Printer Friendly

State "competitor's veto" laws and the right to earn a living: some paths to federal reform.

     A. Economic Liberty and the Constitution
     B. The Rational Basis Test
     C. Constitutional Limits on Licensing Laws
     A. The Theory of CPCN Laws
     B. The Supreme Court and the Competitor's
     A. The Bruner Case
     B. The Struggle Continues
     A. Reduction of CPCN Barriers in the 1980s
     B. Possible Federal Reforms
        1. Civil Rights Legislation
        2. Spending Clause
     C. Antitrust Immunity Reform
     D. Potential Federalism Objections

The certificate of public convenience and necessity (CPCN) is a type of licensing requirement devised in the nineteenth century that today applies to a wide variety of industries. Unlike other types of licensing laws, CPCN requirements do not impose educational or training criteria on persons seeking to enter an industry. Instead, CPCN laws block any new firms from operating unless they can prove to the licensing agency that new competition is in "the public interest," or some similar criterion. Although originally devised for the railroad industry, (1) CPCN requirements today regulate taxicabs, limousines, moving companies, ambulances, and even hospitals and nursing schools. (2)

When first devised, the economic theory behind these laws was that under certain circumstances economic competition could be "inefficient" or "destructive," and therefore government should prevent "excess entry" into the market. But CPCN requirements are now employed to restrict entry into ordinary, competitive markets that lack the characteristics of markets theoretically at risk for "excess entry." Given that CPCN laws do not restrict, or even purport to restrict, dangerous or dishonest business practices--which are addressed by different laws--CPCNs in these ordinary markets cannot be explained as regulation in the public interest. Instead, they are better explained by public choice theory: CPCN laws are tools by which incumbent firms bar competition for self-interested reasons. These laws enrich existing businesses by restricting the supply of services, raising prices for consumers, and--worst of all--depriving would-be entrepreneurs of their constitutional right to earn a living without unreasonable government interference.

In the 1980s, the federal government rolled back many CPCN requirements at the national level, with a resulting boost to economic productivity and decrease in prices. (3) Other countries report similar benefits from deregulation. (4) But CPCN laws remain on the books in many states and municipalities and they are rarely called to account for their economic consequences or for their constitutional legitimacy.

Until recently it has been difficult to demonstrate the precise effects of CPCN laws because while they have been the subject of extensive theoretical literature, there has been little empirical research on the effects of these laws in ordinary competitive markets. (5) But in February 2014, the United States District Court for the Eastern District of Kentucky held that the state's CPCN law for moving companies violated the Fourteenth Amendment because it deprived entrepreneurs of the right to engage in the moving trade without being in any way related to protecting public health, safety, or welfare. (6) The evidence uncovered during that litigation--like evidence revealed in a similar case in Missouri in 2012 (7)--shows how CPCN laws actually operate and demonstrates the need for reform that will not only improve living standards by reducing unnecessary barriers to entry, but also better secure the vital constitutional right to economic liberty.

This article begins by discussing the historical and legal framework of that right and the constitutional doctrine that today governs the states' authority to restrict economic liberty. It then examines the effects of CPCN laws on moving companies in Kentucky and other states, and how deregulation in the 1980s helped curtail similar abuses at the federal level. The article concludes with a brief sketch of possible reforms and potential federalism-based objections to those reforms.


A. Economic Liberty and the Constitution

The freedom to make one's own economic choices is a key liberty that the Constitution was written to protect and that the Fourteenth Amendment promises to secure against state interference. The right to earn a living without unreasonable government interference is deeply rooted in the Anglo-American common law and in America's tradition of rugged individualism. (8) In the seventeenth century, a series of decisions by English courts held that government-imposed monopolies on trades, in the form of exclusive trading privileges (9) or rules imposed by guilds, (10) were contrary to the common law and the guarantees of Magna Carta. By the time of the American Revolution, English courts had held for more than a century that "no man could be prohibited from working in any lawful trade, for the law abhors idleness, the mother of all evil ... and therefore the common law abhors all monopolies, which prohibit any from working in any lawful trade...." (11)

America's founders were well versed in this Whig antimonopoly tradition, (12) and they regarded the pursuit of a trade as essential to the pursuit of happiness. In his 1774 Summary View of the Rights of British America, Thomas Jefferson complained of British trade restrictions that barred colonists from manufacturing things out of iron, but forced them to ship the iron to Britain to be made into retail items. Such laws violated the "natural right" of "the exercise of a free trade with all parts of the world," (13) and deprived the colonists of economic liberty "for the purpose of supporting not men, but machines, in the island of Great Britain." (14) Likewise, in 1792, James Madison wrote that any government that imposes "arbitrary restrictions, exemptions, and monopolies [that] deny to part of its citizens [the] free use of their faculties, and free choice of their occupations" so as to benefit the economic interests of others is "not a just government." (15)

The most egregious violation of this principle of economic liberty was slavery, an institution that deprived slaves of the right, and relieved masters of the moral obligation, to make their own economic choices. Escaped slave Frederick Douglass recalled in his memoirs the joyful sense of liberation he felt when he received his first wages as a free man:
   To understand the emotion which swelled my heart as I
   clasped this money, realizing that I had no master who
   could take it from me,--that it was mine--that my hands were
   my own, and could earn more of the precious coin,--one
   must have been in some sense himself a slave. (16)

Still, even after the formal end of slavery, Southern states persecuted former slaves by imposing a variety of legal restrictions on their right to earn a living. Thus, in 1866, when Congress enacted the nation's first Civil Rights Act, it specified economic liberty as a right that the federal government would protect from state interference:
   [A]ll persons ... shall have the same right in every State ... to
   make and enforce contracts ... and to the full and equal benefit
   of all laws and proceedings for the security of ... property,
   as is enjoyed by white citizens, and shall be subject to like
   punishments, pains, and penalties, and to none other.... (17)

