By Drew Erteschik and J.M. Durnovich

erteschik_drew_LHIntroduction

Most of us left law school with the understanding that so-called “economic liberty” challenges to state regulations will generally fail under rational basis review.  That area of the law, however, has changed dramatically.

This article looks at the change in three parts:

The first part offers a brief refresher on the history of economic liberty challenges in the 20th century.

The second part describes a flurry of recent cases involving successful economic liberty challenges on substantive due process grounds.

The third part examines some possible legal and policy explanations for the modern trend.

20th Century Views

In 1905, the U.S. Supreme Court decided Lochner v. New York, a case that considered a state law capping the maximum hours for bakery employees.[1]  The Court struck down the law on the grounds that it violated the “right of an individual to be free in his person and in his power to contract in relation to his own labor.”[2]  Over the next thirty years—the “Lochner era”—the Supreme Court struck down a number of state laws that infringed upon economic liberty rights.[3]

The Lochner era, however, was short-lived.  Headlined by the Court’s decision in U.S. v. Carolene Products, the Great Depression ushered in the post-Lochner era—a time when the Court established a presumption of constitutionality for state regulations.[4]  Most scholars attribute the shift to non-jurisprudential reasons:  If President Roosevelt’s New Deal was to survive constitutional challenges, the Court needed to dilute Lochner’s potency.[5]

By 1955, the Supreme Court had cemented its deferential standard of rational basis review for economic liberty challenges.  In Williamson v. Lee Optical, the Supreme Court upheld a state law requiring an optometry license to refit lenses in new frames because “it might be thought” that the legislation was a rational response to some problem.[6]

Since Williamson, the Supreme Court has struck down only one licensing restriction under rational basis review: a state law barring Communists from practicing law.[7]

The 21st Century Trend

The Supreme Court’s decision in Williamson turned sixty last year, and for most of its tenure, not much changed in the lower courts.  Recently, however, there has been a remarkable shift in how both federal and state courts approach economic liberty challenges.

Beginning in the early 2000s, and increasing with frequency in the past several years, courts have ushered in a notable, modern trend: a ramped-up brand of substantive due process that strikes down state regulations suffering from significant flaws.

These notable recent decisions include:

  • decisions from the Fifth and Sixth Circuits striking down state laws requiring a funeral director’s license for casket making;[8]
  • a Ninth Circuit decision overturning a state law imposing pesticide licensing requirements on non-insect, pest-control professionals;[9]
  • federal district court decisions in Utah and Texas striking down state laws requiring a cosmetology license for hair braiders;[10]
  • a Texas Supreme Court decision striking down a state law requiring a cosmetology license for professionals offering eyebrow threading—a “grooming practice mainly performed in South Asian and Middle Eastern communities” that “involves the removal of eyebrow hair and shaping of eyebrows with cotton thread.”[11]

These courts have not been bashful in condemning regulation that they found nonsensical.  The Sixth Circuit, for example, wrote that the government’s justification for the casket-making regulation struck the Court “with the force of a five-week-old, unrefrigerated dead fish.”[12]

Other jurists, while less colorful, have been similarly unrestrained.  The Texas Supreme Court’s concurring opinion in the eyebrow-threading case, for example, noted that courts in these types of cases “are increasingly asking whether societal benefits are being subordinated to the financial benefits of those lucky enough to be licensed.”[13]  Likewise, the North Carolina Court of Appeals noted outside of the due process context that there is simply “no advantage in redundant regulation.”[14]

The Texas Supreme Court’s decision in Patel v. Texas Dep’t of Licensing and Regulation is a particularly interesting example of the modern trend.  There, the Court construed the Texas Constitution to impose an additional element beyond the traditional rational basis test:  that the law is unconstitutional if “the statute’s effect as a whole is so unreasonably burdensome that it becomes oppressive in relation to the underlying governmental interest.”[15]

