You Shouldn’t Have to Ask Your Competitors for Permission to Start a Business

Occupational licensing laws make it harder and more expensive for people to get jobs or to create innovative businesses that might not fit into to conceptual box designed by last generation’s regulators. Worse, while these laws are supposed to be about protecting consumers against dangerous or inept practitioners, they’re often exploited by existing businesses to bar newcomers from competing against them.

But these problems are nothing compared to “Certificate of Public Convenience and Necessity” laws, also called “Certificate of Need” or CON laws. Unlike typical licensing rules, CON laws don’t have anything to do with whether a person is educated or qualified. Instead, they prohibit you from going into business unless you first prove to bureaucrats that a new business is “needed.” And these laws rarely define “need,” or explain how to prove it. Still worse, such laws usually allow existing firms to block a newcomer from staring a competing business. In short, CON laws bar you from going into business until you get permission from your own competitors. (It sounds like something from an Ayn Rand novel, right?)

Last week, Cato adjunct scholar Timothy Sandefur and his colleagues at the Pacific Legal Foundation filed a motion with a federal judge in Kentucky asking the court to strike down that state’s CON law for moving companies. The details are here, and they’re telling.

There have been 39 applications for new moving licenses since 2007. Those that were not “protested” by existing moving companies were approved without incident. But in 19 cases,  existing firms did object. And in all of those cases, one of two things happened: either the applicant gave up and abandoned the application, or the government denied it on the grounds that existing moving services were “adequate.” The state never approved an application that was protested by existing firms, no matter what. In one case, an applicant who’d been working for moving companies for 39 years was denied a license in a decision that declared him fully qualified–but said existing companies didn’t need the competition. No wonder Sandefur calls the law “the Competitor’s Veto.”

Notably, of the 114 “protests” filed against applications for new moving licenses in the past five years, all said that the reason for protesting was that a new moving company would cause competition. None even alleged that the applicant was dangerous or incompetent or dishonest.

Not only is Kentucky’s CON law explicitly designed to protect established companies against entrepreneurs who want to work hard to support themselves, but they’re also incomprehensibly vague. What is a “need”? What qualifies as “adequate”? Nobody knows, and state officials testified under oath that they don’t use any objective standards when making such determinations.

The Bluegrass State, by the way, isn’t the only example of this sort of thing. In an article forthcoming in the George Mason Civil Rights Law Journal, Sandefur demonstrates the same pattern in Missouri, where he challenged the constitutionality of a very similar law. There, too, all of the 110 protests filed against moving license applications were filed by existing firms, and all explicitly said that their only reason for objecting was to avoid competition. (That law was repealed last year.)

The Supreme Court has made clear that licensing requirements must focus on the applicant’s “fitness or capacity to practice the profession,” and it has invalidated CON laws that only protect cartels against competitors. Like those laws, Kentucky’s CON law isn’t about protecting the public. It’s based on fallacious and outdated economic theories that saw competition as wasteful and inefficient. Economists now generally agree that competition is the source of efficiency – and that when government tries to decide what kind of businesses are “needed,” that power will be captured by private interests seeking to benefit themselves at the expense of consumers and entrepreneurs. Here’s hoping the court strikes down the Kentucky anti-competition law and enforce the constitutional right to earn a living.