When the constitutionality of that Act was disputed, Reconstruction Republicans drafted the Fourteenth Amendment to protect Americans from oppression by states. (18) Again, one of the rights the amendment's champions singled out as in need of federal protection was the right to economic liberty. Representative John Bingham, one of the amendment's principal authors, explained that it would protect "the liberty ... to work in an honest calling and contribute by your toil in some sort to the support of yourself, to the support of your fellowmen, and to be secure in the enjoyment of the fruits of your toil." (19)

Belief in the dignity of labor and the right to economic freedom animated not only much of the antislavery movement, but also the ratification of the Fourteenth Amendment and the ensuing era of what is today often called "laissez-faire constitutionalism." (20) From the premise that a person has a natural right to his own faculties, and the right to employ those faculties to earn a living for himself and his family, came a reinvigorated commitment to constitutional protection for the right to economic freedom. When California sought to block Chinese immigrants from competing in the labor market, courts ruled that those restrictions violated the Fourteenth Amendment. (21) Courts also barred states from seizing railroads' assets without compensation, (22) from using taxpayer money to subsidize politically influential private businesses, (23) and from dictating the terms of employment to workers and business owners. (24) Though the courts allowed many government restrictions on economic liberty to stand, (25) the ratification of the Fourteenth Amendment helped usher in an era in which state laws unjustly interfering with that freedom were often ruled unconstitutional. (26)

B. The Rational Basis Test

That era came to an end in the 1930s with a series of cases in which the Supreme Court endorsed a new Progressive theory of constitutional law that dramatically expanded, at both the state and federal levels, government power over economic freedom and private property. (27) The most important such decision was Nebbia v. New York, (28) which announced a new "rational basis test" for determining the constitutionality of restrictions on economic freedom. (29) Under this test, such a law is presumed constitutional and will be ruled invalid only if the plaintiff proves that it lacks any rational connection to a legitimate government interest. This test is extremely deferential to the government; a plaintiff is required to disprove every plausible justification for the law. (30)

Scholars and judges have criticized the rational basis test for many reasons, (31) but two of its flaws are particularly relevant here. First, such extreme deference blinds courts to the unjust consequences that public choice theorists would predict in circumstances where pressure groups can freely impose burdens on rivals. The extreme deference of the rational basis test "invites [judges] to cup [their] hands over [their] eyes and then imagine if there could be anything right with the statute," (32) a degree of deference to majoritarianism that contrasts with the attentive skepticism that marked the Constitution's authors. The Founders were well aware that "a pure democracy ... can admit of no cure for the mischiefs of faction" because "there is nothing to check the inducements to sacrifice the weaker party" to the power of the majority or the well-organized pressure group. (33) Accordingly, they designed a system of checks and balances, including an independent judiciary, that would serve as "an intermediate body between the people and the legislature, in order ... to keep the latter within the limits assigned to their authority." (34) But by withdrawing meaningful judicial review, the rational basis test allows politically well-connected participants to exploit the legislative and regulatory processes for their own profit, with only flimsy pretexts of benefiting the general public. The result is to deprive those with little political influence of rights that ought to be constitutionally secured. (35)

A second problem relates to federalism. Commentators often ignore the degree to which Nebbia represented a throwback to the antebellum states' rights theory of federalism. That theory had two basic premises: (36) first, that states, not the federal government, are the fundamental focus of sovereignty and legitimacy, so that notwithstanding federal supremacy a citizen's rights should be subject to state restrictions with little, if any, intervention from the federal government; and second, that federal courts lack the legitimacy or competence to evaluate the states' "domestic institutions." The authors of the Fourteenth Amendment, by contrast, had hoped to provide an independent check on state authority, partly through the federal courts, to protect the rights of all Americans against states, which were seen as dangerously unaccountable under the 1787 Constitution. The new order of the Fourteenth Amendment was thus premised on suspicion of state power and emphasized federal guarantees that would make good on the promise of national citizenship. (37) But Nebbia restored deference to the states and withdrew due process guarantees from all but the most egregious cases. (38) Later decisions softened the blow somewhat by promising greater federal protections to "discrete and insular minorities" and for certain specified rights. (39) This shift gave rise to today's infamous double standard, which provides greater judicial protection for rights like speech, religion, and travel, while almost entirely abdicating federal protection for the equally essential rights of economic freedom and private property. (40)

Today, courts are highly sensitive to the dangers of rent-seeking in some areas of the law. For example, in cases involving the dormant commerce clause, (41) or non-economic matters such as religious freedom and free speech, (42) courts employ more exacting scrutiny and generally bar politically influential groups from using state power to exclude rivals or to impose burdens on them for self-interested purposes. In those contexts, a rigorous judicial conception of the public good--devoted to the principles of "federal free trade" (43) or the "free trade in ideas" (44)--ensures that courts invalidate efforts by rent-seeking groups to exploit political power for their own benefit. Baptists cannot typically exclude Catholics or atheists from starting competing institutions, or promoting their messages, or vying for converts, (45) nor can states normally grant privileges to their own citizens by blocking economic competition from other states. (46) But when it comes to the rights of entrepreneurs and private property owners, courts apply Nebbia's lenient rational basis test, which typically means closing the judiciary's eyes to the rent-seeking shenanigans that result in anti-competitive laws, or even devising dubious post hoc rationalizations in order to uphold those laws.

