The government cannot use its power to protect private companies against competition from others. But for years, this is exactly what Milwaukee did: it limited the number of cabs that could operate in the city to about 320. The result was a taxi cartel. In 2011, a group of independent cab drivers who were shut out of the market joined with the Institute for Justice in a lawsuit to challenge Milwaukee’s protectionist ordinance. They won a complete victory in April 2013 when a state court struck down the ordinance as unconstitutional, freeing the transportation market after nearly 25 years of stagnation.
In response to the cabbies’ victory, the city passed a new ordinance in July 2014 providing a simple procedure for any driver to get licensed and drive a cab with an insured, inspected and safe vehicle. The new law also permits ride sharing companies, such as Uber and Lyft, to compete with taxis for riders.
The new ordinance infuriated the former taxi cartel, which sued the city in federal court on August 25, 2014 to block the new ordinance from taking effect. The cartel’s lawsuit effectively claimed it has a legal right to maintain its monopoly forever.
Two cab drivers joined with the Institute for Justice to ensure that the new ordinance took effect and that they were free to drive their own cabs. They intervened in the lawsuit filed by the taxi cartel—fighting the cartel in order to cement their previous victory, and defend their recently vindicated right to earn an honest living, free of unreasonable government regulations. Fighting alongside the city, they won, both in the district court and then at the Seventh Circuit Court of Appeals. This victory set a precedent that makes it easier for other cities to reform their antiquated transportation systems.
A Brief History of Milwaukee’s Unconstitutional Taxi Cartel
Between 1991 and 2014, if you wanted to own the cab you drove for a living in Milwaukee you needed one of the city’s few available taxi permits. Milwaukee’s taxi laws strictly limited the number of cabs that could operate. You had to be one of the privileged few who received a permit in 1991 or you had to buy one from someone who already owned one.
If any existing owner failed to renew a permit, that permit was cancelled forever, meaning that by 2014, only about 320 cabs were permitted to operate in the city—even fewer than were operating in 1991. The limit—about one taxi for every 1,850 residents—made Milwaukee a taxi wasteland. By contrast, Washington, D.C., has about one taxi for every 90 residents; smaller cities like Denver and Seattle have about one cab for every 480 and 940 residents, respectively.i
These artificial limits on competition served the interests of an increasingly powerful taxi owners’ cartel. The price to buy a permit from an existing owner rose to approximately $150,000 per cab—more than the average value of a Milwaukee single family home. The taxi permit cap made the lucky few with permits well off—and one company, which had come to control more than two-thirds of all of the permits in the city by 2014, very rich.ii Without the capital to afford an existing permit or get new ones from the government, independent taxi drivers were relegated to renting the right to operate a cab from one of the privileged permit holders.
These consequences were no surprise: In 1991, a handful of brave members of Milwaukee’s Common Council (including Alderman John Kalwitz and today’s Common Council President Michael Murphy) had warned of exactly this result and attempted to prevent the cap from becoming law without success. The law was even harder to repeal.
Milwaukee’s taxi permit cap presented a classic case of regulatory capture: The benefits of the system were concentrated in a few permit holders while the costs were diffused among consumers, drivers and would-be owners. The permit holders wanted to keep permits scarce so their values remained high and they also wanted to artificially-suppress the supply of cabs so that each cab had an excess of passengers waiting to keep profits high.
The city’s cab drivers and would-be transportation entrepreneurs were hit hardest—their right to earn a living was hampered by the protectionism—yet they had only a small voice in city government compared to the established taxi cartel. Consumers and drivers alike tolerated the status quo for years on the simple premise that “you can’t fight city hall.”
The price to buy a taxi permit rose to approximately $150,000 per cab—more than the average value of a Milwaukee single family home.
