On January 28, 1993, the Institute for Justice filed a lawsuit on behalf of four entrepreneurs challenging the constitutionality of the Denver taxicab oligopoly. The three-company oligopoly is maintained by the Colorado Public Utilities Commission (PUC) and the state legisla-ture. Their regulatory regime creates an insurmountable barrier to entry into the Denver taxicab market. Since 1947, every application to operate a new taxicab business has been denied.
As a result, countless qualified individuals have been denied the right to earn a living in a business ideally suited to entry-level entrepreneurs. And the general public, especially in low-income, minority communities, suffers from inadequate, unreliable, and costly taxicab service.
The ramifications of this lawsuit extend far beyond Denver and the parties involved. Taxicabs are heavily regulated in cities such as Los Angeles, Chicago, Boston, New York, Miami, Buffalo, Houston, and San Francisco, and market entry is tightly restricted. Taxicab regulations often far exceed legitimate safety concerns, and instead are designed to protect existing companies from competition. The barriers to entry are entrenched and long standing. A 1974 study by the United States Department of Transportation found that regulations restricting entry of new cabs and preventing discounting of fares cost consumers nearly $800 million annually. Moreover, removal of these restrictions would create 38,000 new jobs in the taxi industry.1
The situation remains just as bad today. These new jobs and business opportunities would offer vital hope for those at the bottom of the economic ladder. As The New York Times recently noted, taxidriving has for generations been recognized as a “poor man’s gateway to mainstream America.”2 The current regulatory scheme in Denver benefits only the three existing companies, their lobbyists, and their lawyers.
This lawsuit is part of a comprehensive effort to restore judicial protection for “economic liberty” — the basic civil right of every American to pursue a business or profession free from arbitrary or excessive government regulation. Economic liberty is an essential part of our nation’s promise of opportunity.
THE QUEST FOR ECONOMIC LIBERTY
Following the Civil War, southern governments acted quickly to suppress economic opportunities for newly emancipated slaves by heavily regulating entry into trades and businesses. The national government, acting first through the Civil Rights Act of 1866 and then through the Fourteenth Amendment, sought to protect economic liberty among the “privileges or immunities of citizenship.”3
But in the 1872 Slaughter-House Cases4, the U.S. Supreme Court by a 5-4 vote essentially read the privileges or immunities clause out of the Constitution. Since that time, states have regulated with impunity entry into trades and professions, often for reasons unrelated to public health or safety, such as social discrimination and protection of professional cartels.
Recently, courts have acted to restore some judicial protection for economic liberty under the due process and equal protection clauses of the Fourteenth Amendment. In Brown v. Barry5, for instance, a federal court in 1989 struck down Washington, D.C.’s Jim Crow-era ban on streetcorner shoeshine stands.
The Institute for Justice challenges arbitrary regulatory barriers on behalf of people who are currently outside the economic mainstream. Earlier this month, the District of Columbia City Council deregulated entry into the cosmetology profession in response to an Institute for Justice lawsuit on behalf of African-American hairbraiders. The Institute’s efforts are designed to restore protection for economic liberty as a fundamental civil right.
HISTORY AND SCOPE OF TAXICAB REGULATION
Horse-drawn cabs served American cities without significant regulation through the 19th century. The first motorized taxi-cabs appeared in America in 1897, when the Electric Carriage and Wagon Company placed 12 electric taxicabs in service in New York City. In 1907, New York witnessed the introduction of 65 gasoline-powered automobiles equipped with taximeter-s. Within a year, internal combustion-driven taxis eclipsed all other forms of taxicabs.
