Federal Court Declares California’s Online Real Estate Licensing Law Unconstitutional

John Kramer
John Kramer · November 22, 2004

Washington, D.C.—Late last week [NOTE TO EDITOR: on Thursday afternoon, November 18, 2004] a federal judge in Sacramento ruled in favor of web publisher ForSaleByOwner.com and the Institute for Justice in a First Amendment lawsuit challenging California’s demand that websites obtain a real estate broker’s license to publish real estate advertising and information. The court concluded that the law, which requires websites to obtain a license but specifically exempts newspapers that publish the same information, was “wholly arbitrary” and violated the First Amendment guarantees of free speech and freedom of the press.

“The First Amendment rights of Internet publishers have taken a big step forward,” said Steve Simpson, a senior attorney with the Institute for Justice, which represents ForSaleByOwner.com for free. “States will now think twice before concluding that the Internet is a second-class citizen to traditional media.”

The New York-based ForSaleByOwner.com filed suit challenging the law on May 14, 2003, in U.S. District Court in Sacramento. The law requires websites to spend years and thousands of dollars obtaining a real estate broker’s license simply because they allow individuals to advertise homes for sale on the Internet and they publish information of interest to buyers and sellers. In early 2001, the California Department of Real Estate began vigorously enforcing the licensing law against “for-sale-by-owner” and classified advertising websites that allow individuals to buy and sell homes without a real estate broker. The Department enforced the laws arbitrarily, requiring independent websites to get a license, while exempting newspapers and other print publications. The Department of Real Estate even said during the course of the lawsuit that websites cannot claim it is “easy” to buy and sell homes without a real estate broker or publish other information with which officials disagree.

“This is censorship, pure and simple,” said Simpson. “The First Amendment guarantees that Americans may speak their minds and communicate information without the approval of government censors. Allowing licensing officials to make distinctions among publications cannot be permitted if speech is truly to be free.”

The court agreed, finding the State’s effort to distinguish between newspapers and independent websites “totally unpersuasive.” “[T]here appears to be no justification whatsoever for any distinction between the two mediums,” the court stated. “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.”

To the State’s claim that newspapers are somehow more trustworthy than websites, the court stated “while Defendants vaguely attempt to paint newspapers as geographically situated and relatively more stable than Internet companies, they have not established why this should require websites like FSBO’s to obtain a California broker’s license . . . when online services doing exactly the same thing are not subject to any licensing requirement so long as they are operated by a ‘newspaper.’ Defendants provide no reasonable explanation whatsoever for this requirement, let alone a compelling interest to justify it.”

Websites like ForSaleByOwner.com provide an enormous benefit to consumers, allowing them to save thousands of dollars in real estate commissions and to obtain essential information on home buying and selling.

As ForSaleByOwner.com President Damon Giglio stated, “ForSaleByOwner.com is founded on the enormous potential of the Internet to cut out the middle man and allow consumers to save lots of money by selling homes themselves. It’s great that the law is starting to catch up with technology.”

Chief Operating Officer Colby Sambrotto concurred: “There is absolutely no reason to prevent websites from doing what newspapers are allowed to do. By now, the states should understand that business on the Internet is a tremendous value that should be embraced, not shunned.”

This is an important case with broad implications for e-commerce. Information is more important to the economy than ever before, yet government remains a serious impediment to its free flow and the economic benefits it promises. States clamor to tax Internet businesses, they erect barriers to e-commerce, and they pass laws that favor local brick-and-mortar businesses at the expense of Internet competitors. These laws harm businesses and consumers, stifle innovation, and perpetuate wasteful and antiquated business practices.

The victory was especially important for the Institute for Justice because the court relied upon an earlier IJ victory to strike down California’s real estate licensing law. In that decision, the U.S. District Court for the District of Columbia held that the Commodity Futures Trading Commission could not require licensure of online and software publishers who offered opinions on commodities. This victory by the Institute for Justice was the first federal court case to extend First Amendment protections to Internet publishers.