How Licensing Laws Cripple Competition

Certificate of Necessity requirements trample on the right to earn a living.

In 2004, Maurice Underwood was just a man with a van.

When he made the decision to start his own moving company, Underwood was running an established small business in Reno, Nevada, providing home cleaning services.  A moving business was a natural next step, he thought, after he noticed several of his clients inquiring about moving services.

A year later, the government came calling.

One of Underwood's trucks was cited in 2005 for operating without a license ? in the state, anyone can load or unload a truck, but special permission from the state government is required to drive a loaded truck from point A to point B.  He paid the fine and began the process of bringing his company, Man With A Van Moving, in compliance with the state law.

He soon learned that the only way to get a license in Nevada was to comply with a law requiring proof that his business would not "unreasonably and adversely" affect other companies by creating additional competition.

Another part of the same law indicates the "legislative intent" of the licensing rule ? to discourage competition that may be detrimental to the existing carriers in the state.

Timothy Sandefur is a lawyer with the Pacific Legal Foundation, a nonprofit law firm that challenges laws impeding economic and civil liberties. He is the lead attorney on a federal case challenging the legitimacy of the Nevada licensing law, which he calls "the most blatant anti-competition law" in the nation.

Licensing requirements like those in Nevada are part of that broader problem. Known generally as Certificate of Necessity laws, the requirements apply to trucking companies, movers, limousine and taxi drivers, and even hospitals. They allow private companies to use the strength of the state government to keep competitors from entering the market, or to require large up-front investments of time and money that discourage potential competitors.  

It adds up to a system that benefits the established, entrenched interests at the cost of entrepreneurs ? and, ultimately, consumers, Sandefur said.

"Wal-Mart could make a lot more money if they could use the government to make Target illegal," he said.

In a federal court filing, the Pacific Legal Foundation argues the Nevada government is "irrationally and arbitrarily discriminating against" Underwood in a violation of the U.S. Constitution's equal protection clause.

Andrew MacKay, chairman of the Nevada Transportation Agency, which oversees just about anything that moves objects or people around the Silver State, takes a different view of his state's licensing requirements.

In his six years as chairman of the agency, MacKay says he has never seen an applicant denied a license, provided they go through the entire application process. And he disagreed with the view that the licenses are a mean to keep out competition.

"In short, the Legislature enacted those laws to ensure that the trucking and shipping industries are adequately protecting the public safety," MacKay said.  

Though he declined to discuss the specifics of the Underwood case because of the ongoing litigation, MacKay said he is a former businessman who understands the importance of competition.

"I believe in the free market," he said. "But if you're going to hire a mover or a limousine company, there is an expectation that you are getting someone who can do the job safely and economically, without price gouging."

The battle rages elsewhere as well.

In 2009, Raleigh Bruner started a new moving company and learned that he had to obtain an "Intrastate Household Goods Certificate" from Kentucky's perfectly bureaucratic-sounding Transportation Cabinet Division of Motor Carriers.

And the only way to do it was to win approval from the existing license-holders in the state.

Once one of those other companies protested, state law requires the new applicant to hire a lawyer ? owners are not allowed to represent themselves at the state board ? and begin a lengthy process of hearings that costs a new company valuable start-up cash.

In practice, the only way a new business can get a license is to prove there are not already enough movers in the market to meet demand, said Tom Underwood (no relation to Maurice), state director of the Kentucky chapter of the National Federation of Independent Businesses.

"This is a state-controlled monopoly, that's all there is to it," Tom Underwood said.

But the days might be numbered for the moving cartels in Kentucky. Brunner filed a lawsuit in federal court last year to get the Kentucky law overturned. Though the case is still pending, there is now legislation in the state Senate that would deregulate Kentucky's moving industry.

Existing license holders oppose the change, saying it would decrease the value of their licenses, but Underwood points out that the licenses have only become such expensive commodities as a result of the state's restricted market.

Despite the opposition, Underwood said there is enough support for the bill to be passed into law before the state Legislature's annual session ends in mid-March.

These state licensing laws are hardly a new phenomenon ? and neither is the fight against them.

The first such laws were created in the late 19th century and designed to protect semi-monopolies like railroads, but they gradually evolved into government-enforced bans on competition in a variety of sectors.

In 1932, the U.S. Supreme Court struck what should have been a decisive blow. In New State Ice Company v. Leibmann, the court struck down an Oklahoma law that banned the delivery of ice unless a new delivery company could prove to a state board there was a public need for more deliveries.

The board that made the decision, perhaps unsurprisingly, was staffed by the owners of existing ice companies.

In the 7-2 ruling, Justice George Sutherland wrote "it is beyond the power of the state, under the guise of protecting the public, arbitrarily to interfere with private business or prohibit lawful occupations."

But that ruling did little to stop the march of restrictive licensing laws. In recent year, though, the tide has started to turn.

In 2007, Minnesota lawmakers eliminated a state law requiring new moving companies to give notice to existing companies.

A year later, the Ninth Circuit Court of Appeals overturned a California state law for licensing pest control workers.

In 2009, the Pacific Legal Foundation challenged a similar law in Oregon on behalf of college student Adam Sweet and his start-up moving company, 2Brothers Moving. A federal judge declined to overturn the law, but the Oregon Legislature removed moving companies from the licensing requirement, though it remains in place for other types of carriers and taxi companies.

In 2012, Missouri lawmakers brought an end to a similar law that gave existing moving companies veto power over new applicants.

Missouri State Rep. Eric Burlison (R-Springfield), who sponsored the legislation that changed that law, said the old arrangement created some nonsensical loopholes for companies to operate.

New moving companies could obtain federal licenses, but faced a harder time obtaining state licenses, which could be blocked by existing companies.  

As a result, some start-up companies could legally move a customer from inside Missouri to Kansas or Kentucky or elsewhere across state lines, but would be operating outside the law if they tried to move the same customer to a neighboring town in Missouri.

"It absolutely insane that we would forever enshrine certain businesses and make sure they would never get any competition," Burlison said. "That's not the role of government and it should never have been the role of government."