Independent Taxi Drivers’ Lawsuit Brings Transportation Freedom to the City
It turns out, though, that you can. In 2011, represented by the Institute for Justice, three Milwaukee cab drivers sued the city, and won.iii In April 2013, Judge Jane Carroll of the Milwaukee County Circuit Court ruled that the cap violated the drivers’ right to earn an honest living, which is protected by the Wisconsin Constitution.iv She found that the cap had no rational basis other than shielding existing cab owners from competition, something that the government cannot constitutionally do.
The lawsuit vindicated the rights of independent taxi drivers and gave the Common Council’s reformers a court mandate to undo the City’s protectionist taxi permit scheme. In response to the lawsuit, the council first increased the number of permits by 100—to a total of 420 cabs permitted to operate in the city.v This, however, did not make the permit scheme constitutional; it just made the cartel slightly larger. The council offered the new permits by lottery, but was shocked when would-be entrepreneurs entered more than 1,700 applications in the lottery for a chance to drive their own cab. The surge of individuals with the desire to drive for a living helped prove that the cab drivers were right all along: the artificial cap was deeply protectionist and there was an enormous pent-up demand among Milwaukee drivers to start their own businesses. Moreover, in the months surrounding the lottery, other contract passenger carrier services—such as Lyft and Uber—entered the Milwaukee market and became popular among riders by providing alternative transportation options to compete with traditional cabs.
These events convinced a majority of Milwaukee’s aldermen that it was time to acquiesce to the court’s ruling. On July 22, 2014, the Common Council therefore passed a new ordinance completely eliminating the cap on taxi permits and allowing for competition from alternative contract passenger carriers. This new ordinance is at the heart of the present litigation.
The Taxi Cartel Strikes Back
The old taxi cartel has responded furiously to the freeing of the Milwaukee market. A group of related companies owning 162 permits, and headed by Joe Sanfelippo Cabs, Inc., has argued that its incumbent taxi owner members have a right to be protected by the force of law against competition from new taxi owner/drivers and alternative services.vi They filed a lawsuit against the city in federal court on August 25, 2014 to prevent the new ordinance from going into effect.
The taxi cartel argues that its members’ constitutional rights have been violated because the new ordinance reduces the value of their permits on the secondary market and causes them to compete on the free market with new drivers. In short, they demand that the city pay them the difference between the value of their permits on the secondary market under the previous, unconstitutional permitting scheme, and the value of those permits today. They also demand a prohibition of alternative services, like Uber or Lyft. The taxi cartel’s suit seems to ignore the fact that the inflated prices previously paid for taxi permits for years by drivers on the secondary market were due solely to the former, protectionist ordinance—which was declared unconstitutional in state court in 2013 and held to violate transportation entrepreneurs’ right to earn a living.
Simply put, all of the taxi owners’ arguments are naked attempts to return to an era in which they got rich through an unconstitutional scheme by which cabs were artificially limited and the rights of independent transportation entrepreneurs were systematically denied.
Drivers Intervening to Defend Freedom against the Taxi Cartel
Two independent taxi drivers have joined with the Institute for Justice to intervene in the lawsuit between the taxi cartel and the City of Milwaukee. Whenever a lawsuit between two people substantially affects the rights of third parties, such as the cab drivers in this case, they have a right to intervene and assert their rights in that lawsuit. That is what the Institute for Justice and its taxi-driver clients are doing now.
Jatinder Cheema and Saad Malik fear that if Joe Sanfelippo Cabs, Inc. and the other cab companies prevail in their suit—or the City of Milwaukee goes back on its reform—they will lose their right to own a cab in the city and to earn an honest living free of unreasonable regulation.
Jatinder is a Milwaukee resident who has been driving cabs since 2002. He rents a permit from one of the existing permit holders, driving a night shift. He would like to own his own cab so he can drive during hours he sets for himself. Jatinder and two fellow drivers, Ghaleb Ibrahim and Amitpal Singh, were plaintiffs in the original lawsuit against the city that led to the protectionist ordinance being struck down as unconstitutional.
