According to George Will, the most significant blow against crony capitalism in 2014 may have been a little-noticed court ruling in Kentucky.
In his regular column, Will contends that, “last year’s most encouraging development in governance” might have been a District Court ruling — the first of its kind since 1932 — striking down a “certificate of necessity” (CON) regulation in Kentucky.
The judge in that case, “struck a blow for liberty and against crony capitalism,” Will says, by overturning a significant barrier to entry for new businesses that hindered both efficiency and innovation. (RELATED: Adam Smith Opposes Regulation of Taxi Industry)
To obtain a CON, a new business must demonstrate not only that it is, “fit, willing, and able properly to perform” its stated purpose, but also that existing supply is “inadequate,” and that the good or service the company supplies “is or will be required by the present or future public convenience and necessity.”
Moreover, CON applicants must notify their prospective competitors, who can and frequently do file protests. Even if they are dismissed, such protests impose legal costs that many new businesses cannot afford.
From 2007 to 2012, Will claims, “39 Kentucky applications for CONs drew 114 protests,” and only three “persevered through the hearing gantlet.” All three were ultimately denied their CON’s. (RELATED: Seven Myths About Net Neutrality Regulation)
Raleigh Bruner was not even aware of Kentucky’s CON regulations when he founded the Wildcat Moving Company in Lexington in 2010 with dreams of operating statewide, but became uncomfortably familiar with it when competitors sought to shut him down for failing to obtain a CON.
Bruner, with the help of the Pacific Legal Foundation, reacted by filing a lawsuit alleging that, “the CON process violates the Constitution’s equal protection clause,” because it advantages established companies over new entrants; and also violates the 14th Amendment’s protection of “privileges and immunities,” specifically the right to earn a living.
In a Pacific Legal Foundation press release, Bruner asserted, “It was a shock to learn that Kentucky required new moving businesses like mine to be approved by other moving companies in order to serve the public.”
“This isn’t the American way, and that’s why I went to court,” he explained, adding that the right to establish new businesses primarily benefits consumers, by forcing down prices and improving the quality of goods and services.
U.S. District Court Judge Danny Reeves apparently endorsed that argument in his February 3 ruling, which the PLF claims, “held that it is unconstitutional for government to favor some companies over others merely for the purpose of protecting existing businesses from competition.”
“Today’s historic ruling is a victory for entrepreneurs, for consumers, and for the free enterprise principles embodied in the Constitution,” proclaimed Timothy Sandefur, the principal attorney who argued the case for the PLF.
George Will reports that the last time a U.S. court issued such a ruling was in 1932, when the Supreme Court struck down an Oklahoma law requiring new ice companies to prove a “public need” for their service.
At the time, the Court accepted the argument that the law served to “foster monopoly in the hands of existing establishments,” illegally impinging on “the opportunity to apply one’s labor and skill in an ordinary occupation.”
However, “Since 1938, courts have—without justification from the Constitution’s text or structure—distinguished between rights deemed ‘fundamental’ and others pertaining to economic life,” opening the door to a torrent of occupational licensing laws requiring certification of everything from casket makers to fortune tellers. (RELATED: Study: Occupational Licensing Burdens Low-Income Workers, Entrepreneurs)
Judicial tolerance of CON laws, Will argues, is an abdication of judicial responsibility: “Such judges are either confessing that they cannot fathom basic political processes or they are saying that they cannot trust themselves to recognize brazen, unapologetic rent-seeking when they see it.”
If other courts accept and adopt Judge Reeves’ precedent, though, it could lead to “judges returning to judging, thereby doing something rare in government—rethinking a wrong turn.”
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