The birth of the modern taxicab in the United States oc-curred without restrictions on the free market; still, those restrictions were not long in coming. Some believe today’s heavy regulation of the industry in the United States was a response to “ruinous competition” that harmed the public during the Great Depression. To the contrary, close historical analysis indicates that, not only was there no “ruinous competition,” but the majority of taxicab regulations were already in place in the late 1920s.6 During the 1930s car prices and wages fell, bringing large numbers of drivers into the industry. The Federal Trade Commission found that:
Many unemployed workers entered the taxi industry using rented cars, and as a result taxi fares, occupancy rates, and revenues per cab declined. Pressures for restrictions on the taxi industry came from the American Transit Association, public transit firms, the National Association of Taxicab Owners (which passed a resolution favoring entry and minimum fare controls) and the established taxi fleet.7
Entry restrictions did not even pretend to protect the “public interest,” and were often couched in explicitly anti-competitive terms. Improved safety or reduced congestion and pollution were occasionally given as reasons, but only as after-the-fact rationalizations. In reality, regulators wanted to “‘drive many cut-throat cabs, operating without authority, from the streets and . . . enable the organized cab fleets and transit companies to increase their profits.”8
There has been little change in the way taxicabs are regu-lated since the wave of restrictions of the 1930s. For example, with the 1937 Haas Act, New York issued 13,566 taxicab medallions (licenses required to operate a taxicab). Today, there are only 11,800 medallions in the city.9 Existing medallions can be sold to new operators, but at a price of $140,000 apiece; most aspiring entrepreneurs lack resources to enter the profession. Similar artificially high costs of entry exist in the majority of U.S. cities. Over the years, the taxicab industry in heavily-regulated cities (like Los Angeles, Chicago, Boston, Miami, Houston, San Antonio, Buffalo, Albany, Salt Lake City, and San Francisco) has stagnated. Poor quality, high fares, and long waiting times are now the standard in many cities where taxicab giants have taken control of the market with the aid of regulation. Chicago and Los Angeles, where regulations forbid new taxicab services, illustrate this clearly; in both cities, powerful monopolies have bought out the competition and raised taxicab fares, while new competition cannot enter the market.10
While some cities prohibit outright new entrants to the taxicab market, others achieve the same results while preserving the facade of open entry. Many cities like Denver and Philadelphia condition entry on a showing of “public convenience and necessity,” a standard in practice almost impossible to satisfy. A 1983 survey of 103 cities with populations of 50,000 or more found that 87 percent restricted entry in some manner:
30 percent had a fixed number of licenses; 9 percent had a fixed ratio of licenses to population; 25 percent required a showing of public convenience and necessity to obtain a license; 6 percent had franchise require-ments; and 17 percent had minimum service standards.11
While safety and insurance requirements are valid, there is no reasonable basis for restricted entry. A 1984 study of taxicab regulations by the Federal Trade Commission concluded that “there is no persuasive economic rationale” for most regulations, stating “restrictions on entry, minimum fare controls, and restrictions on ride-sharing . . . reduce rather than increase efficiency.”12 Economists, left and right, agree virtually unanimously and state that consumers are big losers (second only to would-be cab owners); they pay higher fares, wait longer for a cab, and get worse service than they would with competition.13
Poor, minority, and elderly consumers are hit especially hard by these regulations.14 Members of these groups are less likely to own cars and are more likely to live in areas that are served poorly, if at all, by taxicabs and other forms of public transit. A study commissioned by the Urban Mass Transit Administration determined that by every measure, low-income individuals “rely more heavily on taxicabs than do higher income individuals.”15 As another study concluded:
In addition to causing misallocation of resources, taxi regulations adversely affect the distribution of income. Low-income people spend a larger percentage of their incomes on taxis than do high-income people, and in many taxi markets, consumption of taxi rides per capita is higher for low-income people. As a result, [these regulations] impose a disproportionate burden on low-income people.16
As Dr. Walter Williams remarks, “The[se] laws are not discriminatory in the sense that they are aimed specifically at blacks. But they are discriminatory in the sense that they deny full opportunity for the most disadvantaged Americans, among whom blacks are disproportionately represented.”17
TAXICAB REGULATION IN DENVER
As common carriers, taxicabs were placed under the regulatory authority of the newly-created Colorado Public Utilities Commission (PUC) in 1913. By 1935, the PUC controlled entry into the taxicab market and regulated the fares that taxis could charge. Every taxicab company was required to have a certificate of public convenience and necessity issued by the PUC. Each certificate specified how many taxicabs each company could operate.
