America’s Antitrust Loophole: How State and Local Governments Are Thwarting Entrepreneurs and Eliminating Competition

Jaba Tsitsuashvili

What does Chicago’s “Schnitzel King” have in common with Kentucky’s “Wildcat movers”? Both are hindered by laws that unfairly restrict their ability to earn a living simply because the established members of their respective industries have successfully lobbied for anti-competitive legislation. Throughout the country, state and local governments have erected artificial barriers to entry in all sorts of industries under the guise of protecting public health and safety. But what these laws really do is reflect the interests of the established few who have decided that they do not want new competition, hurting consumers in the process.

Surely a world where licensing requirements were entirely eliminated would not be ideal. I want some assurance that my doctor knows what he’s doing. And if I were to wind up in an ambulance, I would hope the emergency medical technician (EMT) was up to the task of keeping me alive. But this 2012 study shows that, based on fees, training and education, and mandatory exams, 66 professions had more burdensome licensure requirements than EMTs. The profession requiring the most average training was interior designer (though licensing was only mandated in four states). More widely regulated professions with more onerous requirements than EMTs included barbers (13th most burdensome), cosmetologists (17th), makeup artists (40th), auctioneers (60th), and manicurists (65th). I have a hard time believing health and safety are the primary factors driving such immense economic restrictions if it takes over ten times as long to be certified to cut hair as it does to be a certified EMT.

To understand the legal complexity of challenging these schemes, which take the form of licensing requirements, zoning restrictions, and “certificates of necessity,” we need to understand the underlying tensions at play.

When ostensibly competing companies in the same industry get together to fix prices or drive out competition, we subject their collusion to stiff antitrust penalties, often through criminal prosecution. This aversion to anti-competitive business activity is the backbone of the American free market system. It would stand to reason that if the same companies banded together to eliminate competition by the sword of government, we would similarly condemn them.

Unfortunately, the Supreme Court has seemingly bungled its resolution of a tension between two crucial elements of American freedom: the Due Process Clause of the Fourteenth Amendment and the right of unfettered political speech under the First Amendment. The Court has held that when companies engage in concerted lobbying efforts to restrict entry into the marketplace through the force of law, the First Amendment forbids curtailment of these political activities, and antitrust liability will not attach. “The proscriptions of the [Sherman Antitrust] Act, tailored as they are for the business world, are not at all appropriate for application in the political arena.” Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 141 (1961). 

The Court, in affirming this principle in City of Columbia v. Omni Outdoor Advertising, 499 U.S. 365 (1991), neglected two important caveats. First, the presumption of legitimacy extends “so long as the law itself does not violate some provision of the Constitution.” 365 U.S. 127 at 136. Second, under the Fourteenth Amendment, a state cannot, “under the guise of protecting the public, arbitrarily interfere with private business or prohibit lawful occupations or impose unreasonable and unnecessary restrictions upon them.” Jay Burns Baking Co. v. Bryan, 264 U.S. 504, 513 (1924). These ideas, working in conjunction, should make it clear that the antitrust loophole afforded by the First Amendment must still pass constitutional muster, which arbitrary licensing laws should not under the Fourteenth Amendment.[1]

The country would be better served if the Supreme Court (and lower courts) reaffirmed our commitment to economic liberty. In New State Ice Co. v. Liebmann, 285 U.S. 262 (1932), the notion of trying to turn matters of private competition into issues of public concern was emphatically shot down on Fourteenth Amendment grounds. At issue was whether selling ice was a business inherently private in nature or whether it could be categorized as one “charged with a public use.” The Court said in no unclear terms that it was a private business interest that could not be legislatively restrained under the pretense of public concern. Id. at 277-80. Unfortunately that view has taken a backseat to the rational basis test.

So it is that under the current state of the law, entrepreneurs face an uphill battle in places like Chicago, where the Chicago Tribune has argued that the “ordinance [prohibiting food trucks from parking within 200 feet of existing eateries] doesn't serve the needs of the lunch-seeking public. It benefits the brick-and-mortar eateries, whose owners don't want the competition.” The Institute for Justice (IJ), a nonprofit public interest law firm, is fighting on behalf of the “Schnitzel King” and other food truck owners and street vendors in a recently filed lawsuit. IJ has made inroads with recent victories in Utah (where hair-braiding restrictions were struck down as unconstitutional even on rational basis grounds) and Atlanta (where the city was told that it could not kill existing small businesses by granting a restrictive vending license to one private monopoly because to do so was a violation of the City Charter).

At least in Chicago the food truck owners are subject to fairly straightforward limitations, and their ability to get their businesses off the ground is not subject to the whims of existing business owners. That is what happens in states with certificate of necessity (CON) laws, or what Timothy Sandefur of the Pacific Legal Foundation rightly calls “CON jobs.” For example, in Kentucky one cannot start a moving business without the consent of everyone who already has a moving certificate.  Granted, some sort of safety oversight may be necessary when dealing with large trucks and transportation. But existing owners can veto a startup based simply on the fact that customers might choose the new company over their own. Entrepreneurial spirit and American dream be damned. These laws make no pretense of being about health or safety. They simply embolden entrenched businesses with enough political clout to ensure that no one steps on their turf.

But why are these battles not more publicized? Why are consumers not up in arms about these unfair restrictions on their options? It’s hard to fight on behalf of a business owner that you don’t know exists. Publicity is crucial in making sure that legislators are held accountable for the measures they pass and the interests they serve. Luckily, thanks to efforts by organizations like the Institute for Justice and Pacific Legal Foundation, the mainstream media is starting to get wind of these egregious violations of the Fourteenth Amendment. CNN recently did a great job of putting faces to these battles and highlighting how real people are being forced out of business in an already precarious economy in which entrepreneurs who create jobs should be rewarded and encouraged, not shut down and fined into oblivion.

Public health and safety are real concerns, and there is certainly a wide scope for the legitimate exercise of government police power. But courts need to make clear, either by taking a broader view of antitrust law or through a more robust enforcement of substantive due process, that private parties cannot decide who sells us our lunch, who paints our nails, and who moves our couches.

[1] The difficulty in winning these cases on Fourteenth Amendment grounds is largely a function of the current state of Due Process interpretation, as established by United States v. Carolene Products Co., 304 U.S. 144 (1938). Carolene established the principle of presumptive constitutionality, making economic regulations subject merely to a rational basis test. Id. at 152 n.4.