As the concurring opinion put it, this version of rational basis review “bears a passing resemblance to ‘rational basis’-type wording,” but, in reality, amounts to “rational basis with bite—demanding actual rationality, scrutinizing the law’s actual basis, and applying an actual test.”[16]  The concurring opinion went on to express a sentiment common in the cases described above:  that “[i]f judicial review means anything, it is that judicial restraint does not allow everything.”[17]  In other words, “[t]he rational-basis bar may be low, but it is not subterranean.”[18]

While the other cases noted above apply a federal substantive due process analysis rather than a state constitutional version of that analysis, the result has been the same: a renewed willingness of courts in economic liberty challenges to “second-guess the degree to which the law actually serves the asserted interest, and the degree to which a less burdensome law would serve the law just as well.”[19]

Indeed, applying this new brand of rational basis review, it is difficult to imagine courts sustaining the types of laws that were sustained in the post-Lochner era—for example, a state law requiring permits to sell ice.[20]

Explanations for the Modern Trend

There appear to be at least two possible explanations for the rise of these new economic liberty decisions.

First, a number of these recent cases involve the specter of economic protectionism.  In those cases, courts have repeatedly shown a willingness to apply a much more penetrating analysis of whether the government’s interest is truly a “legitimate government interest.”

The U.S. Supreme Court has long recognized that “official” economic protectionism—in other words, government actors protecting their own pocketbooks from competitors—is not a legitimate government interest.[21]  In 2015, however, the Court in N.C. State Bd. of Dental Exam’rs v. FTC took this recognition to new heights:  Targeting self-interested “active market participants” who control licensing boards, the Court cited to a well-known law review article describing certain licensing boards as “cartels . . . comprised of private competitors deputized to regulate and to outright exclude their own competition, often with the threat of criminal sanction.”[22]  These and similar attitudes may be driving the results in cases in which economic protectionism is a factor.[23]

Second, it appears that courts, like policymakers, have begun to realize the dangers of overburdensome licensing laws—a movement that has been embraced across the political spectrum.[24]

While “the government understandably wants to rid society of quacks, swindlers, and incompetents,”[25] studies confirm that overburdensome licensing has serious negative consequences, many of which are disproportionately inflicted on lower-income workers.[26]  These negative consequences include fewer job opportunities, preventing workers from moving across state lines, and lowering wages for unlicensed workers who have equivalent education, training, and experience as licensed workers.[27]  In addition, overburdensome licensing laws can reduce competition, causing consumers to pay higher prices for the same (or lesser) goods and services.[28]

This regulatory expansion has grown steadily over time.  In the 1950s, only one in twenty Americans needed a license for their chosen profession.[29]  Today, that number is nearly one in three.[30]

While most of these licensing schemes likely have ample justification, some may be difficult to justify.  State laws currently require licenses for “shampoo assistants,”[31]florists,[32] horse masseuses,[33] Bingo game administrators,[34] interior designers,[35] and fortune tellers.[36]  It is difficult to imagine what an unauthorized-practice proceeding brought by the Fortune Teller Licensing Board might look like.

Conclusion

As the cases above show, substantive due process claims have become a potent weapon in economic liberty cases.  Unlike 20th century courts, 21st century courts have not hesitated to strike down regulatory schemes with significant flaws—especially those regulations that are motivated by raw economic protectionism.

While only the Fortune Teller Licensing Board can see the future, the authors expect that this modern trend will continue.

This article states the authors’ individual views, and not necessarily the views of any client.

[1]         198 U.S. 45 (1905).

[2]         Id. at 58.

[3]         See, e.g., Coppage v. Kansas, 236 U.S. 1 (1915) (striking down state law barring employers from contracting to prohibit employees from joining unions); Adams v. Tanner, 244 U.S. 590 (1917) (striking down state law barring certain employment agencies from assessing fees for their services); New State Ice Co. v. Liebmann, 285 U.S. 262 (1932) (striking down state law barring the sale of ice without a permit).

[4]         304 U.S. 144 (1938).

[5]         See Larkin, Public Choice Theory and Occupational Licensing, 39 Harv. J.L. & Pub. Pol’y 251 (Winter 2016).

[6]         348 U.S. 483, 488 (1955).

[7]         Schware v. Board of Bar Examiners, 353 U.S. 232 (1957).

