Wednesday, September 17, 2003

Rights and Reason: Where Cosmetology and Real Estate Converge

Virginia Postrel blogs the story of a self-employed Texas beautician who, despite having the required state cosmetology license, is facing the government’s wrath over a supplemental licensing requirement:
Little did she know that the state requires an "independent contractor's license," which entails no additional qualifications, merely a $65 fee. This license is, as far as I can tell, purely a shakedown. You pay your money and give them your address. The license has nothing to do with either professional qualifications (that's the cosmetology license) or tax payments (that's another state department). But those $65 fees add up. And if you don't have the independent contractor's license, you get socked with a $500 fine--precious working capital Denise had planned to use for supplies. (Her landlord got hit with a $1,000 fine for each contractor who lacked the required license.) She is not a happy entrepreneur.

After a bit of rooting around, I managed to find some some mention of the independent contractor's license on the state cosmetology commission's website. But it would be very easy to overlook that information, which isn't featured on the home page. From a first glance, you'd think the commission was concerned with professional qualifications and protecting the public from bad perms and mangled manicures. But you'd be wrong.

This harassment is happening in business-loving, entrepreneur-celebrating Texas. It persists because this sort of petty bureaucratic hassle--and the associated hidden taxes--is so routine that it doesn't constitute "news" and hence never becomes a political cause. But it's stifling business expansion just when the economy most needs it, and it's punishing bold, productive people.
Licensing regulations exist under the state’s general “police” powers to protect the public’s health and safety. State legislatures, however, see few practical limits to police power, and state courts are reluctant to get in the way even when a requirement is clearly unconstitutional or unlinked to any rational health and safety justification.

A case I’m working on right now raises issues similar to the example cited by Postrel. In New York State, it is against the law for individuals to sell apartment rental listings without a special “apartment information vendor” (AIV) license, which is separate from a general real estate broker’s license. The AIV law was passed in the late 1970s to combat potential fraud in the rental market; for example, individuals might sell repackaged newspaper rental listings as original compilations. The AIV law places substantial burdens on legitimate businesses, however, such as mandatory refunds on request and a ban on advertising specific properties.

In 1992, LaLa Wang started, an online multiple listing service (or MLS) for customers looking to rent apartments. In most markets, real estate brokers form an MLS to combine their individual listings into a single, shared database. The traditional MLS concentrates resources in the hands of the brokers. New York City, however, is one of the few major markets to lack an MLS (in part because New York’s notorious rent control laws create an artificial supply shortage that make high-commission rentals too valuable a commodity for brokers to share with one another). Wang’s service changed all that. Not only did MLX create a de facto MLS, it did so in a more open platform than a traditional service: Customers could directly access the MLX database via a password protected account.

New York officials, and their political allies in the traditional real estate industry, used the AIV law to try and shut Wang down. They claimed that Wang needs an AIV to operate her service. But the Internet-based MLX service is merely a forum to exchange rental listings, not the type of self-contained lists that were the intended target of the AIV law. Wang’s service is no different than a newspaper that runs apartment listings, yet New York officials acknowledge newspapers do not need an AIV license to operate.

Furthermore, the AIV law’s requirements make it nearly impossible for an Internet-based listing service to succeed. For example, the law requires brokers to refund all but $15 to a customer on demand, with or without reason. MLX charges about $249 for access to its database, meaning all but $15 would have to be refunded to a customer who searched the listings and didn’t find what they were looking for. Few businesses have a legal obligation to refund a fee after the service was used in full.

Far from protecting consumers, the AIV law serves as a practical barrier to entry, especially for newer technology-based services that look to compete with established real estate brokers, or even protected forums like newspapers.

When Wang refused to get an AIV on grounds that it would either make MLX’s business illegal or unprofitable, the New York secretary of state revoked her regular real estate broker’s license. It did so on the sole ground that she was “untrustworthy” to hold a broker’s license--the refusal to obtain an AIV license itself being “untrustworthy” behavior. Wang appealed the secretary’s decision to the New York courts, which turned a blind eye to her challenge. Wang is now considering a final appeal to the United States Supreme Court on federal constitutional grounds.

The most obvious constitutional defect with New York’s regime is the trampling of free speech rights. If Wang wants to offer a forum to exchange information, the state has no right to restrict or restrain such efforts under the First Amendment. There is no allegation of fraud or misrepresentation against Wang--only her failure to comply with an irrational licensing regime that arguably doesn’t apply to her business model in the first place. The state affords Wang a lesser degree of First Amendment protection based on the forum she chooses to operate; remember, if Wang started publishing a newspaper that contained the same type of listings she provides now, the state would not require the AIV license.

Like the recently settled Nike case, Wang’s battle with New York is a question of so-called “commercial speech” rights. The state is regulating speech based on economic motive. The First Amendment does not permit this, but most courts simply look the other way. The Supreme Court itself articulated a needlessly complex “commercial speech doctrine” to review regulations like New York’s, and even under that test, the AIV law has unjustly restricted Wang’s rights, not to mention her economic livelihood.

As Virginia Postrel notes, state regulatory abuse is so routine now that it doesn’t rise to the level of a political cause. But folks like Wang, who are battling the system despite the odds, show us that there may yet be a crusade to be waged (and won) against the ever-expanding abuse of “police” powers over the economic rights of Americans.

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