This practice is nowhere more evident than in the realm of occupational licensing laws, which serve as barriers to entry to entrepreneurs who would otherwise enter the market, thus increasing competition and decreasing consumer prices. Excessive judicial deference to state governments has cultivated a legal environment that encourages existing firms to demand more restrictive licensing laws, to police rivals for possible infractions, and to otherwise devote resources to blocking new entrants. Thanks to the rational basis test, they typically get away with it. For example, in 2005 in Meadows v. Odom, (47) a federal district court upheld a Louisiana licensing requirement for florists, ignoring extensive evidence that the law was adopted solely to protect established florists against new competition. The court ruled that the law might somehow protect consumers against having their fingers scratched by the wires that florists use to hold their flower arrangements together. Such a laughable rationalization for the law--which lacked evidentiary support--allowed incumbent firms to prevent competition by depriving Sandy Meadows of her right to earn a living by arranging flowers. (48)

Perhaps most shocking is the Tenth Circuit's 2004 decision in Powers v. Harris, (49) which holds that government may restrict economic competition without requiring any public-interest justification. The court held that "intrastate economic protectionism constitutes a legitimate state interest," (50) a proposition that flies in the face of the entire philosophical framework of due process of law--indeed, of constitutionalism itself. (51) The Powers decision holds that whatever government chooses to do in the realm of economics passes the legitimacy test simply because the government has chosen to do it. A licensing restriction need not advance any public purpose, such as public safety or even some broadly conceived public welfare goal. A law that blocks economic opportunity on pure ipse dixit is still a lawful application of government power: "while baseball may be the national pastime of the citizenry, dishing out special economic benefits to certain in-state industries remains the favored pastime of state and local governments," the Powers decision states. (52) Under that decision, legislatures are not only allowed to indulge in the mischiefs of faction, they are almost invited to revel in it. Citizens, meanwhile, are instructed that if they seek protection for individual rights, they "must turn to the [state] electorate" (53) rather than to the Fourteenth Amendment--when that amendment's very purpose was to shield individual rights from the vicissitudes of political controversy. (54)

Other courts of appeal have rejected the extreme degree of deference articulated in Powers and have held that occupational licensing laws must relate to at least some concept of the public good. The Fifth, (55) Sixth, (56) and Ninth (57) Circuits have ruled that economic protectionism is not a legitimate government interest for purposes of rational basis review, and that licensing restrictions must relate to protecting the public from fraud, incompetence, or other harms. Yet the rational basis test's deferential attitude toward government regulation leaves even this principle vulnerable.

Consider the Fifth Circuit's 2013 decision in St. Joseph Abbey v. Castille, (58) which struck down a licensing law that required people who sell caskets to obtain funeral director licenses. (59) The court held that the plaintiffs--a group of monks who made and sold coffins--did not practice the trade of funeral directing, so it was irrational to force them to undergo the expensive and time-consuming process of learning the skills of funeral directing and obtaining a funeral director's license. (60) The court found that the requirement bore no rational connection to protecting the public from any realistic danger. (61) But in rejecting the state's "threshold argument" that it could protect licensed funeral directors against competition regardless of any connection to the public interest, (62) the court added a significant--and possibly fatal--caveat: "economic protection, that is favoritism, may well be supported by a post hoc perceived rationale ... without which it is aptly described as a naked transfer of wealth." (63)

The court cited an earlier decision that upheld a licensing law for taxicabs under which larger, established firms were accorded special privileges that were denied to smaller firms and to those wanting to start new firms. (64) To operate a taxi in Houston, as in many other cities and states, a person must first obtain a CPCN from a regulatory agency. Each CPCN allows the holder to operate one taxicab. After having long capped the number of CPCNs available, the city decided to issue 211 new Certificates under a weighted lottery system. (65) Under this system, companies that already held 80 or more CPCNs were classified as "large," those with 25-79 as "mid-large," those with 4-24 as "mid-small," and so forth. (66) Large firms were then eligible to receive one of 28 new Certificates, while the mid-large firms were eligible to receive one of 12, and so on. (67) For each category, the number of available Certificates diminished over the second, third, and fourth years, but in each year, the number was skewed in favor of large firms. (68) In total, large firms were entitled to more than half of the new CPCNs, while mid-large firms could only receive one-fifth of them. (69) New entrants who held no Certificates would be eligible to receive only one of 11 new ones in the first year and none in the second, third, or fourth years. (70)

The small firms challenged this scheme on the grounds that it was devised simply to protect the market position of large firms against competition from newcomers. (71) But the court upheld it, on the theory that "the larger the taxi company, the more likely it is to offer a broader range of services that better serve consumer needs." (72) Thus, it was legitimate for the city to accord the large firms special privileges. Yet it is bizarre to suppose that granting more licenses to established firms and sharply restricting new entrants would "foster enhanced competition," as the court claimed, or increase the quality of taxi service. (73)

The court shrugged at these objections because "the rationality standard is a low threshold." (74) Although it refused to go as far as the Powers court and hold that protectionism per se is a legitimate interest, the Fifth Circuit held that "promoting full-service taxi operations is a legitimate government purpose" that the biased licensing scheme would accomplish. (75) Castille relied on this precedent to conclude that "economic protectionism in service of the public good" would pass constitutional muster. (76) But protectionist legislation is virtually always predicated on the notion that "promoting" the protected industry is somehow good for society. If future courts indulge anticompetitive licensing schemes whenever the legislature claims that such a scheme serves the public interest, it will be all too easy for lawmakers to evade the constitutional restriction. Such deference transforms the rule against "naked preferences" (77) into what Justice Sandra Day O'Connor has called the "stupid staffer" test, (78) or what the antifederalist "Brutus" once called "a most pitiful restriction." (79) Since government will always say that what it does is in the public interest, requiring legislation to serve the public interest means nothing unless courts exercise some independent judgment on the merits of that question.