To obtain a certificate, an applicant must demonstrate both that adequate service is not being provided and that the existing companies cannot provide adequate service. The applicant must meet a virtually impossible legal standard by demonstrating “substantial inadequacy” of service. There are no objective criteria by which a new applicant can determine what must be done to demonstrate inadequacy of service. Even if an applicant demonstrates substantially inadequate service, existing companies can easily refute this by declaring their ability to provide additional service and asserting that the new company would duplicate service already being provided. Existing companies hire teams of lawyers to contest applications from new entrants. With such an impossible barrier to surmount, it is not surprising that no new taxicab company has been allowed to start in Denver since 1947.18 Meanwhile, virtually all other forms of transportation in Colorado, including luxury limousines; off-road scenic tours; charter buses; couriers; trash haulers; transporters of sand, dirt, gravel, or road surface material; freight haulers; and household goods movers do not have such barriers to entry.
The taxicab market in Denver consists of three companies: Yellow Cab, Zone Taxi, and Metro Taxi. All three of these firms have origins in the 1930s. While they may be rivals in the market, they all band together to keep new taxicab companies out of Denver. In the recent hearing on Quick Pick Cabs’ application, Yellow Cab and Zone Taxi were even represented before the PUC by the same lawyer.
In 1951, Yellow Cab took over Rocky Mountain Transportation and the Publix Cab Company and began operations with a fleet of 75 taxicabs.19 It remained locally owned until 1976, when a partnership of Texas businessmen purchased the company. When the Texans decided to sell the company in 1979, the union took control of the troubled firm.20 However, the change in ownership was not enough to make Yellow Cab successful. In 1983, the company was riding high with gross revenues of $17 million,21 but by 1986, its revenues had fallen to $6.4 million with an operating loss of $2,545 and outstanding debts totalling $800,000 (of which $500,000 were past due).22 Revenues continued to fall in 1987, dropping to $6 million while the net loss rose to $166,000.23 As the Denver Post reported in 1987, Yellow Cab executives blamed the economy for their woes, but a veteran Yellow Cab driver blamed the company for the troubles: company committees “spend too much time smoking cigarettes, drinking coffee, and arguing. There’s too much overhead and they don’t get enough work done.”24 By 1988, Yellow Cab was on the auction block again, but this time with no takers. High debts and low revenues finally forced the company into receivership in May 1991, where it remains today.
Metro Taxi Inc. began as the brainchild of five executives of East Coast taxicab firms; finding Denver a prime site for their innovative marketing techniques, they purchased Ritz Cab from its local owner. Ritz was founded in 1932; by 1985 (the year of its sale) it had a tiny fleet of only 32 taxicabs. However, the new owners of Metro had much bigger plans for the small firm: within a year, they had increased their taxicab fleet five-fold. Coupled with an aggressive marketing campaign, they began to capture a large share of the Denver taxicab market.25
A taxicab company’s fleet can only be expanded with the permission of the PUC; how could a newcomer like Metro accomplish this nearly impossible task? According to Yellow Cab attorney Isaac Kaiser, the company “cut a deal” on fleet size with Yellow and Zone.26 Each company agreed not to oppose applications for more taxicab permits by Zone and Metro; as a result, Zone increased its fleet from 75 taxicabs to 150, and Metro from 32 to 150 taxicabs.27 Yellow Cab, meanwhile, has authorization for 600 taxicabs.
This is not the end of the story. At the same time Metro was buying out Ritz Cab, the PUC received two applications for new taxicab companies: one from Yellow Cab drivers that wanted to form a new company, and another from the owners of taxicab companies in Houston and Austin, Texas. Colorado State Senator Joe Winkler suggests that the newly-created Metro colluded with Zone and Yellow Cab to keep the new companies from obtaining a license by agreeing to raise the number of taxicabs that each could operate, thus eliminating demand for a fourth company. Although the Texans protested the expansion of service by Zone and Metro (because it would hurt their chances of proving a need for their service), the PUC ruled that only current holders of permits could protest applications, and the expansion of the fleets was approved. Meanwhile, both applications to form new taxicab companies were rejected after the three existing companies filed protests against them.28
As a result, the Denver taxicab market today is an oligop-oly, even as the three existing firms demonstrate inefficient management and poor service to low-income neighborhoods. And a potential avenue for legitimate entrepreneurial opportunity is completely and unnecessarily extinguished.
