Does Legalizing Uber and Lyft "Take" The Property Of Taxi Companies?

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Environmental Law & Property Rights Practice Group, was recorded on Friday, May 17, 2019, during a live teleforum conference call held exclusively for Federalist Society members.     

 

Micah Wallen:  Welcome to The Federalist Society's teleforum conference call. This afternoon’s topic is on “Does Legalizing Uber and Lyft ‘Take’ the Property of Taxi Companies?” My name is Micah Wallen, and I'm the Assistant Director of Practice Groups at The Federalist Society. 

 

      As always, please note that all expressions of opinion are those of the expert on today's call.

 

      Today we are fortunate to have with us Professor Ilya Somin, who is Professor of Law at George Mason University School of Law. After our speaker gives his opening remarks, we will then go to audience Q&A. Thank you for sharing with us today. Ilya, the floor is yours.

 

Prof. Ilya Somin:  Thank you very much for having me, and thanks to The Federalist Society for organizing this event. And thanks to all of you who are in the audience on the call. Over the last several years, there have been quite a number of cases where taxi companies have brought lawsuits arguing that state and local laws that legalize Uber and Lyft and allow them to compete with taxi companies violate the Takings Clause because they supposedly take the property of the taxi companies without compensation. Courts have so far, pretty much uniformly, rejected these sorts of arguments. Three circuit courts have done so – the Third Circuit, the Seventh Circuit, and the Eleventh Circuit. And also a number of district courts have as well.

 

      However, the cases do raise some important broader issues about the nature of private property and what is covered by the Takings Clause and also about the ways in which private property rights, and property rights generally, should not be interpreted in a way that blocks useful innovation and competition. Doing so would both be very problematic from a legal point of view but also would cause serious problems in terms of stifling innovation.

 

      So I’ll start off by talking about what is going on in these cases and what the arguments are. I’ll then explain why it is that the courts have ruled that there is no taking here. There is no violation of the Fifth Amendment. And I’ll talk also about some broader, deeper issues that these cases raise, some of which I think the court decisions haven’t fully addressed. And lastly, I’ll go on to discuss some broader implications of the issues that have been raised in this litigation.

 

      So to start off with the details of how these cases work, prior to the rise of Uber and Lyft, in many cities there was a system of taxi medallions where the government, through regulations, artificially restricted the number of taxis that could operate. And if you wanted to legally operate a taxi company, you had to buy medallions from the city or from one of the incumbents who already owned the medallions. And often, these medallions could be extremely expensive – hundreds of thousands of dollars per cab or the like. When Uber and Lyft came along, approximately a decade ago, they began to compete with traditional taxi companies, and they ended up significantly cutting into their business. Obviously, Uber and Lyft were, in many cases, both cheaper and more efficient and provided higher quality services than traditional taxi companies did. So the profits of these taxi companies declined.

 

      In addition, often Uber and Lyft are not subject to the same sorts of regulations and restrictions as traditional taxi companies are, and that gives them some further competitive advantage. The taxi companies were obviously not at all happy about this dilemma, even though consumers were. The consumers certainly benefited. So in many jurisdictions, taxi companies went to court, and they said that when the local government legalized Uber and Lyft or permitted them to operate, they were, in effect, taking the property rights of the traditional taxi companies and doing so without compensation; that is that the Fifth Amendment says that if the government takes private property, they must pay compensation and obviously, this hadn’t happened in any of these cases.

 

      And the argument is that if you owned one of these taxi medallions that it implicitly carried a guarantee that you would have a kind of monopoly control over the taxi market or that at least nobody else would be allowed to compete with you, unless they also bought one of the same types of medallions. And by allowing Uber and Lyft to compete without buying into the medallion system, that greatly devalued the medallions; certainly reduced their profitability. Indeed, sometimes made that profitability negative, and therefore was a taking of property.

 

      So that’s the argument that was made. Why did courts reject it? For some very good reasons. One is that in general property rights under the Takings Clause and the Constitution generally only include the right to control your own property. They don’t include the right to control the use of other people’s property; in this case the property of those who work for Uber and Lyft and drive cars for them. And of course, allowing Uber and Lyft to compete did not, in any way, prevent the traditional taxi companies to continue to use their cars to provide taxi services – doing so was less profitable than before, but their ability to use their property was not impaired. Similarly and closely related, the taxi medallions themselves were in no way confiscated. The right that actually comes with a medallion is the right to operate a taxi yourself, not the right to prevent others from doing so.

 

      So Judge Richard Posner wrote in the Seventh Circuit decision on this, which involved the City of Chicago, he said, “The city is not confiscating any taxi medallions. It is merely exposing the taxi companies to new competition – competition from Uber and other transportation network providers. Property does not include a right to be free from competition.” So it is true that the traditional taxi companies are correct in arguing that letting Uber and Lyft into the market greatly reduced the market value of their medallions, but it is simply not the case that any government policy that reduces the value of your property is thereby a taking.