If there is to be any substantial meaning to the rule against "mere economic protection of a particular industry," (80) it must take the form of courts examining whether the need for protectionism actually exists, and if so whether the law in question actually promotes the public good more effectively than some more pro-competitive policy would. As we will see, existing Supreme Court precedent provides helpful guidance on this point.

C. Constitutional Limits on Licensing Laws

The Supreme Court has always held that the Due Process Clause forbids states from imposing occupational licensing laws that lack a rational connection to the applicant's skill in practicing the trade. Its first pronouncement on licensing, Dent v. West Virginia, (81) upheld a licensing requirement for doctors, finding that such laws are constitutional so long as the training and education standards are "appropriate to the calling or profession, and attainable by reasonable study or application." (82) But it warned that requirements that lack such a relationship or standards that "are unattainable by such reasonable study and application," would unconstitutionally "deprive one of his right to pursue a lawful vocation." (83) Dent was decided before the advent of rational basis scrutiny, but the Court has reaffirmed its holding since then, most notably in Schware v. Board of Examiners. (84) There, the Court held that New Mexico could not prohibit Communist Party members from obtaining law licenses. Although states may "require high standards of qualification" for entry into a profession, the Court held, "any qualification must have a rational connection with the applicant's fitness or capacity to practice the law." (85) While this test retains the deference of the rational basis scheme, it imposes a meaningful limit by requiring that the licensing rules relate to the person's qualifications or suitability for the business in question. (86)

This "fitness or capacity" test is grounded in the basic principles of due process of law, which forbid government from restricting liberty arbitrarily, or simply to benefit those who happen to wield political authority. (87) The freedom to enter a trade may be restricted in order to protect the general public from harm but the state may not restrict this freedom simply out of animosity or to protect the market position of dominant firms.


A. The Theory of CPCN Laws

CPCN laws differ from ordinary licensing requirements in that they bear no connection to the applicant's fitness or capacity to practice the trade. Instead, such laws are expressly aimed at preventing new firms from entering an industry unless the licensing officials are persuaded that more competition is desirable.

Different laws characterize this desirability in different ways, but typically they require an applicant to demonstrate that allowing a new firm to enter the industry would be consistent with the public interest, that existing services are inadequate, or something to that effect. Such laws are often written in extraordinarily vague terms. A recent Illinois case, (88) for example, involved a city ordinance that required a CPCN for operators of "vehicle for hire" companies. Under that ordinance, the city manager would grant a CPCN if he or she found "that further vehicle for hire service ... is desirable and in the public interest"--whatever that meant. (89) Other CPCN laws are explicitly anticompetitive. Nevada's CPCN law for taxis, limousines, and moving companies requires an applicant to prove, among other things, that his new business "will [not] unreasonably and adversely affect other carriers operating in the territory" and will not "create competition that may be detrimental to ... the motor carrier business." (90) Other states also expressly require the licensing agency to consider the economic impact a new firm will have on existing firms when deciding whether to grant a new certificate. (91)

Ordinarily, a CPCN law works as follows: An entrepreneur wanting to start a firm must first apply for a Certificate, which entails submitting extensive financial information and proof of insurance and undergoing a criminal background check. The applicant may also be asked to describe his or her proposed area of operations. Upon filing an application, the agency offers the firms that already hold CPCNs--the existing businesses in the industry--the opportunity to object to the issuing of a new CPCN to the applicant. If any firm files an objection, the applicant must then participate in a hearing before the agency to prove that a new firm is desirable under the criteria listed in the statute--for instance, that a new firm is in "the public interest." While an applicant's qualifications are one consideration (usually phrased as whether the applicant is "fit, willing, and able"), they are not the only one; CPCN laws usually give the agency extremely broad discretion to determine whether a new firm is desirable.

Because CPCN laws enable established firms to file an objection that triggers the hearing requirement--a barrier to entry that in practice is often insurmountable to the applicant--these laws have sometimes been called "the Competitor's Veto." Like the more famous "Heckler's Veto" in First Amendment jurisprudence, which enables an audience member to silence a speaker whose message he or she does not want to hear, the "Competitor's Veto" enables existing firms to disallow their potential competition.

The CPCN was invented in the late nineteenth century to regulate the railroad industry. (92) That industry had monopoly characteristics and was regulated as a common carrier, which meant that the government imposed certain diseconomies to compensate for the monopoly advantages railroads enjoyed. For example, railroads were often allowed to exercise the government's power of eminent domain in order to lay tracks, in exchange for which the railroad was required to serve all customers without discrimination, or to submit to rate regulation and other restrictions. These diseconomies raised the specter of "cream-skimming," a phenomenon in which a competitor can enter a market and, not being subject to such restrictions, perform more efficiently. (93) At a time when railroads and streetcars were typically operated by private investors, cream-skimming was seen as a disincentive to private investment in such utilities. Who would devote money to building a railroad or streetcar line subject to regulatory burdens, if a competitor might swoop in the next day with a cheaper, less regulated line? Proponents of CPCN laws thought they would resolve this concern and encourage private investment in public utilities. (94)

