Private companies cannot use government power to outlaw competition, yet this is precisely what the established taxi cartel in Minneapolis tried to do.

In October 2006, the city removed an artificial government-imposed cap on the number of taxis legally permitted to operate within city limits. The new ordinance increased the number of taxicabs on the street each year until 2010, when the cap will be lifted entirely, opening the door to all taxi businesses that are fit, willing and able to serve the public.

Predictably, the city’s taxi cartel sued to keep out newcomers by attempting to maintain its stranglehold on the industry. The cartel’s action was the last gasp of a dinosaur that free-market reforms have made extinct.

The cartel’s baseless lawsuit threatened the civil rights of entrepreneurs like taxicab owner Luis Paucar. Simply put, Luis has the right to earn an honest living in the occupation of his choice free from government-enforced barriers to entry erected to protect existing companies.  That is why on May 1, 2007, the Institute for Justice Minnesota Chapter (IJ-MN) filed legal papers to intervene in the suit brought by the taxi cartel in order to defend the free-market reforms on behalf of Luis Paucar and his new company.

The judge allowed IJ to intervene and in December 2007, Federal District Court Judge James Rosenbaum ruled in favor of Paucar and adopted the recommendation of Federal Magistrate Franklin Noel that all five counts of the Taxi Coalition’s complaint should be dismissed.

The Taxi Coalition then appealed the case to the U.S. Court of Appeals for the 8th Circuit.  After argument, in July 2009, a unanimous panel of the 8th Circuit upheld the constitutionality of Minneapolis’ deregulation of the local taxi industry and rejected entirely the cartel’s absurd takings claim.  The court’s opinion reflected fully IJ’s argument that municipalities may not be held hostage by the threat of a takings claim for the premium that entrenched interests pay, in secondary markets, for licenses that are restricted in number and then deregulated.

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In 2006, the city of Minneapolis opened its taxi market to competition, freeing entrepreneurs who for decades had been shut out by the city’s government-imposed taxi cartel—and giving consumers more options than ever.  Immediately after the reforms became official in 2007, the established taxicab companies who benefited from the cartel filed suit in a desperate attempt to maintain their stranglehold on the city’s taxi market.  In the recently filed lawsuit, the cartel absurdly contends that freedom for consumers and entrepreneurs is unconstitutional.

For decades, the entrenched cartel benefited from a cap on the number of vehicles permitted to operate a taxi within city limits.  But that doesn’t mean their privileged position was unchallenged.  As far back as 1984, efforts have been made to end the anticompetitive and collusive market for transportation services in Minneapolis.  Those efforts included a lawsuit by the Federal Trade Commission and successive legislative pushes for reform during the 1990s.  Yet as late as October 2006, the city was limited to 343 regular taxis and the established procedure for increasing that number and allowing new entrepreneurs into the market lay dormant and unenforced.  Compared to cities like Boston and St. Louis that have approximately one cab for every 300 residents, the Minneapolis market was closer to an astonishingly low one cab per 1,000 residents.

Finally, on October 12, 2006, the city broke the cartel’s grip and acted to correct this injustice: The mayor signed into law reforms to the city’s taxi ordinance removing the government-imposed cap and opening the market to entrepreneurs that are fit, willing and able to serve the public.   The reforms were finalized on March 30, 2007.  In response to the passage of reform, the cartel filed suit against the city.

Simply put, the free-market reforms adopted by the city open a market that had been closed by anti-competitive regulation.  The reforms restore freedom of choice for consumers, and they open the door of economic opportunity to entrepreneurs and taxi drivers.  They certainly do not deprive anyone of the right to obtain a taxi license or to operate a taxi company.  But, ironically, that’s just what the cartel’s lawsuit attempts to do.

On May 1, 2007, the Institute for Justice Minnesota Chapter filed a motion to intervene in the lawsuit brought by the established taxi cartel.   On behalf of taxicab entrepreneur Luis Paucar and consumer Blanca Prescott, IJ-MN is intervening in the lawsuit defend the city’s free market reforms against the cartel’s unfounded attack.

Luis Paucar:  Entrepreneur with an American Dream

Luis Paucar embodies the American Dream.  He came to the United States with a vision of becoming a successful entrepreneur.  Through hard work and dedication, he turned that dream into a reality.