 

      If, for instance, the government closes down a road near your property, and therefore the value of your property diminishes, that doesn’t constitute a taking because your ability to use the property has in no way been impaired, even though the value of it might go down.

 

      Now, there are, I think, some complications that the cases here did not address even though I do think they reached a result. One is that these cases were made somewhat easier because of the fact that when the local governments granted these medallions, there was no contract which said, “You have the monopoly over the taxi market or an oligopoly where there only people who are allowed to compete are those who have medallions.” It was often implicitly understood that this would be the result. But there wasn’t any legal arrangement which specifically said that.

 

      And that does raise the question of what if the taxi companies had had more foresight and they had insisted and gotten a contract which says that “You have this monopolistic right and you can, in fact, exclude competitors”? What if the government then went back and said, “Nonetheless, we’re going to let Uber and Lyft compete”? In my view, this is an important question, and it’s a closer question than the one that actually came up in the cases. But I still think it would not be a taking. But to show that it would not be a taking, you would have to go back to the 18th and 19th century roots of the Takings Clause and recognize that private property, as understood at the time, did not include any and all government-granted rights and privileges. Rather, private property was thought to be only the kind of property that you could own by natural rights, or at least through the traditional common law, not government-created monopolies, or not forms of property that only exist because of legislation.

 

      This argument actually came up in the 19th century in the debate over abolishing slavery. Some people said that abolishing slavery would be a taking, and moreover it would not be for a legitimate public use because the right to, quote/unquote, “own the property” would not go to the government. It would go to the freed slaves themselves. And the response that was given by anti-slavery advocates and also was the dominant view of legal theorists of that era is that slavery was not conventional private property because it could exist, if at all, only by means of specific government legislation, and therefore it was different from, say, property in land and property in objects and the like. And similarly, a monopoly right to exclude competitors is also something that can exist, if at all, only through legislation enacted by the government, and therefore in the 18th and 19th century understanding of private property, the one I think is embedded in the original meaning, a monopolistic right to control the taxi market would not qualify as private property. It would just be a government-granted privilege, and therefore would not qualify for mandatory just compensation under the Fifth Amendment.

 

      This does raise the different question about the status of intellectual property because, obviously, intellectual property is also a government-granted monopoly, and if it doesn’t exist in the state of nature, it may not be a natural right. So the argument I just advanced may be one that would suggest that the government can take intellectual property without compensation. I think there’s two possible answers to this. One possibility is that intellectual property, unlike most other monopolies and unlike slavery before the Civil War, actually was understood as a natural right. My George Mason University college, Adam Mossoff, has a series of articles arguing that this was indeed how intellectual property was understood at the Founding.

 

      Another possibility, if Adam is wrong, is that we can just bite the bullet and say, “Yes, the Takings Clause as such does not protect intellectual property. But of course Congress can protect it through legislation. It could pass legislation, and probably would pass legislation, saying that the government cannot take intellectual property without paying market value compensation.

 

      In addition to Takings Clause arguments, there are some other arguments that have been raised in these cases by the taxi companies. One is the claim that it’s a violation of the Equal Protection Clause to treat the traditional taxi companies differently from Uber and Lyft and subject the traditional taxi to a higher level of regulation. A second is a substantive due process argument that their due process rights have been violated. I think both of these are pretty weak arguments, and courts have uniformly rejected them. I’m going to pass over them in the initial presentation, but I would be happy to talk about them in more detail in the question period if people are interested.

 

      So as I suggested earlier, these cases raise broader implications that go beyond the specific context of Uber, Lyft, and taxi companies. One important lesson that these cases teach, and I think this is often forgotten in some public and even legal debates over property rights, is that the government has not taken your property if they merely do something that reduces its value. A taking can only occur if the government has invaded the property, has damaged the property, or has restricted your ability to use it in some way. If they haven’t damaged the property, occupied it, or restricted it, then they can potentially take measures that reduce its value. Those measure might be problematic in some way. But they would not violate the Takings Clause because there would be no actual taking of your rights.

 

      A second is that it’s important to recognize the idea that property rights do not include a right to restrict other people’s property unless you have a specific contractual relationship with that other private party. And they certainly don’t include a right to monopolize a market against competition, which is what the medallion owners have been trying to do here. And I think there is a good deal of confusion over these points in public discourse. And it’s important to unscramble that. It has implications, for example, for the current debate over restrictive zoning and the need to address that where zoning restrictions impose restraints that massively increase the price of housing and reduce people’s access to jobs. But some argue that loosening zoning restrictions would be somehow a taking of the property of the people who currently live there because it would reduce the value of some of those existing properties.