Another rationale for CPCN laws was the concept of "destructive competition/' which was fashionable in economic circles in the early twentieth century. According to this theory, unregulated competition was dangerously inefficient because the lag time between a spike in demand and the increase in supply meant that new supplies would become available only when demand had begun to fall, leaving producers with undesired goods and collapsing prices. CPCN laws would prevent this purported tendency toward inefficiency by delaying producers' ability to respond to increases in demand. (95) This theory--like most economic thinking predicated on the notion that economic competition is inefficient--is now largely obsolete. Economists now recognize that free competition produces efficient outcomes and that the inefficiencies created by government efforts to force firms to "act in concert" (96) are far more trouble than they are worth. (97) Firms are the best judges of whether it is worth responding to rapid demand increases, or whether a passing fashion will leave them holding the bag. And supply and demand is the only mechanism for determining what level of output is economically efficient. (98)

The concept of "destructive competition" or "excess entry" can still be found in the economic literature. But the theory applies only to industries with high start-up costs, homogenous goods or services, and oligopolistic competition. (99) Such circumstances are rare, and certainly are not present in the taxi, limousine, or household goods moving markets. Indeed, it is difficult to imagine an industry with more heterogeneous services or lower start-up costs than the moving industry, and any oligopoly in these markets is the result, rather than the cause, of government intervention. (100) The downsides to restricting competition--in particular, the pervasive knowledge and rent-seeking problems--seem to overwhelm any potential benefits. (101)

CPCN requirements have two other rationales, which are not predicated on the conscious prevention of competition. First, some have argued that CPCN laws are simply an investigative tool, whereby existing firms participate as advisors to the government agency charged with policing the industry. (102) According to this theory, incumbent firms know the industry best and know the people and firms involved in that industry; they are therefore in the best position to inform public officials of who is and is not qualified to operate. But this argument overlooks the obvious conflict of interest involved in deputizing existing firms as gatekeepers empowered to decide who else may enter the market. Moreover in many, if not most, CPCN schemes, the existing firms are not required to provide information, let alone legally admissible evidence, relating to the applicant's skills and qualifications.

A similar defense of CPCN laws is that they are meant to remedy "information asymmetry." (103) Information asymmetry occurs when one side of a transaction lacks knowledge about the transaction, possessed by the other party, that might otherwise affect his decision to buy or sell. A common goal of government regulation is to resolve such imbalances, often through disclosure requirements or by requiring a minimum degree of knowledge and skill on the part of the practitioner; this is the Dent rationale for occupational licensing. In some markets, information asymmetry is a significant problem, although it is dubious whether government regulation is the solution. (104) Even if it is one solution, information asymmetry concerns are more properly addressed by rules that require certain qualification or skill levels--so as to protect less-informed consumers against possible exploitation--than by laws that simply prohibit new entrants without regard to skill, as CPCN laws typically do. Information asymmetry is also far less a concern in an industry like household goods moving than, for example, the restaurant industry or the market for legal services, since the consumer can, and usually does, research and compare moving companies before hiring one. Customers have plentiful online resources, such as Angie's List, Yelp!, or Unpakt, (105) to help them choose a qualified and reliable company. The CPCN restriction is prima facie less adapted to resolving this concern than are ordinary types of regulation, such as qualification requirements, regular inspections, and a process for redressing consumer complaints.

Finally, and most fundamentally, CPCN laws are intended to allow regulators to control entry into a trade in order to serve predetermined goals--to "rationalize" the industry, to ensure the "health" of the industry, or to maintain "adequate service." The assumption is that regulatory agencies can control economic behavior to accomplish certain outcomes. But this assumption ignores the spontaneous and creative nature of economic competition. (106) It is not possible for an entrepreneur to prove that her proposed business model is a good idea, or will serve economic "health," since such a concept has no objectively measurable standards. Economic competition is a discovery process, (107) whereby proposed businesses either succeed or fail depending on countless dynamic factors. Supply and demand shift on a moment-to-moment basis. The world's most successful and sophisticated companies find it hard enough to predict whether consumers will want some new product or service--New Coke or the Microsoft Zune are proof enough of that. It is unrealistic to expect that government regulators, with far fewer resources to perform consumer research (and who rarely ever attempt any), can determine what constitutes a "healthy industry" or what services are "adequate." Worse, this requirement deters innovation that can create goods and services that cannot be anticipated or described beforehand. Had Starbucks been required to prove, in 1992, that the United States "needed" a new chain of coffee shops, it could not have done so. There were millions of coffee shops in the United States at that time, and they were doubtless providing "adequate" service, whatever that means. Yet it turned out that the United States did "need" a new coffee chain; we know this now because Starbucks has been so successful. The only way to learn whether the country "needed" more coffee shops was to try the experiment. Yet by forcing applicants to prove the need for a new firm before they try, CPCN laws do not allow entrepreneurs to try the experiment. They stifle the innovation and experimentation on which economic growth depends, and they penalize the creativity, perseverance, and courage that lie at the core of a peaceful and flourishing society. (108)

B. The Supreme Court and the Competitor's Veto

The Supreme Court first addressed the constitutional issues raised by CPCN laws in two cases in the 1920s, Buck v. Kyukendall (109) and Frost v. Railroad Commission of California. (110) Both involved Dormant Commerce Clause and due process challenges. In Buck, Washington State denied an Oregon bus line authority to transport passengers on the grounds that existing bus services were "adequate." (111) The Supreme Court held the law invalid on the grounds that while states may adopt "appropriate ... regulations ... to promote safety upon the highways and conservation in their use," they may not impose restrictions on competition per se. The Washington law's
   primary purpose is not regulation with a view to safety or to
   conservation of the highways, but the prohibition of competition.
   It determines, not the manner of use, but the persons
   by whom the highways may be used. It prohibits such use to
   some persons, while permitting it to others for the same
   purpose and in the same manner. (112)