[8]         St. Joseph Abbey v. Castille, 712 F.3d 215 (5th Cir. 2013);Craigmiles v. Giles, 312 F.3d 220 (6th Cir. 2002).

[9]         Merrifield v. Lockyer, 547 F.3d 978 (9th Cir. 2008).

[10]        Clayton v. Steinagel, 885 F. Supp. 2d 1212 (D. Utah 2012); Brantley v. Kuntz, 98 F. Supp. 3d 884 (W.D. Tex. 2015).

[11]        Patel v. Texas Dep’t of Licensing and Regulation, 469 S.W.3d 69, 73 (Tex. 2015).

[12]        Craigmiles, 312 F.3d at 225.

[13]        Patel, 469 S.W.3d at 105 (Willet, J., concurring).

[14]        Trayford v. N.C. Psych. Bd., 619 S.E.2d 862 (N.C. Ct. App. 2005).

[15]        Patel, 469 S.W.3d at 87.

[16]        Id. at 98 (Willett, J., concurring) (emphasis in original).

[17]        Id. at 95 (emphasis in original).

[18]        Id.

[19]        Eugene Volokh, Texas Supreme Court (somewhat) reinvigorates “substantive due process” protection for economic liberty, The Volokh Conspiracy, June 26, 2015, available athttps://www.washingtonpost.com/news/volokh-conspiracy/wp/ 2015/06/26/texas-supreme-court-somewhat-reinvigorates-substantive- due-process-protection-for-economic-liberty/ (last visited Sept. 2, 2016).

[20]        Liebmann, 285 U.S. 262.

[21]        See, e.g., Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411 (1983); City of Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978); H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 537-38 (1949).

[22]        N.C. State Bd. of Dental Exam’rs v. FTC, 135 S. Ct. 1101, 1116 (2015) (citing Edlin & Haw, Cartels by Another Name: Should licensing occupations face antitrust scrutiny?, 162 Univ. Penn. L. Rev. 1093, 1094 (2014)).

[23]        See Suzanne Hoppough, The New Unions, Forbes, Feb. 25, 2008, available athttp://www.forbes.com/PART_FORBES/2008/0225/100.HTML (last visited Sept. 4, 2016) (suggesting that licensing boards are now “the main vehicle for workers seeking to shield themselves from competition”); see also Patel, 469 S.W.3d at 103 (Willett, J., concurring) (stating that “[n]aked economic protectionism, strangling hopes and dreams with bureaucratic red tape,” is not a constitutionally protected governmental interest).

[24]        In 2015, the Obama Administration published a report examining state licensing regimes.  See Dep’t of Treasury, et al., Occupational Licensing: A Framework for Policy Makers (July 2015).  This report ultimately recommended that states “ensure that licensing restrictions are closely targeted to protecting public health and safety, and are not overly broad or burdensome.”  Id. at 43.  The Institute for Justice has published a study reaching similar conclusions.  See Carpenter, et al., License to Work: A National Study of Burdens from Occupational Licensing (Institute for Justice, May 2012).  Here in North Carolina, the General Assembly’s Program Evaluation Division also reached similar conclusions in a 2014 report.  SeeProgram Evaluation Division, N.C. General Assembly, Final Report to the Joint Legislative Program Evaluation Oversight Committee, Report No. 2014-15 (Dec. 17, 2014).

[25]        Patel, 469 S.W.3d at 101 (Willett, J., concurring).

[26]        See id. at 109 n. 121.

[27]        See White House Report at 4.

[28]        See id. at 12.

[29]        Patel, 469 S.W.3d at 102–03 (Willett, J., concurring).

[30]        Id.

[31]        Ala. Code § 34-7b-1(21).

[32]        La. Rev. Stat. Ann. §§ 3:3804(A)(2), (3), (4), (C), (D), 3:3809.

[33]        172 Neb. Admin. Code § 182-004.02D.

[34]        16 Tex. Admin. Code § 402.402(b)

[35]        N.M. Code R. § 16.42.3.8(A).

[36]        Mass. Gen. Laws Ann. ch. 140 § 185I(2).