Joining Jatinder in the present lawsuit is Saad, who also rented a cab for years in Milwaukee. Like Jatinder, Saad did not win a permit in the lottery, but his mother did, which has enabled him to drive a cab for his family since June 2014. He dreams of owning more cabs one day, and now can do so because of the cap’s complete repeal.
The Intervenors’ Legal Challenge: Taxi Cartels Have No Legal Right to Be Protected From Competition
The claims of the taxi cartel come down to one simple but false theory: that they have a legal right to be protected from competition. They are wrong.
First, the taxi cartel claims that they are owed compensation from the city because the new ordinance has “taken” from them the value of their taxi permits on the secondary market. In other words, under the old, unconstitutional and protectionist law, anyone who wanted to drive a taxi would have had to pay the cartel a substantial sum—while under the new law, anyone can get a license by applying to the city and complying with reasonable regulations without paying anything to the cartel. The taxi cartel thinks that is unfair and wants compensation from the city. It is true that the U.S. Constitution requires that the government provide compensation whenever it takes private property for public use.vii But the taxi cartel can still do everything they formerly could do. They still have their permits and are still free to operate cabs. The existing taxi permit owners simply have increased competition—and there is no legally enforceable property right requiring the government to prohibit others from competing against you in an ordinary business like taxi driving.
Second, the taxi owners are also challenging Milwaukee’s decision to allow alternative services such as Lyft and Uber to provide rides for hire to consumers in the city. But the law is clear that plaintiffs cannot use the Equal Protection Clause to demand the arrest of their business competitors. If taxis are being treated worse than alternative services, the remedy is for the taxis to be treated better, not for the other services to be treated worse.
Simply put, all of the taxi owners’ arguments are naked attempts to return to an era in which they got rich through an unconstitutional scheme by which cabs were artificially limited and the rights of independent transportation entrepreneurs were systematically denied. That chapter of history was closed with a court decision in 2013—the story of transportation freedom is Milwaukee’s future.
Institute for Justice: 20 Years of Protecting Transportation Freedom
Founded in 1991, the Institute for Justice is the national law firm for liberty. IJ engages in cutting-edge litigation and advocacy to defend individual rights nationwide. This challenge to defend transportation freedom in Milwaukee follows the Institute’s 2013 victory in which Milwaukee’s ordinance imposing limits on the number of cabs was declared unconstitutional. IJ is currently representing transportation entrepreneurs against unreasonable regulations in Chicago (http://www.ij.org/chicago-ridesharing), Portland (https://ij.org/portlandsedans) and Tampa, (http://www.ij.org/tampafares), and has defeated protectionist transportation cartels and regulations in Denver, Minneapolis, Las Vegas, New York and Nashville in years past.
The Litigation Team
FLead counsel for the Institute for Justice is Attorney Anthony Sanders, who is based in IJ’s Minnesota office. He is joined by Larry Salzman, an attorney from the Institute’s headquarters in Arlington, Virginia. Local counsel for the case is Milwaukee-area attorney Mike Dean.
For more information, please contact:
J. Justin Wilson Director of Communications Institute for Justice (703) 682-9320 ext. 206 [email protected] http://www.ij.org/milwaukee-taxi-freedom
i See Bruce M. Schaller, Entry Controls in Taxi Regulation: Implications of US and Canadian experience for taxi regulation and deregulation, at 6, available at http://www.schallerconsult.com/taxi/entrycontrol.pdf.
ii Task force calls for improvements to city’s taxi fleet, Milwaukee Journal Sentinel, 1B-2B (Mar. 22, 2005), available at http://news.google.com/newspapers?nid=1683&;dat=20050321&id=_L0aAAAAIBAJ&sjid=dEUEAAAAIBAJ&pg=4247,331612.
vi Complaint, available at http://www.ij.org/images/pdf_folder/economic_liberty/mke_taxis/joe-sanfelippo-complaint-8-25-14.pdf
vii U.S. Constitution, am. V (“nor shall private property be taken for public use, without just compensation”).
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