Again, in Frost, the Court struck down a CPCN requirement on the grounds that it was "in no real sense a regulation of the use of the public highways," but "a regulation of the business of those who are engaged in using them," designed "to protect the business of those who are common carriers in fact by controlling competitive conditions." (113)

But the Court's most direct confrontation with CPCN laws occurred in New State Ice Co. v. Liebmann, (114) a 1932 decision involving an Oklahoma law that prohibited the opening of new ice-making or ice-delivery businesses unless the state ice commission was satisfied of the need for additional competition. When Ernest Liebmann started a new ice firm, the Commission sought to enjoin his operations and the case ultimately arrived at the Supreme Court. While recognizing that the state could regulate businesses and require licensure for practitioners of trades, the Court found the CPCN law unconstitutionally arbitrary. Delivering ice "is a business as essentially private in its nature as the business of the grocer, the dairyman, the butcher, the baker, the shoemaker, or the tailor," (115) and the CPCN requirement is
   no[t] different] in principle ... [from] the attempt of the
   dairyman under state authority to prevent another from keeping
   cows and selling milk on the ground that there are enough
   dairymen in the business; or to prevent a shoemaker from
   making or selling shoes because shoemakers already in that
   occupation can make and sell all the shoes that are needed. (116)

The law did not protect the public against badly made ice or incompetent or dangerous delivery services. Nor did it help prevent monopolization of the ice industry. Instead, the law established a monopoly: "The aim is not to encourage competition, but to prevent it; not to regulate the business, but to preclude persons from engaging in it." (117)

The dissent in Liebmann was written by Justice Louis Brandeis, notorious for his belief in the concept of "destructive competition." (118) In Brandeis's view, the Court was too stringently applying the Due Process Clause to prevent states from "experimenting" with regulations of industry. (119) Although Brandeis's "laboratories of democracy" metaphor has become a staple of federalist rhetoric, it was the obsolete, unhealthy form of federalism that he was advocating; one in which citizens' basic rights would be left at the mercy of state governments, and the federal guarantee of the Fourteenth Amendment left unenforced. The Court made this point when it rebutted Brandeis's laboratory metaphor. While the Liebmann majority had no abstract objection to states experimenting with regulatory schemes, it observed that states cannot "experiment" in ways that violate the Constitution: "unreasonable or arbitrary interference or restrictions cannot be saved from the condemnation of that amendment merely by calling them experimental.... [I]t would be strange and unwarranted doctrine to hold that they may do so by enactments which transcend the limitations imposed upon them." (120) States had no more authority to "experiment" by depriving individuals of economic liberty than they had to "experiment" by censoring speech, establishing religion, or otherwise abridging constitutionally protected rights.

Liebmann has never been overruled, and its basic principle--that states may not arbitrarily restrict entry into a trade simply to protect established firms against competition--remains valid, though often ignored, law. While the rational basis test is indulgent toward the purposes and means states choose in regulating industry, the law still bars states from "experimenting" in ways that violate constitutional rights, including the right to earn a living.


Kentucky's CPCN requirement for movers of household goods was typical of the genre. (121) Under that law a CPCN applicant was required, before filing an application, to notify existing Certificate holders of his intent to apply, either by publishing a notice in a newspaper each week for three weeks be-before applying or by emailing every existing CPCN holder. (122) This notice would enable any interested person to file an objection, called a "protest," against the granting of a CPCN. (A person or company filing a protest was referred to as a "protestant.") The court later found it significant that, although the general public could, in theory, see the newspaper notice, the e-mail notification procedure only required the applicant to notify existing moving companies. (123)

After publishing the notice, the CPCN applicant would then submit the application to the Kentucky Transportation Cabinet's Motor Carrier Services Division, along with evidence of financial solvency. (124) The Division would then schedule an administrative hearing to determine whether to grant the CPCN. (125) If no protest was filed, the Division could cancel the hearing, (126) but whenever a protest was filed, the hearing was mandatory, and the protestant was allowed to participate. (127)

No law or regulation specified what information a protest must contain; although the law required protestants to state the grounds for the protest, the protestant had no obligation to provide any factual information, admissible evidence, or even allegations relating to the applicant's qualifications, skills, or any other matters. Nor did the law require that protests be signed, notarized, or accompanied by affidavits. (128)

If the hearing was not cancelled, the applicant was required to prove four things to be entitled to a CPCN: (1) that the applicant was fit, willing, and able to operate the proposed service (that is, qualified); (2) that "existing transportation service [was] inadequate"; (3) that the proposed service "[was] or [would] be required by the present or future public convenience and necessity"; and (4) that the proposed operation would be "consistent with the public interest and the transportation policy declared [in the law]." (129)

If no protest was filed and the Division cancelled the hearing, the applicant was still obliged to prove to the Division that there was "a need for the service" and that the applicant was "fit, willing and able to perform this service." (130)

The statute contained no definitions section, and such crucial terms as "inadequate" were not explained in any statute, regulation, or case law. (131) Nor was "present or future public convenience and necessity" defined in any controlling legal authority. Although the term "public convenience and necessity" is common in utility regulation, (132) state courts had never explained how officials were to determine what future public needs might be, let alone how they were to predict future convenience. (133) Nor was it clear how, or even whether, "public convenience and necessity" differed from "the public interest." As for the regulation under which, in the absence of a protest, the applicant had only to prove a "need" for the proposed service, the term "need" was also not defined in any statute, regulation, or case law. (134) Among other things, this lack of definition in the statute meant that applicants were left with little guidance on how they could prove "inadequacy" or "need," and as we shall see, even extensive economic analysis was deemed insufficient. Nor was the Division shy about admitting that these terms were left undefined. The Kentucky Transportation Cabinet admitted in discovery that there were "no independent standard[s] or document[s] or list of factors or statistics" on which it relied when assessing "adequacy." (135)

