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

• Author: Sandefur, Timothy
• Position: Continuation of III. Kentucky's Competitor's Veto Law through Conclusion, with footnotes, p. 1042-1072

1. The Bruner Case

   In 2010, shortly after earning his Masters in Business Administration from the University of Kentucky, Raleigh Bruner decided to start a moving company, which he named after the University's basketball team, the Wildcats. Within a year, Wildcat Moving employed thirty-one people, many of them University students, and operated a fleet of five trucks. Then on May 21, 2011, state officials sent Bruner a letter informing him that he had failed to obtain a CPCN and that Wildcat Moving was operating illegally.

   Represented by attorneys with the Pacific Legal Foundation Bruner sued, arguing that the CPCN law violated the Due Process and Equal Protection Clauses of the Fourteenth Amendment. The CPCN law was not rationally related to protecting the public, but served only to protect existing firms against legitimate competition from new companies, which, as the Sixth Circuit has held, is not a legitimate government interest. (176) After hearing evidence to this effect, the court ruled that the Kentucky CPCN "acts as a 'Competitor's Veto'" that bars people from entering the moving trade for reasons unrelated to the person's skills or qualifications. (177)

   Kentucky officials offered three justifications for the CPCN requirement. First, they claimed that the requirement helped ensure that moving companies did not damage property. Second, they argued that the requirement helped them to obtain information about an applicant's skills and qualifications--the "investigative tool" theory. Third, they argued that the CPCN requirement resolved the problems of "information asymmetry" and "excess entry" into the moving industry. (178) The court found these arguments baseless.

   The requirement that prospective movers notify existing firms of their intent to apply for a CPCN and allow those firms to trigger the expensive and time-consuming hearing procedure did nothing to prevent property damage: Existing laws already made property damage illegal. Moreover, experienced, skilled movers who were unlikely to damage property, such as Michael Ball, could be, and often were, denied CPCNs without regard to their qualifications. (179) Nor did the Competitor's Veto process decrease administrative costs, because "when a protest is filed, the Cabinet must hold a hearing," which increases costs. (180) And because the history of enforcement demonstrated that "the result [of a hearing] is pre-determined," the whole process merely wasted resources "in a futile administrative exercise." (181)

   As to the state's argument that the Competitor's Veto was designed to remedy "information asymmetry" and "excess entry," the procedure had no realistic connection to these concerns. Aside from the question of whether information asymmetry is a significant concern in the moving industry, the Competitor's Veto process did not address the problem, because it did not require applicants to disclose any information about qualifications--the separate "fit, willing, and able" portion of the statute already did that--and any such information that was discovered was not disclosed to the general public. Nor were applicants required to notify the public of their intent to seek a CPCN. (182) And, as we have seen, protestants were not required to provide information relevant to protecting consumers, nor did they ever do so. The court thus had little trouble rejecting the information asymmetry rationale. "[T]he only 'information' supplied to new applicants is that no new competition is wanted." (183)

   The theory of "excess entry" fared no better. Assuming that this theory had any applicability to the moving industry, there was no evidence that such considerations played any role in the process of granting or withholding a license. The Division engaged in no serious consideration of consumer welfare or market research, but instead allowed existing firms to "essentially 'veto' competitors" for reasons "completely unrelated to ... societal costs." (184) Officials charged with enforcing the law "testified that they had never heard of the phrase 'excess entry,'" (185) and the fact that many moving companies operated successfully for years without getting a CPCN proved that there was unmet market demand for new moving services, regardless of any assessment of the "adequacy" of existing services. Thus, the court concluded, "[t]o the extent that the protest and hearing procedure prevents excess entry into the moving business, it does so solely by protecting existing moving companies--regardless of their quality of service--against potential competition." (186) Having dispensed with these rationales for the Competitor's Veto procedure, the court concluded that it served only the unconstitutional goal of "economic protectionism." (187)

