The Conflict Between Airbnb and New York Is Only Beginning

(Bloomberg) -- Airbnb Inc. is in talks with New York officials about potentially settling a lawsuit the company filed last month against the state and city governments. The company is challenging a new law that punishes people renting their homes. But regardless of the outcome of those talks, many rentals on Airbnb will remain illegal thanks to an older law, and officials must still figure out what to do about it, posing fundamental problems for both the startup and the government.

A federal judge postponed a meeting scheduled for Monday to discuss Airbnb's suit, saying the two sides are talking about a potential resolution. They are set to update the court by the end of the week. The talks are intended to resolve questions about how the law would be enforced, according to people with knowledge of the proceedings. A settlement isn't likely to be reached by this week's deadline, said the people, who asked not to be identified because the talks are private. 

The suit has its origin in a law signed by Governor Andrew Cuomo on Oct. 21, which creates new fines for people who post advertisements on sites like Airbnb. While many kinds of short-term apartment rentals have been outlawed since New York passed a separate bill in 2010, the government's attempts to enforce the law have been largely unsuccessful.

Airbnb has acknowledged that some activity on its site breaks these laws, but it objected to the new framework for enforcing them. Following a path it took in San Francisco and elsewhere in California, Airbnb sued on the grounds that the law violated the First Amendment because it punished speech related to illegal activity, rather than the activity itself. Airbnb also claimed the government was prohibited from punishing the company itself, citing a federal law called the Communications Decency Act, which says websites can't be punished for content posted by their users.

Lawmakers in Albany dispute the First Amendment arguments. But they also deliberately tried to steer clear of this potential pitfall. Linda Rosenthal, who sponsored the bill in the assembly, said the state never intended to punish Airbnb. But the actual enforcement falls to the city, and in a preliminary hearing, Melanie Sadok, a lawyer for the city, said the local government thought the law allowed it to pursue Airbnb directly.

For Airbnb, legal ambiguity in a market as important as New York could complicate any prospects for an initial public offering. Jeff Jordan, whose venture capital firm Andreessen Horowitz is a backer, suggested as much a couple months ago. Investors recently valued the business at $30 billion.

If anything, the political fight has gained steam since the law was passed. There have been pro- and anti-Airbnb rallies in New York City in the last week. The San Francisco company has been campaigning against state legislators who supported the new law, while critics have been looking for any way to undermine the business. Austin Shafran, a spokesman for anti-Airbnb group Share Better, has called the company a bully and compared it with Donald Trump, noting its affiliation with Peter Thiel, the billionaire Trump supporter whose VC firm Founders Fund is an investor in Airbnb.

Tom Cayler, a tenant activist who lives in Manhattan, said Airbnb is misreading the political atmosphere. There has been a long-running problem with illegal short-term rentals in New York, but it only became salient when a wealthy Silicon Valley startup got involved, he said. The company is now drawing attention to a lawsuit he thinks it will lose. “They're doing the job we never could do—saying Airbnb is illegal in New York,” Cayler said. “We've been trying to make this clear for years.”

Airbnb would like officials to just trust the company to do the right thing. “If Airbnb is alerted to shared spaces or private rooms that appear to be operated by unwelcome commercial operators or that do not reflect the community vision, it generally will remove such listings,” the company wrote in its suit. Airbnb said on Tuesday that it will make it technically impossible for people to post multiple listings in the city.

This wouldn't eliminate all unlawful listings, although it would make it harder for large-scale commercial property owners to run sprawling illegal hotel operations through Airbnb's platforms. Many doubt it'll work. The company implemented a similar system in San Francisco, and the impact was insignificant enough that the city government went back and changed its law to hold Airbnb responsible for illegal listings on its platform.

Rosenthal, the New York lawmaker, said she's tired of Airbnb's maneuvering. She said Airbnb has relied on illegal listings to fuel its business in New York for years. State law prohibits renting an apartment in a multi-unit building for less than 30 days if the permanent resident isn't present.

The mayor's Office of Special Enforcement is tasked with enforcement, but it's had a rough go of things. After the agency receives a complaint, it must travel to the apartment in question and identify a tourist staying there. Last summer, in an acknowledgement that it was having difficulty getting results, the city nearly doubled its budget to $2.8 million, added 17 additional staff members and attempted to beef up its data chops to identify and pursue multiple offenders.

Because the site obscures the exact location of listings and doesn't display identifying information about hosts, cities may need Airbnb's assistance to get anything done. Given the increasingly poisonous relationship between the two sides, that seems like a tall order.

To contact the author of this story: Joshua Brustein in New York at jbrustein@bloomberg.net.

To contact the editor responsible for this story: Mark Milian at mmilian@bloomberg.net, Alistair Barr