Exposing Taxis to Competition from Uber and Lyft Is Not a Taking that Requires Compensation Under the Constitution

A federal court correctly rejects a dubious takings claim by Philadelphia cab companies.

It is no secret that taxi company profits have taken a major hit because of competition from ride-sharing services such as Uber and Lyft. Some cab companies have tried to recoup their losses by filing lawsuits claiming that they are entitled to compensation under the Takings Clause of the Fifth Amendment, which mandates that the government must give "just compensation" to people whose "private property" is taken by the state. They contend that jurisdictions that issue medallions to taxi companies have, in effect, created a property right entitling those firms to exclude competition from ride-share services. A recent ruling by federal district Judge Michael Baylson of the Eastern District of Pennsylvania rightly rejects such a claim filed by Philadelphia cab companies [HT: Nick Sibilla of the Institute for Justice].

The key flaw in the taxis' position is well summarized by an earlier opinion in a similar case decided by the Seventh Circuit Court of Appeals in 2016. It was written by Judge Richard Posner, probably the most distinguished federal lower court judge of the last several decades. Baylson quotes part of the following telling passage from Posner's ruling:

[T]he City [of Chicago] is not confiscating any taxi medallions; it is merely exposing the taxicab companies to new competition —competition from Uber and the other TNPs [Transportation Network Providers].

"Property" does not include a right to be free from competition. A license to operate a coffee shop doesn't authorize the licensee to enjoin a tea shop from opening. When property consists of a license to operate in a market in a particular way, it does not carry with it a right to be free from competition in that market… Indeed when new technologies, or new business methods, appear, a common result is the decline or even disappearance of the old. Were the old deemed to have a constitutional right to preclude the entry of the new into the markets of the old, economic progress might grind to a halt. Instead of taxis we might have horse and buggies; instead of the telephone, the telegraph; instead of computers, slide rules…..

Taxi medallions authorize the owners to own and operate taxis, not to exclude competing transportation services. The plaintiffs in this case cannot exclude competition from buses or trains or bicycles or liveries or chartered sightseeing vehicles or jitney buses or walking; indeed they cannot exclude competition from taxicab newcomers, for the City has reserved the right… to issue additional taxi medallions. Why then should the plaintiffs be allowed to exclude competition from Uber?

The issuance of medallions does not create a legal right to to exclude competitors, even if cities often used the medallion system to create an artificial scarcity of competition, thereby fleecing consumers and driving up taxi company profits. Baylson also effectively refutes the Philadelphia taxi firms' claim that the Philadelphia medallion system should be interpreted to create a constitutionally protected property right even if similar systems in other cities do not (see pp. 55-56 of his opinion). The simple fact of the matter is that, while the medallions may be protected property rights, "[t]here is no allegation that the government seized or confiscated medallions." And the medallions do not create constitutionally protected "property rights in the transportation market itself, which are nowhere mentioned in statute [that established the medallion system]."

I would go further and suggest that even if the laws conferring medallions did explicitly guarantee the holders protection against competition, that still would not be enough for courts to require compensation under the Takings Clause. The Clause does not require government to compensate businesses for any and all policies that reduce their profits. Compensation is only necessary if the government takes "private property." A state-created legal right to exclude competitors from a market is not private property. It goes beyond giving the holder control over his or her own property, and instead allows them to restrict the use of others' property (in this case, cars). Such a right is not private property as that concept is usually understood in Anglo-American law, and certainly would not have been considered such by the framers and ratifiers of the Fifth Amendment.

One could point to the example of intellectual property as a property right protected by the Takings Clause, despite the fact that it is in large part a legal right to constrain competition. But, as my George Mason University colleague Adam Mossoff argues in an important article, the Founders may have considered patent and copyright to be "natural" property rights, not merely government-created monopolies. If Mossoff is right, intellectual property is readily distinguishable from government-created cartels in conventional markets, including taxi medallion systems. If not, perhaps courts should rethink the status of intellectual property under the Takings Clause (though Congress would, of course, remain free to provide compensation to aggrieved intellectual property owners by statute).

In addition to claiming that the government's failure to suppress competition from ride-share firms violates the Takings Clause, the Philadelphia taxi companies also contend that it violates the Equal Protection Clause of the Fourteenth Amendment. Baylson effectively disposes of this weak claim, too.

This ruling is the latest in a series of federal court decisions rejecting similar takings claims by taxi companies. The judge does an excellent job of summarizing the earlier decisions on the subject, and notes that he could find "no legal precedent in which a medallion-holding taxi company survived a motion to dismiss on a comparable takings theory, much less received a damage award." Hopefully, taxi companies will see the writing on the wall, and stop trying to use constitutional litigation to suppress their rivals. As Baylson puts it, "[a] court is not suited to protect market participants from competition, or from changing consumer preferences… the resolution of competitive combatants must take place in the marketplace, rather than in a courtroom."