   Still, the court limited its decision. First, it did not find the statute facially unconstitutional, only unconstitutional in its application. Second, it limited its decision to the moving industry. (188) Third, the court left in place the statute's "fit, willing, and able" provision, which Bruner had not challenged, and which ensured that applicants for CPCNs were qualified, skilled, and properly insured, and would operate legally. Finally, the court rejected Bruner's argument that the statutes and regulations were unconstitutionally vague. This last outcome is troubling because the court gave no explanation for its holding except the assertion that "[t]he Kentucky Supreme Court and the applicable regulations have defined the terms 'inadequate' and 'present or future public convenience and necessity.'" (189) As we have seen, this statement is not true. Although the court cited two state precedents to support this proposition, neither defines the terms in the statute. (190) And given that officials had testified that they "[did not] have any standards" (191) for determining the "inadequacy" of existing services, the "need" for new services, or "future public convenience" in the moving industry, it is hard to understand why the court found these statutory terms sufficiently clear. In fact, the CPCN requirement is better described by a line from Yick Wo v. Hopkins: The power the statute gave to the Division "is not confided to their discretion ... but ... to their mere will. It is purely arbitrary, and acknowledges neither guidance nor restraint." (192)

   Be that as it may, the ruling in favor of Bruner marked a major victory for entrepreneurs in the Bluegrass State. Within a few months, Bruner was granted not just one CPCN, but three, to operate several new moving companies throughout Kentucky. (193) Soon after the case was decided the state enacted new legislation repealing the Competitor's Veto requirement for moving companies, (194) and state transportation officials later announced that because they saw no distinction between the Competitor's Veto law in the moving industry and in other industries, they would therefore apply the Bruner decision to all transportation industries. (195) In other words, to operate any transportation firm in the state, an individual need only be qualified and abide by public safety laws. (196)

   It is too early to report on the consequences of eliminating Kentucky's Competitor's Veto law, but evidence from Missouri suggests that it will lead to a flourishing of new businesses as the barrier to entry collapses under the pressure of supply to meet consumer demand. (197) As the court noted, the fact that moving companies were able to operate illegally for long periods without obtaining a license demonstrates an unmet need for new moving services in the state.

2. The Struggle Continues

   Though gratifying, the result in Bruner is unusual. Far more often, judges sacrifice entrepreneurs' rights under the rational basis test on the dubious theory that people deprived of economic liberty can and should obtain relief from the legislature instead of the courts. To borrow a term from Robert McCloskey, this notion is at best an "amiable fiction," (198) since small business owners rarely have the political resources necessary to have CPCN laws or other restrictions on their economic liberty eliminated.

   Consider the case of Maurice Underwood, a Reno entrepreneur who tried to start a moving company in his home state in 2011. Nevada's licensing restrictions for moving companies are arguably the most anticompetitive in the country. The state requires any CPCN applicant to prove to the Nevada Transportation Authority that, among other things: (1) "the operation of, and the provision of such services by, the applicant ... will foster sound economic conditions within the applicable industry"; (2) "[t]he granting of the certificate ... will not unreasonably and adversely affect other carriers operating in the territory"; (3) "[t]he proposed operation ... will benefit and protect ... the motor carrier business in this State"; (4) "the potential creation of competition in a territory which may be caused by the granting of the certificate ... will [not] unreasonably and adversely affect other carriers operating in the territory"; (199) and (5) the new business will not "create competition that may be detrimental to ... the motor carrier business within this State." (200)

   Note the extreme vagueness of these standards. Asked at a legislative hearing to define "sound economic conditions," the Chief Executive Officer of the Nevada Transportation Authority testified, "It is what it is ... you know it when you see it." (201)

   The statute gives existing moving companies the privilege of filing an objection (called a "petition to intervene") to any application for a CPCN, (202) and, as in Kentucky, they are not required to allege that the applicant is a danger to the public. All applicants are required to participate in a hearing, whether or not such a petition is filed, and are required to prove these and other factors to obtain a CPCN.

   Underwood did not know about this law when he started his company, which he named "Man With Van...