November 16, 2013

“Certificates of Public Convenience and Necessity” for moving companies: the Competitor’s Veto

By “Certificates of Public Convenience and Necessity” for moving companies: the Competitor’s Veto

John Stossel’s latest special, “War on The Little Guy,” features our lawsuit on behalf of Kentucky entrepreneur Raleigh Bruner and his company, Wildcat Moving. Often, when I tell people about this case, they’re stunned—how can it be that the law actually requires you to get permission from your own competition before you’re allowed to start your business? Isn’t that crazy?

Crazy, yes—but not uncommon. In fact, most states have laws like these—called Certificate of Public Convenience and Necessity or Certificate of Need laws—covering a variety of industries, including railroads; gas pipelines; limousine and taxi companies; ambulances; buses; and, of course, moving companies. By my count, 23 states now have these “CON Laws” on the books when it comes to moving companies. (That would be: Alabama, Arkansas, Colorado, Connecticut, Illinois, Indiana, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Pennsylvania, Rhode Island, South Carolina, Virginia, Washington, and West Virginia. In recent years, Missouri and Oregon have repealed their moving company CON laws thanks to PLF lawsuits. Minnesota and Ohio have also repealed theirs.) Many others apply to other industries.

CON laws work this way: if you want to start a moving company or a taxi company or whatever, you have to apply for a Certificate. And whenever an application is filed, existing companies get the chance to file objections. When objections are filed, then you have to go to a hearing and prove to a group of bureaucrats that there’s a “public need” for a new business. Some states go further: in Kentucky, you have to prove that the existing companies are “inadequate.” In Nevada—which has the most anti-competitive licensing law in the nation—you have to prove that you would not compete against existing moving businesses. How do you do this? Nobody really knows: the laws don’t say. It’s basically just up to the bureaucrats. In short, these laws create a Competitor’s Veto that allows existing firms to veto their own competition.

In our Kentucky case, it turns out that since 2005 there have been 39 applications for Certificates to run moving companies. Half of those weren’t protested by existing moving companies, and the applications were approved without trouble. But 19 were protested. And because these guys know that the state always denies a Certificate whenever a protest is filed, most applicants withdrew their applications as soon as protests were filed. Only three applicants went to a hearing to try to prove that a new moving company was needed—and they were all denied. Not a single time since 2005 has any existing moving company even tried to show that the new applicant was unqualified, or a danger to the public, or anything like that. On the contrary, all 114 protests filed since 2005 have stated that the only reason for the protest was that a new company would compete with existing companies. (See for yourself; here’s an example.) Every protested application was denied, and in all cases resulting in a written decision, the government admitted that the applicants were safe and qualified—but still blocked them from operating because existing movers didn’t want competition.

Take this example: a company called Margaret’s Moving tried to get a license in 2008. Eight existing moving companies filed objections—none saying that Margaret’s was dangerous or unqualified. Instead, they all said they were objecting because they didn’t want competition. (One said that “customers [had] call[ed] him and [told] him that they were going to move with [me] but they decided to move with…Margaret’s because [she] was cheaper.”) So there was a hearing and the government denied the application on the grounds that (1) existing moving services were “adequate,” and (2) because Margaret’s had been operating for a while without a Certificate, which is against the rules….

…but then a year and a half later, Margaret’s applied for permission to buy a Certificate from an existing moving company. That wouldn’t cause any new competition, so the existing companies didn’t object. And the government—which had so recently before declared Margaret’s unqualified, now said okay—and in its written decision praised Margaret’s for its long experience, because it had “been in the moving industry for over ten years”!

For other examples, check out our brief. They show how arbitrary these laws really are. CON laws have nothing to do with protecting the public against dangerous or unqualified moving companies. They’re about protecting existing movers against legitimate competition…and in the process stifling the right to earn a living. The victims are hard-working entrepreneurs like Raleigh Bruner, or our clients in other CON law cases: Adam Sweet, Michael Munie, and Maurice Underwood.

CON laws were invented in the 19th century to govern railroad companies. The reasoning behind them was always dubious, but railroads were government-created monopolies, often funded by private investors, and there was at least some economic or legal theory behind them. For example, streetcars were often funded and run by private companies operating under a government charter, so restricting competition was thought to encourage such investment, and to compensate streetcars that were sometimes forced to operate at a loss. But at the beginning of the 20th century, some people started thinking that economic competition was a bad thing. Economists have now overthrown that notion, but at the time it led to the expansion of these CON laws to prevent “cutthroat competition” and “dog-eat-dog competition” and so forth—even in ordinary, non-monopoly markets like the moving industry. Today, they apply not just to railroads but to ordinary, competitive markets where (even if you buy the old arguments for them) they don’t make any sense–like the moving industry.

What has the Supreme Court said about this? There aren’t many precedents, but in every lawsuit challenging the constitutionality of a CON law, the Supreme Court has held them to be unconstitutional. The most notable was New State Ice Co. v. Liebmann, a 1932 case in which the justices struck down an Oklahoma law requiring a CON before you could start an ice-delivery business. The Court held, with only a single dissent, that the law was unconstitutional:

Here we are dealing with an ordinary business…as essentially private in its nature as the business of the grocer, the dairyman, the butcher, the baker, the shoemaker, or the tailor…. [T]he practical tendency of the restriction, as the trial court suggested in the present case, is to shut out new enterprises, and thus create and foster monopoly in the hands of existing establishments, against, rather than in aid of, the interest of the consuming public…. There is no question now before us of any regulation by the state to protect the consuming public…. The control here asserted does not protect against monopoly, but tends to foster it. The aim is not to encourage competition, but to prevent it; not to regulate the business, but to preclude persons from engaging in it. There is no difference in principle between this case and 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.

Since then, the Court has reiterated that while government can impose licensing requirements on businesses, those requirements “must have a rational connection with the applicant’s fitness or capacity to practice” the trade. In other words, states can’t bar you from entering a trade for reasons that have nothing to do with your qualifications. Yet CON laws today restrict competition by blocking people from going into business for reasons totally unrelated to their fitness or capacity: simply to prevent competition in industries where nobody doubts that competition is a good thing.

Yet states continue to impose these restrictions, and the results are just what you would expect: cartels of politically influential companies that use the laws to prevent legitimate competition. As I explain in depth in an article coming soon in the George Mason University Civil Rights Law Journal, existing moving companies are often quite candid that they’re blocking a person from running a moving company solely in order to prevent competition. It’s time that CON laws were abolished. They are a prime example of the abuse of law to serve private, instead of public interests—and that’s unwise, unfair, and unconstitutional.

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