Upon his arrival from Ecuador, he secured his status as a permanent resident and put his entrepreneurial skills to work.  While succeeding in business as a grocery store owner in south Minneapolis, he saw an opportunity to provide affordable transportation to individuals often ignored by the existing taxicab cartel.  In particular, he sought to fill an important niche by offering dispatchers as well as drivers that are fluent in Spanish.

In October 2003, Luis created A New Star Limousine and Taxi Service, Inc.  He began the company from a basement office near his corner grocery.

As late as the fall of 2005, no licensed taxi service company in Minneapolis offered both Spanish-speaking dispatchers and drivers.  Nonetheless, Luis was prohibited by Minneapolis’ antiquated taxi ordinance from legally operating his taxi service within city limits.

Luis tried to find a way to operate A New Star legally in Minneapolis by obtaining taxi licenses from the cities of St. Paul and Richfield and limousine permits from the state of Minnesota.  But this cluster of licenses made it absurdly difficult for Luis to operate his business in Minneapolis.

For example, under the old Minneapolis Taxi Code, taxis licensed outside the city were permitted to drop off passengers inside city limits, but they could not pick up those passengers or solicit any other business in Minneapolis.  Consequently, A New Star’s St. Paul and Richfield taxis were forced to “deadhead” back to their staging areas after dropping off their passengers, meaning they could not pick up passengers on their return routes.  Luis’s drivers tried to pick up taxi passengers by offering a limousine service, but the premium fares were often too costly for passengers.

Additionally, the city restricted Luis’s limousine service to advance-scheduled passenger pickups.  Any attempt at coordinating A New Star’s taxi and limousine services was impractical for all but the most regular customers.  And if a limousine missed a scheduled passenger-pick up, it could not respond to “street hails” much less “troll” for fares along city streets.  When attempting to coordinate taxi and limousine services, Luis regularly risked the significant economic losses associated with both taxis and limousines “deadheading” empty back to a staging point.

Ultimately, the mix of licenses and vehicles operated by Luis, and the hope of coordinating the services he could legally offer, was a recipe for confusion and penalties under the discriminatory taxi code.   For four years, Luis tried desperately to obtain taxi vehicle licenses for A New Star Taxi from the city of Minneapolis and was continually frustrated by seemingly insurmountable regulatory hurdles.

Unlike the established cartel, Luis has never asked for special favors.  He merely wants the opportunity to peacefully run his business while honestly competing for customers.  Until the city opened the market, however, Luis was unable to legally offer his much needed services.

Blanca Prescott:  Experiencing the Taxi Cartel Firsthand

Blanca Prescott has suffered through horrible, firsthand experiences of life in a city plagued with a taxicab cartel.  Blanca, a young, single mother of three who went completely blind due to illness at age 20, relies on taxi service for transportation around Minneapolis.  Her family cannot afford a car and her neighborhood is too hazardous, particularly given her condition, for her to feel safe using the city’s bus service.

On June 7, 2005, hours before her daughter’s graduation from Head Start, she telephoned Luis Paucar’s company, A New Star, and scheduled a multi-stop trip, involving travel to the local K-Mart and then on to her daughter’s ceremony.  A New Star’s driver waited in the parking lot for his blind passenger.

But while the driver was assisting Blanca back into his car for the second leg of the trip, he was cited for operating a taxi in Minneapolis without a government-approved license.  The Minneapolis police officer ordered Blanca out of the car, had the vehicle towed and left her in the parking lot to fend for herself.  It was 5:30 p.m. and her daughter’s graduation was at 6:30 p.m.  No other taxis were in the vicinity, and Blanca eventually arrived late to her daughter’s graduation.  Luis Paucar and his driver spent the next six months in court battling the citation.

Blanca discovered A New Star in late 2003 after terrible service from the existing Minneapolis taxicab cartel, including Red & White Taxi, Blue & White Taxi, and Rainbow Taxi.  Wait times varied wildly from 15 minutes to almost two hours.  Sometimes taxis never came or were dispatched to the wrong address.  Drivers refused to walk Blanca to her door and even dropped her off two or more houses down the street from her home with no help.  Blanca encountered rude service and believes she was overcharged by drivers taking unnecessarily long routes.  She believes that Rainbow’s poor service was because they took her business for granted, knowing she had few options.

By contrast, her service with A New Star has been outstanding.  The drivers walk her from her door, help her in the car, walk her to her destination and speak in Spanish, which is her preference.  The dispatcher always calls if the car will be late and her wait time is usually between five and 10 minutes.

Minneapolis Adopts Free Market Taxi Reform

The taxi reforms enacted on October 12, 2006, and amended in minor respects on March 30, 2007, make it possible for Luis Paucar to do business in Minneapolis and for Blanca Prescott to freely use his services.  The reforms gradually eliminate the license cap by 2011 by authorizing the issuance of 45 new licenses nearly semi-annually from 2006 through 2010 and lift the cap thereafter.  They replace the old law’s subjective “public-convenience-and-necessity” test—which favored existing companies—with an objective “fit, willing and able” standard for determining the issuance of new taxi vehicle licenses.  Also, they allow entrepreneurs to apply for and receive taxi vehicle licenses together with an application for a service company license without being required first to join an existing taxi company, thus ending the gatekeeper power of existing companies.

The passage of taxi reform was supported by an abundance of evidence.  At numerous public hearings conducted between May and October 2006, the City Council entertained and considered evidence and testimony from members of the public as well as experts in the fields of transportation law, policy and economics.

Professor Jeremiah E. Fruin, PhD., of the University of Minnesota, Center for Transportation Studies, submitted a written personal statement and presented live testimony based on peer-reviewed studies of the taxi industry as well as the testimony and detailed studies that underpinned the 1995 reforms.

In summary, Professor Fruin testified:

The city’s restriction on the number of taxi vehicle licenses through its cap on the number of licenses created a cartel that did not serve any legitimate public purpose.

There was no reason to believe the city of Minneapolis was an exception to the general rule that any legal restriction on the number of taxicabs directly causes artificially high rates, less service and lower quality taxi service than would otherwise exist under conditions of free entry regulated only by reasonable public health and safety requirements.

The consensus of economists, as well as experts in the field of transportation law and economics, showed that increasing the number of taxicab licenses results in lower taxi rates, more taxi service, more innovative taxi service, higher quality taxi service and more consumer demand for taxi service when combined with the enforcement of reasonable public health and safety regulations.

The city’s restriction on the number of taxi vehicle licenses was the critical mechanism that produces low taxi driver compensation because it tipped the balance in favor of the already-licensed taxicab owner against the taxi driver, making taxi drivers “modern urban sharecroppers.”

When taxi reform was finalized on March 30, 2007, everything changed for Luis.  A New Star was awarded 12 taxicab vehicle licenses.  As a result, Luis’s existing taxi and limousine service is free to expand neighborhood taxi service throughout Minneapolis.  Luis made significant investments in infrastructure, vehicles and personnel in anticipation of applying for these taxicab vehicle licenses.

After nearly twenty-five years of struggle, entrepreneurs like Luis Paucar of A New Star Taxi are now free to access the marketplace based solely on their fitness, willingness and ability to furnish basic transportation services to the public.  Further, consumers like Blanca Prescott are finally free to choose among taxi companies who now must engage in genuine competition to earn their business.

Luis has finally realized the opportunity that America promises and Blanca feels liberated by the sense of independence made possible by greater freedom of choice.  The threat posed to A New Star and Blanca from the cab cartel’s lawsuit is both economic and deeply personal.

History and Scope of Taxicab Regulation

The current battle is not the first over the Minneapolis taxi market—nor is the first time the taxi cartel has sued to maintain its government-granted and unconstitutional privilege.  For almost 25 years, the Minneapolis Taxi Code has been a tug-of-war between those who want a legalized cartel and those who believe in the entrepreneur’s right to earn an honest living and the consumer’s freedom to choose.  Before current reforms, the Minneapolis Taxi Code was the tattered remnant of nearly a quarter century of legislative and legal wrangling that shows the power of the entrenched taxi cartel.

In 1984, the Federal Trade Commission filed suit against the city of Minneapolis for the anticompetitive and collusive nature of its taxicab-licensing ordinance, which was alleged to violate antitrust laws because of the cap it placed on the number of taxicab licenses.[1]  The lawsuit alleged that the city of Minneapolis engaged in illegal conduct that had several undesirable effects:

Eliminating and preventing competition between competitors and potential competitors in the operation of taxicabs in Minneapolis

Strengthening the market power of authorized taxicab companies operating in the Minneapolis taxicab market

Raising, fixing, stabilizing, maintaining, or otherwise interfering or tampering with the rates charged for taxicab service in and from Minneapolis

Depriving interstate and intrastate consumers of taxicab services in and from Minneapolis of the benefits of free and open competition in taxicab services [2]

The FTC withdrew its lawsuit only after the city reformed its taxi ordinance in 1985 to raise the number of taxicab licenses from 248 to 323 by February 1, 1986, and to include flexible licensing regulations, which would result in as many as “an additional 25 licenses every year thereafter.”  In connection with the enactment of these reforms, the FTC observed “[t]hese changes offer the prospect of preventing the anticompetitive conduct alleged in the complaint by strongly facilitating new entry into the Minneapolis taxicab market.”

The Empire Strikes Back

The 1985 reform ordinance was almost immediately challenged in state court by the Minneapolis Taxicab Owners Association, the apparent forbearers of today’s cartel[3].  The city did not vigorously contest the lawsuit, and did not oppose the continuation of a temporary restraining order barring the implementation of the 1985 reform ordinance for nearly three years.  Then, in March 1988, the city of Minneapolis repealed the 1985 reform ordinance, reinstated a taxicab license cap, and further imposed the limitation that no additional licenses could be issued unless “required” for the “public convenience and necessity.”

The minutes from the related March 23, 1988, committee meeting did not point to any genuine public purpose for its reinstatement of the license cap; instead, the ordinance was described as being “in the nature of a settlement of a lawsuit brought by the taxicab industry.”[4]

On May 11, 1988, the Minneapolis Taxicab Owners Association’s lawsuit was quietly dismissed with prejudice.  Importantly, there was no consent judgment and the dismissal order does not mention any settlement agreement.

The industry’s legal threats appear to have worked—and to have carried weight years later.  In 1993, when Minneapolis’ city council was debating whether to amend add a provision for the issuance of temporary licenses without a public convenience and necessity hearing, reform efforts were strangled by another apparent legal threat from the taxi industry.

The Minneapolis Taxi Task Force

A few years later, the city made another attempt at free-market reforms.  During the spring and summer of 1995, the city of Minneapolis put together a Taxi Task Force.  The Taxi Committee held hearings, considered several policy papers and wrote a report.  City Council eventually passed amendments to the Minneapolis Taxi Code that modestly liberalized the Code by making it easier for new licenses to be issued and mandating hearings every two years to determine if more taxi licenses would be needed.[5]  Additionally, 70 new licenses were issued and a lottery was established for the issuance of 35 new licenses as well as the issuance of forfeited and temporary licenses.[6]

But even these modest reforms were too much for the taxi cartel.  It filed suit in an effort to reverse them.  The case was dismissed by both a trial and appellate court.[7]

Despite the pro-free-market reforms passed in 1995, and made effective in 1996, the city still capped the current number of renewable “regular” taxi vehicle licenses at 343.[8]  And while the Code required the City Council to consider increasing the number of authorized licenses following a “public convenience and necessity hearing” at least every two years, the city did not conduct such a hearing for more than 10 years.

In essence, existing taxi companies continued to act as the gatekeepers to the Minneapolis taxi market—until the 2006 reforms now subject to the taxi cartel’s current bogus legal challenge.

The Right to Earn an Honest Living

Luis Paucar has the right to work for a living in the occupation of his choice free from government-imposed barriers to entry erected to protect existing companies.  This right to economic liberty is one of the essential personal freedoms the 14th Amendment was enacted to secure.[9]

Against this constitutional right to economic liberty, the taxicab cartel is advancing the novel theory that its “rights” have been violated by free market reforms.  But there is no constitutional right to be protected from open market competition. Neither the cartel’s right to do business nor its right to use an existing taxi license have been taken.  In short, the taxicab cartel isn’t being deprived of licenses—it’s trying to deprive others of such licenses through its absurd lawsuit.

The cartel simply doesn’t want to face new competition in what had been a comfortably non-competitive market.  And the companies who already have licenses complain that they can no longer reap the rewards of a closed market by selling licenses for steep prices—as high as $24,000—propped up only by the government-imposed cap.  But those special privileges—which came at the cost of freedom for consumers and entrepreneurs—amount to nothing more than corporate welfare.  And there is no constitutional right to corporate welfare.

Knocking Down Barriers to Economic Liberty

The Institute for Justice Minnesota Chapter seeks to restore constitutional protection for the right to economic liberty—the right to earn an honest living in the occupation of one’s choice free from excessive government regulation.  Minneapolis Taxi Owners Coalition, Inc., v. City of Minneapolis, is the fifth case in the organization’s campaign to restore economic liberty as a basic civil right under both the Minnesota state and U.S. constitutions.

In Anderson v. Minnesota Board of Barber and Cosmetologist Examiners, IJ-MN freed hairbraiders from the state of Minnesota’s onerous cosmetology licensing regime.  Crockett v. Minnesota Department of Public Safety successfully stopped the government from enforcing a blanket ban on advertising, soliciting or using the Internet to conduct lawful, direct sales of wine.  Dahlen v. Minneapolis freed sign hanging entrepreneurs from Minneapolis’ discriminatory licensing regime.

In Johnson v. Minnesota Board of Veterinary Medicine, IJ-MN is currently challenging Minnesota’s crackdown on “horse teeth floaters”—entrepreneurs who level a horse’s teeth.

The Institute for Justice has scored numerous additional victories for entrepreneurs and consumers across the nation:

Clutter v. Transportation Services Authority—In 2001, IJ defeated Nevada’s Transportation Services Authority and its entrenched limousine cartel that had stifled competition in the Las Vegas limousine market.

Jones v. Temmer—In 1995, IJ helped three entrepreneurs overcome Colorado’s protectionist taxicab monopoly to open Denver’s first new cab company in nearly 50 years. IJ used this victory to help break open government-sanctioned taxicab monopolies in Indianapolis and Cincinnati.

Ricketts v. City of New York—In 1999, IJ joined commuter van entrepreneurs in a fight against the government bus monopoly that would not allow any jitney entrepreneurs to provide service to consumers in underserved metropolitan neighborhoods in New York City.

Swedenburg v. Kelly— The Institute for Justice successfully waged the nation’s leading legal battle to reestablish the American ideal of economic liberty when, on May 16, 2005, the U.S. Supreme Court struck down discriminatory laws that existed only to protect the monopoly power of large, politically connected liquor wholesalers.  Vintner entrepreneurs Swedenburg and Lucas joined wine consumers and IJ in filing this federal lawsuit as a challenge to the ban on direct interstate wine shipments in New York.  The case raised issues of Internet commerce, free trade among the states, and regulations that hamper small businesses and the consumers they seek to serve.

Craigmiles v. Giles—The Institute for Justice successfully led a federal court to strike down Tennessee’s casket sales licensing scheme as unconstitutional, a decision that was upheld unanimously in December 2002 by the 6th U.S. Circuit Court of Appeals and not appealed.  This marked the first federal appeals court victory for economic liberty since the New Deal.

Armstrong v. Lunsford—The Institute for Justice opened the hairbraiding profession in Mississippi in 2005 when the state legislature responded to this lawsuit, filed in federal court in 2004, by allowing IJ’s clients to continue their entrepreneurship without obtaining a needless government license.

Christian Alf v. Arizona Structural Pest Control Commission—In 2004, the Institute for Justice Arizona Chapter (IJ-AZ) persuaded Arizona bureaucrats to change their position on requiring teenage entrepreneur Christian Alf to obtain a government issued license for his after-school handyman business helping local residents prevent roof rats.

Cornwell v. California Board of Barbering and Cosmetology—In 1999, IJ defeated California’s arbitrary cosmetology licensing requirement for African braiders.

Diaw v. Washington State Cosmetology, Barbering, Esthetics, and Manicuring Advisory Board—In March 2005, after being sued by the Institute for Justice Washington Chapter (IJ-WA) just seven months earlier, state bureaucrats exempted braiders from discriminatory cosmetology licensing requirements.

Farmer v. Arizona Board of Cosmetology—In 2004, as a result of an IJ-AZ lawsuit, the Arizona Legislature exempted hairbraiders from the state’s outdated cosmetology scheme. Corp. v. Zinnemann—Also in 2004, the Institute for Justice prevailed in persuading the U.S. District Court for the Eastern District of California to stop the state of California’s efforts to impose real estate broker licensing requirements on an informational website.

Franzoy v. Templemen—In April 2007, IJ represented two interior designers in successfully challenging New Mexico’s titling law, which prohibited anyone except government-licensed interior designers from using the terms “interior design” or “interior designer.”  The New Mexico Legislature amended the law doing away with the speech restriction.  The Governor signed the bill into law in April 2007.

Gary Rissmiller v. Arizona Structural Pest Control Commission—In the fall of 2006, IJ-AZ challenged the state’s requirement that gardeners and landscape maintenance workers obtain three separate licenses simply to kill weeds with over the counter products.  As a result of this litigation, gardeners throughout the state are now free to control weeds using products available to the average consumer.

Taucher v. Born—In 2003, the Institute for Justice convinced a federal court to strike down a discriminatory regulation issued by the Commodity Futures Trading Commission that would have required entrepreneurs such as publishers of financial newsletters and Internet websites to register as commodity trading advisors.

Uqdah v. D.C. Board of Cosmetology—In 1993, IJ’s work in court and the court of public opinion led the District of Columbia to eliminate a 1938 Jim Crow-era licensing law against African hairbraiders.

Wexler v. City of New Orleans—In 2003, the Institute for Justice successfully persuaded a federal court to strike down an absurd ordinance that prohibited booksellers from selling books on city sidewalks without a government issued permit.

Litigation Team

The Institute for Justice Minnesota Chapter filed its Memorandum in Support of Motion to Intervene in this case, Minneapolis Taxi Owners Coalition, Inc., versus City of Minneapolis, on May 1, 2007, in the U.S. Federal District Court for the District Court of Minnesota.  The lead counsel for the Institute for Justice is Nick Dranias, staff attorney with IJ-MN.  He is the author of “The Land of 10,000 Lakes Drowns Entrepreneurs in Regulations,” which examines numerous government-imposed barriers to honest enterprise that exist throughout Minnesota.  The report was released in May 2006 and is available online: /images/pdf_folder/city_studies/MN-barrier-study.pdf.  Dranias is joined by IJ-MN Executive Director Lee McGrath.

The Institute for Justice is a public interest law firm that advances a rule of law under which individuals can control their destinies as free and responsible members of society.  Through litigation, communication and outreach, IJ secures protection for individual liberty and extends the benefits of freedom to those whose full enjoyment is denied by government.

IJ-MN litigates under the Minnesota and federal constitutions to reinvigorate economic liberty, preserve property rights, promote educational choice and defend the free flow of information essential to politics and commerce.  For more information, contact:

Bob Ewing Communications Coordinator Institute for Justice 901 North Glebe Road, Suite 900 Arlington VA 22203-1854 [email protected] Phone: (703) 682-9320 ext. 206

Nick Dranias Staff Attorney Institute for Justice Minnesota Chapter 527 Marquette Avenue, Suite 1600 Minneapolis MN 55402-1330 [email protected] Phone: (612) 435-3451

[1] In re City of Minneapolis, 105 F.T.C. 304 (1985).

[2] Id.

[3] In a lawsuit under case number 85-11452 in Fourth Judicial District Court (Hennepin County).

[4] Standing Committee on Licenses & Consumer Services, Regular Meeting Minutes, March 23, 1988, at pp. 1-2.

[5] Former Mpls Code § 341.270(a), (b) (2005).

[6] Id. § 341.300(b)(1), (2).

[7] Minneapolis Taxi Federation v. City of Minneapolis, 1996 WL 722091 (Minn. Ct. App. 1996).

[8] Former Mpls Code § 341.300(b) (2005).  This number does not include the 40 wheelchair accessible vehicle licenses issued in 2002 and temporary or limited “seasonal” licenses.

[9] Truax v. Raich, 239 U.S. 33 (1915) (holding the right to work for a living in the common occupations of the community is of the very essence of the freedom and opportunity secured by the 14th Amendment).

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