Even aside from the risk of being denied a license, the hearing requirement was a substantial barrier to entry for entrepreneurs. Like many states, Kentucky requires any business organized as a corporation to be represented by an attorney at an administrative hearing--the corporation's officers or owners are not allowed to represent the corporation. (136) But hiring a lawyer is expensive, and the delay imposed by the hearing requirement was also substantial: On average, a protested applicant who participated in a hearing could expect to wait some eight months for a hearing, and more than two months after that for a decision. (137)

Public choice theory would predict that if a law empowers incumbent moving companies to bar new firms from obtaining licenses, or at least to delay and burden their efforts to do so, the incumbent firms will exploit this advantage when doing so is profitable. Incumbent firms are particularly likely to do this where, as in Kentucky, the cost of filing a protest is low, and the burden it imposes on rival firms is severe. If investment in rent-seeking activity is proportional to the expected net return to the rent-seeking firm, a process that gives each existing firm the power to impose a potentially crushing burden on potential rivals at little cost to itself is likely to attract more self-interested activity than a process that requires, for example, that any potential protest identify specific facts about the applicant's skills, or that such a protest be signed under penalty of perjury.

Considering the effectiveness of CPCN laws as barriers to entry, Judge Richard Posner has written that such laws "may perpetuate monopoly." (138) If a firm wishes to enter the market, it must persuade a government agency to allow it to do so, which
   will require a formal submission, substantial legal and related
   expenses, and a delay often of years--all before the firm may
   commence operations. The costs and delay are alone enough to
   discourage many a prospective entrant. Much more is involved
   than running a procedural gauntlet, however, for ultimate success
   is by no means certain. The favor with which regulatory
   agencies look upon entry varies with the agency and the period,
   but the predominant inclination has been negative. (139)

Thus, CPCN laws limit "greatly the growth of competition in the regulated industries." (140)

Kentucky's CPCN law for moving companies proved these predictions with striking clarity. From January 1, 2007, through August 21, 2012, (141) thirty-nine applicants sought permission to operate a moving company in Kentucky. Nineteen of these applications were protested by one or more existing moving firms, for a total of 114 protests filed during that five-year period, all of which were filed by existing moving companies. (142) Although any member of the general public could legally file a protest, none ever had. Of course, as the statute did not require that the general public be notified of the licensing process or a CPCN application, they likely were unaware of it. (143) Contrary to the government's claim that the protest procedure helped provide licensing officials with information about an applicant's skills and qualifications, the Division never investigated any allegations contained in any protests, nor did it examine protests to ensure that they met any standards of proof. Further, there was no information in these protests that would be helpful, even if the Division had investigated. No protest alleged any danger to the public if the application were granted, or suggested that the applicant was incompetent or unqualified. On the contrary, every protest stated as the grounds for objection that a new moving firm would be "directly competitive with ... these protestants and [would] result in a diminution of protestant's revenues." (144) Yet the Division never rejected a protest as inadmissible or incomplete in that 2007-2012 period, (145) strongly undermining the "investigative tool" rationale for the CPCN requirement.

Of the nineteen firms whose CPCN applications were protested, fifteen abandoned their applications rather than proceed through the hearing process. (146) This outcome is not surprising because during this period the Kentucky Transportation Cabinet rejected all protested applications, and it did so solely on the grounds that existing moving services were "adequate." No application was denied due to public safety concerns. (147)

Contrast this outcome with the treatment of applicants who sought only permission to purchase an existing CPCN from another company. Because this route would not increase the competitive pressures that incumbent firms faced, those firms had less incentive to bar these "transfer applications." Public choice theory would therefore predict that existing firms would be less inclined to protest transfer applicants than applicants for new CPCNs. That was, in fact, what occurred. From 2007 through 2012, fifteen transfer applications were filed. (148) None were protested, nor were any denied. On the contrary, many applicants who sought new CPCNs and were protested then abandoned those applications, only to turn around and file a transfer application instead, which was not protested. On at least three such occasions, the applicants who gave up seeking a new CPCN and chose to buy one from an existing firm instead bought one from a firm that had protested the application for a new certificate. For example, when Little Guys Movers applied for a new certificate in March 2012, eight existing firms protested, including Affordable Moving, Inc. Little Guys withdrew its application, and five months later, it filed a transfer application to buy a CPCN. That application was not protested and was approved a month later. The firm that sold Little Guys a CPCN was Affordable Moving, Inc. (149) This example is further evidence that existing firms used the protest procedure solely for the self-interested purpose of vetoing potential competition, because public safety concerns would not suddenly vanish when the applicant purchased a certificate from an existing firm instead of requesting a new one.

The experiences of applicants who went through the hearing process are also telling. One applicant, Michael Ball, had been in the moving business for thirty-five years when he decided to apply for a CPCN in his own name. (150) Six existing firms filed protests, (151) none of which identified any public safety concerns or fears about Ball's qualifications or honesty. Instead, all complained that Ball's company would be "directly competitive with" their own operations and "result in a diminution of [their] revenues." (152) At the hearing, no testimony or other evidence was heard that suggested that Ball was unqualified, or that his operation would endanger public health, public safety, the environment, or public infrastructure. (153) In fact, one protestant testified that he believed Ball "would be [a] great [mover]." (154)

The hearing officer agreed. In an order dated February 19, 2013, he concluded that Ball was fully qualified and thus met the "fit, willing, and able" requirement under the law. (155) Nevertheless, he rejected Ball's application on the grounds that Ball had "not prove[n] that the existing household goods moving service in Louisville is inadequate and that his proposed service is needed." (156) Thus, notwithstanding Ball's extensive experience and training, he was prohibited from operating his own firm solely because existing firms considered the increased competition undesirable.