THE CURRENT CONTROVERSY
The Institute for Justice is representing four experienced drivers who grew frustrated with the inefficient management and increasingly onerous leasing requirements of the taxicab company. Leroy Jones is representative of the drivers wishing to start their own business. Jones drove a Yellow Cab for two years, but left after disputes with the company over its treatment of drivers. He now earns his living as a travelling salesman, but no longer has the income or the flexibility of hours he enjoyed as a successful taxicab driver. An aspiring entrepreneur, Jones has formed a taxicab company that will provide a work environment that respects drivers, encourage driver participation and ownership, and provide taxicab service to all areas of Denver. Jones has joined forces with three other entrepreneurs and experienced taxicab drivers, Ani Ebong, Rowland Nwankwo, and Girma Molalegne, to form Quick Pick Cabs, Inc.
Quick Pick Cabs applied to the PUC for a certificate of public convenience and necessity in summer 1992. Yellow Cab and Zone Taxi, along with 10 other transportation companies all protested the application.
As earlier described, current PUC rules give tremendous advantage to the existing companies anytime a potential competitor applies. The applicant must meet a virtually impossible legal standard by demonstrating substantial inadequacy of service. But equally insurmountable are the procedures allowing well-heeled opponents to dramatically raise the application costs through burdensome requests for information from the applicants. In typical fashion, the protesting companies served Quick Pick Cabs with enormously complex and demanding interrogatories soliciting information about everything from Quick Pick Cabs’ five-year advertising plan to the names of over 100 individuals currently driving a taxicab for one of the three companies who had agreed to work for Quick Pick Cabs. On November 24, 1992, Quick Pick Cabs’ application for a certificate of public convenience and necessity was summarily denied.
The inequities and the inefficiencies of the regulated taxicab monopoly aroused even the PUC to urge reform. In June, 1992, the PUC advocated easing entry and regulation through legislation placing taxicabs under the doctrine of regulated competition. Under this less onerous doctrine, they would still be regulated for safety and insurance, but applicants would have to show only that their entry would serve the public interest. Senate Bill 9318 was recently introduced in the Colorado legislature to achieve this reform, but similar efforts in the past have been soundly defeated by lobbyists for the taxicab companies.
The PUC regulatory regime that governs entry into the Denver taxicab business prevents Mr. Jones and his colleagues from pursuing their chosen profession. This de facto ban on new companies regulation bears no relation to protection of public health, safety, or welfare. All such legitimate public interests could be served by regulations far less sweeping. In addition, no rational basis exists to regulate taxicabs in a manner that unnecessarily destroys entry-level entrepreneurial opportunities, while permitting regulated entry of newcomers in other transportation businesses. As a result, the regulatory regime deprives these aspiring entrepreneurs of the opportunity, protected by the Fourteenth Amendment to the U.S. Constitution, to pursue a trade or business.
Although decisions of the PUC have been litigated in state court before, this lawsuit is the first to challenge the constitutionality of the PUC-created taxicab monopoly and the regulatory regime that perpetuates it.
The personal impact of the de facto ban on new taxicab businesses on the lives of Leroy Jones, Ani Ebong, Rowland Nwankwo, and Girma Molalegne is devastating. It impairs their ability to earn a good living for themselves and for their families. It limits the opportunity to develop their considerable skills and to work for themselves, instead of others. It destroys their dream of a brighter future. These aspiring entrepreneurs realize there is no guarantee of success in a competitive economy, but it was only upon encountering this ban that they realized that they would not even have a chance to compete. Until the state’s oppressive ban is removed, they will be denied one of the most basic civil rights . . . the right to earn an honest living.
The Institute for Justice advances a rule of law under which individuals control their destinies as free and responsible members of society. Through strategic litigation, training, and outreach, the Institute secures greater protection for individual liberty, challenges the scope and ideology of the Regulatory Welfare State, and illustrates and extends the benefits of freedom to those whose full enjoyment of liberty is denied by government.
For more information contact:
John Kramer Director of Communications Institute For Justice 1001 Pennsylvania Avenue, N.W. Suite 200 South Washington, D.C. 20004 (202) 457-4240
Produced: January 1993.