

Taxis are reflected in a window in Times Square in New York in December 2012. Reuters

In a lawsuit filed in Manhattan, a coalition of for-hire companies and trade associations charged that city officials improperly drew up rules last year that let customers use apps to hail cabs virtually. The suit argues that the regulations violate a law that bans yellow-cab drivers from prearranging rides with passengers.

The rules allowing so-called e-hails were set to take effect Friday, despite the legal challenge. Still, the service isn't available in New York because app developers have yet to make their technology jibe with existing meters.

Manhattan Supreme Court Judge Arthur Engoron said he would hear arguments in the case on Feb. 28. A decision could be handed down as soon as the next day, he said.

The lawsuit is yet another hurdle for e-hails, one of the chief initiatives for reimagining the city's taxi fleet backed by Mayor Michael Bloomberg and David Yassky, the chairman of the Taxi and Limousine Commission.

In a statement, Mr. Yassky derided the lawsuit, calling it "wrong."

"This suit seeks to keep the taxi industry and New Yorkers in the dark ages," he said. "Next thing, they'll be suing restaurants to go back to wood-burning stoves. Our rules allow for e-hail now, and the only question is, do we embrace these new services and ensure that consumer protections are in place, or listen to obstructionists and watch e-hail apps proliferate without any regulatory input."

Even before the suit, changing the tightly regulated New York taxi market was proving to be a significant challenge.

Mr. Yassky led a fight in December to allow e-hailing apps, which are increasingly cropping up in global capitals and smaller cities. Though the products are different, the programs generally allow a customer to hit a button on a smartphone and send a signal to any nearby cabdrivers who are connected to the same network—the digital equivalent of raising an arm to flag down a cab.

Mr. Yassky ultimately won approval from the nine-member commission for a pilot program that would allow the apps as soon as Friday. In the lawsuit, livery companies charged that the yearlong pilot program was used as a guise for a rule change after Mr. Yassky failed to assemble the needed votes. Commission members are set to decide after the end of the program whether to adopt a permanent change.

The companies seeking to market taxi apps in New York, including Hailo Network USA Inc., Uber Technologies Inc. and Flywheel Software Inc., say their products will soon be commonplace. They are popular in cities including London, Chicago, Tel Aviv and Moscow.

But the apps challenge a central tenet of the New York taxi market: Yellow cabs can accept customers who flag them down on the street, but cannot "prearrange" a fare by phone or radio. Livery cars, generally speaking, may do the opposite, responding to phone requests but not accepting street hails.

"I think that the law on this is well settled over the past 30 years," said Ira Goldstein, a spokesman for the Black Car Assistance Corporation, a plaintiff in the suit. "The yellows have the rights of street hails and that prearrangement is the territory of the for-hire vehicle industry."

Meanwhile, some app makers have said that the service has been slow to get started because the TLC's rules are cumbersome, especially a section intended to mollify concerns from vendors who provide the meter and credit-card systems to the 13,000-strong fleet.

The TLC pilot program requires that any app that allows customers to pay with their phones—as most e-hailing services do—process all its payments through the existing terminals, which are provided by two vendors, Creative Mobile Technologies LLC, and VeriFone Inc. That has required the app companies to negotiate licensing agreements, and to begin the technical work of making their programs interact with the payment systems.

Two companies—Flywheel, formerly known as Cabulous, and Hailo—have received preliminary approval and are working to adapt their systems. On Thursday, Hailo said it would file a request to the TLC asking that the company be allowed to bypass the meters and process its payments independently.

Write to Ted Mann at