Another notable feature of Ball's application was that it demonstrated the almost infinite malleability of the "inadequacy" standard. Although Kentucky courts had never defined "inadequacy," they had held that the public's desire for better or more convenient service was not enough to prove inadequacy. (157) Nor was "proof of some instances of unsatisfactory service." (158) In one case, the Kentucky Court of Appeals found the testimony of five witnesses that existing shippers were inadequate was not sufficient, because their testimony represented only "a few isolated instances of unsatisfactory service." (159) Indeed, even if an applicant did prove that existing moving services were inadequate, the application could still be rejected on the grounds that the existing services might become adequate in the future. (160) But it is hard to imagine how one might measure whether existing movers could become adequate. This vagueness reinforced the statute's cartel characteristics. In Ball's case, the protestant who admitted that her firm could not always meet customer demand testified, "I have [two] brothers in the moving business. So I would call one of their companies [to help out] first." (161) Thus, the statute perpetuated family oligopoly by encouraging existing firms to toss business to relatives instead of allowing new competition.

Another protested applicant, Larry Coyle, tried at his hearing to prove that existing moving services were inadequate by presenting testimony from a professional economist about the market for moving services in Berea County, where Coyle hoped to locate his business. (162) The economist testified that the county's population had increased dramatically in the previous decade and now constituted a trade area of about 145,000 people, but was served by only a single moving company. (163) The effort was fruitless, thanks to the flexibility of the "inadequacy" test. The hearing officer concluded that the existing company "testified to a significant decline in demand," so that allowing a new company to compete would be "unfair and destructive" to existing firms. (164) Although the hearing officer again found that Coyle was fully qualified, he was denied a license on the grounds that existing moving services were sufficient.

The experience of the third applicant who went through a hearing is even more revealing. That case involved Margaret's Moving & Storage, which applied for a CPCN in September 2008, only to be protested by eight existing movers. (165) Again, none identified any danger to the public or claimed that Margaret's service was unqualified or dishonest--indeed, one acknowledged that he "did not complain about [Margaret's] quality of work or ability to do [its] job." (166) Instead, all protested solely on the basis that existing moving services were adequate. At the hearing in May 2009 one protestant, the owner of Arrow Moving and Storage, testified that he protested because "customers [had] call[ed] him and [told] him that they were going to move with Arrow, but they decided to move with applicant/Margaret's Movers because [Margaret's] was cheaper." (167)

The Margaret's Moving & Storage application was complicated by the fact that Margaret's had been operating illegally, without a license, for several months before applying for a CPCN. Thus, when the Division rejected Margaret's application, it did so for two reasons: first, because existing moving services were adequate, and, second, because by operating illegally, Margaret's had proven that it was not "fit, willing, and able" to operate in compliance with the law. (168)

After Margaret's application was denied, its owner sued the Kentucky Transportation Cabinet, arguing that the rejection was proof of racial discrimination. (169) That case was swiftly settled out of court, with one condition of settlement being that Margaret's would be allowed to purchase a CPCN from an existing firm. In November 2009, Margaret's filed a transfer application, which received no protests, and the Division granted permission in a decision that made no mention of the prior illegal operations that only a year earlier had been grounds for finding that Margaret's Moving & Storage failed the "fit, willing, and able" test. In fact, not only did the Division now find that Margaret's was "fit, willing, and able," but the hearing officer commented favorably on the owner's long experience in the moving industry. (170) Margaret's purchased its CPCN from J. D. Taylor, one of the companies that had protested its 2008 application for a new CPCN. (171)

A final piece of evidence that helps dramatize the rent-seeking process that Kentucky's CPCN law put into place comes from the treatment of an applicant who took an aggressive approach during the application process. In 2012, a business called MJ, LLC, applied for a CPCN and was protested by seven existing firms. As usual, the firms did not claim that MJ was unqualified, but based their protests on the fact that MJ's business would "directly compet[e] with ... these protestants and [would] result in a diminution of protestants' revenues." (172) The Division scheduled a hearing, but in the months leading up to the hearing, MJ's attorney served the protestants with formal discovery requests, demanding answers to a variety of questions. Weeks later, three firms withdrew their protests rather than answer. (173) A fourth firm, which did answer the questions, admitted in an interrogatory response that it "would have no interest in protesting any application which was not requesting a certificate for household goods authority with a [base of operations] in Lexington or a nearby city." (174) When MJ persisted with follow-up interrogatories, two more firms withdrew their protests the following week. (175) The Kentucky federal district court struck down the Competitor's Veto law before MJ's application proceeded further, but this behavior again supports the conclusion that protestants used the notice-and-hearing process not to protect consumers or to prevent dangerous or dishonest moving companies from entering the market, but simply to prevent competition.
COPYRIGHT 2015 Harvard Society for Law and Public Policy, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2015 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:I. Economic Liberty as a Fundamental Civil Right into III. Kentucky's Competitor's Veto Law, p. 1009-1042
Author:Sandefur, Timothy
Publication:Harvard Journal of Law & Public Policy
Date:Jun 22, 2015
Previous Article:Behavioral public choice: the behavioral paradox of government policy.
Next Article:State "competitor's veto" laws and the right to earn a living: some paths to federal reform.

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters