IJ Knocks Internet Licensing Law Offline

February 2005

IJ Knocks Internet Licensing Law Offline

By Steve Simpson

California consumers, a federal district court granted summary judgment this past November in favor of the Institute for Justice and its client, ForSaleByOwner.com, in its First Amendment challenge to California’s real estate licensing law. Finding the licensing requirement “wholly arbitrary,” the court ruled that the State could not require classified advertising websites such as ForSaleByOwner.com to obtain a real estate license while allowing newspaper-owned websites to operate without one.

IJ brought suit on behalf of the New York-based company in May 2003 after California began requiring websites that simply advertised properties for sale in the state to obtain a real estate broker’s license as a condition of doing business in California. The onerous licensing law required website operators to take years of college-level real estate courses and apprentice as a real estate salesperson before even being able to sit for the brokers’ exam. Once licensed, websites would have to operate out of an office located in California, thus eliminating the benefits of the World Wide Web for entrepreneurs and consumers alike. Due to an exemption, newspapers are free to publish real estate advertisements in print or online without having to obtain a license. For websites like ForSaleByOwner.com that do not represent clients or give personalized advice, the law was thus triply bad. The educational requirements were irrelevant to their businesses, the in-state office requirement rendered them unable to compete with newspapers located within the state, and the law was enforced arbitrarily.

IJ mounted a two-pronged First Amendment attack on the law. First, we argued that the license requirement was a prior restraint on publication. Building on our 1999 victory in Taucher v. Born, in which the Institute for Justice successfully challenged a federal law requiring publishers of commodity investment newsletters to become registered trading advisors, we argued that California’s licensing law required publishers to obtain the government’s permission in order to publish. The U.S. Supreme Court has stated in a number of cases that while the government can license professionals who represent clients and provide personalized advice, it may not require a license for those who simply publish general advice or information. Unfortunately, the line between professional advice and general information is often murky, especially in the Internet age, so the Institute for Justice is trying to shore up this important protection for free speech.

Second, IJ argued that the State may not discriminate against certain speakers based on the content of their message or the media they use to publish it. California’s licensing scheme singled out independently owned real estate websites for licensure, but did not require a license for newspaper-owned websites or for anyone who published classified advertising for goods or property other than real estate. As the U.S. Supreme Court has recognized, government favoritism of certain speakers over others raises the specter of censorship. Indeed, in defending its laws, the State contended that newspapers should be permitted to publish without a license because they are more trustworthy than independently owned websites, and even went as far as to characterize some of the information ForSaleByOwner.com published—the notion that individuals can buy and sell homes without using a broker, for instance—as “harmful” to consumers. This was censorship, pure and simple.

Although the court denied our prior restraint claim—reasoning, incorrectly in our view, that the licensing law on its face concerned conduct rather than speech—it agreed with us that the State could not require a license for websites while exempting newspapers. Calling the State’s attempt to justify this distinction “totally unpersuasive,” the court stated: “[T]here appears to be no justification whatsoever for any distinction between the two mediums. Even if a distinction was warranted in 1959, when the [newspaper exemption was passed], that does not mean that the same rationale for exempting newspapers remains viable in 2004, given the vast advances in technology that have occurred in the meantime.”

Significantly, in coming to this conclusion, the court rejected the State’s argument that ForSaleByOwner.com published only commercial speech, which would have justified lesser protections for the website under the First Amendment. As noted, the court based its conclusion in part on the reasoning in Taucher v. Born, IJ’s previous First Amendment victory on behalf of publishers, demonstrating that IJ’s strategy of building on its victories works.

The State of California opted not to appeal so now ForSaleByOwner.com is free to provide its valuable service to property owners across California, and homeowners can save lots of money by selling their homes themselves rather than being forced to work with a realtor or broker.

The Institute for Justice’s victory in the ForSaleByOwner.com case is an important one for free speech and for e-commerce. The efforts of Internet entrepreneurs can too easily be stifled by ham-handed regulators or, worse, laws that attempt to protect local businesses from national competition. The victory is another step in IJ’s efforts to ensure that e-commerce is not smothered before it has a chance to flourish. It won’t be our last.Steve Simpson is an IJ senior attorney.

IJ clients and entrepreneurs, Colby Sambrotto and Damon Giglio, founders of ForSaleByOwner.com, a New York internet advertising and information service, are now free to publish without strict government licensing regulations.