tomes of statutes and regulations, in all fifty states, plus D.C., Canadian markets, and local county and city governments, one old saying is "proper planning prevents poor performance."

Then again, another old saying is "forgiveness is easier than permission." Pick your poison, folks.

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