 

      Finally, although I don't think it’s a violation of the Takings Clause, I think there is a plausible argument that in some instances, we should compensate people whose livelihood is threatened by new innovations in markets or new competition. You can have reasonable arguments about that. But that shouldn’t be done through the Takings Clause. And if it is done, it should not be done in a way that stifles the new innovation or restricts competition. It could be just a lump sum compensation, and in my view, it should only be limited to situations where the people are in some sort of dire need or the like where they’ve been reduced to poverty. In that case, it might be desirable to have some sort of social safety net for them, but not at the expense of stifling or preventing new innovation and competition.

 

      Ultimately, although it’s not so great from a standpoint of traditional taxi companies, Uber and Lyft are valuable innovations that have enormously benefited both consumers and the broader economy. They’ve also even helped to prevent drunk driving incidents and other accidents. They reduce their rate. So I think this is an example of the broader phenomenon of new innovation perhaps harming current participants in a market but ultimately benefiting society. It’s a good thing the courts have not interpreted the Takings Clause to stand in the way of that. And with that I conclude, but I very much look forward to your questions.

 

Micah Wallen:  Thank you, Ilya, for those opening remarks. Not seeing any question jump in right away, Professor, I had one of my own. Does it at all change the analysis here the fact that they're arguing the legalizing of Uber and Lyft is the taking? Whereas it seems like in order for it to be legalized, they would’ve had to make it illegal in some form in the beginning. I know that a lot of cities, for instance, put extra fees or bans on Uber and Lyft with their picking up from airports, etc. Does that matter in the analysis at all?

 

Prof. Ilya Somin:  I think it does not. The fact that the city may have made illegal a previous -- made illegal a particular type of competition and market doesn’t mean that it’s a taking if they legalize it. It would actually be dangerous and pernicious if they did do it that way because it would mean that any reduction in regulation of a previously regulated market would be a taking if that reduction reduced the profits of some of the existing competitors in that market. It would mean that airline deregulation was a taking, trucking deregulation was a taking; almost any kind of deregulation would be a taking because almost any kind of deregulation that increases competition creates some problems for existing competitors and reduces their profitability.

 

Micah Wallen:  And it seems like if they're arguing that it’s a taking based on the lowering of their economic value, it seems like prior Supreme Court cases required more so, I believe the term was a total wipeout. I think Scalia may have used that term once in terms of the economic value. Is that sort of just the end of their cases here? Is that, in and of itself -- the fact that all they're arguing is that there is a diminishing of their economic value, but it doesn’t amount to anywhere near 95 percent. Does that point in and of itself sort of deal away with this?

 

Prof. Ilya Somin:  No, I don't think so because what you're referring to is the Lucas case where the Supreme Court majority opinion written by Scalia said that in a regulatory takings case, a case where the government imposed restrictions on your property rights, it’s only automatically a taking if you suffer a total loss of economic value. But if you only suffer a partial loss, it doesn’t follow that it’s not a taking; rather in that event, the case would be analyzed under the three-factor Penn Central test from the Penn Central case in 1978. And under that test, it’s often difficult to figure out whether there has been a taking or not, and therefore the fact that there hasn’t been a total wipeout, as he put it, would not by itself be the end of the case.

 

      Also, if this thing were potentially a taking, it’s not clear whether it would be analyzed under the Penn Central regulatory takings framework or under some other framework. Because if it were a taking, it’s hard to say exactly what it would be because usually the regulatory takings approach is applied only if the government has in some way restricted your use of your property right. And it’s hard to argue that that’s what has happened here given that they can still use their medallions to operate their own taxi services. They’re simply be less profitable than before.

 

      So had the courts ruled that this is something that [inaudible 18:29] principle could be a taking, then there would be other difficult question about whether the Penn Central test applies, and if so, which way would it go? If the Penn Central test did not apply, there would be difficult questions as to exactly what sort of test would.

 

Micah Wallen:  It seems that the taxi companies would arguably want the Penn Central test to apply because it seems like the investment-backed expectations prong of the test really -- at least it seems like they could make the argument that that really plays in their favor. That these medallions which have begun to cost ridiculous amounts of money are -- those investments are made under the impression that this would be a monopoly.

 

Prof. Ilya Somin:  Yeah, I think that is part of their argument that that prong of the three-part test supports them. There would be difficult questions of while they may expect a high profit to continue, they should also be aware that in this market, as in many others, technological innovations could cut into the profits. So it’s not entirely clear how that would turn out. I think at least one other prong of Penn Central, the prong that relates to the character of the government action, might well go against them. On the other hand, the economic impact prong, that one might go in favor of them because there is a very large economic impact on these taxi companies.

 

      So one of the many problems with the Penn Central test is that it’s not clear what should be done when two prongs cut one way and the third prong cuts the other way. So it’s not easy to figure out what would’ve happened had courts said that this could be taking, and that the Penn Central test applies to it.

 

Micah Wallen:  We do have a question coming in now, so without further ado, we’ll move to our first question.

 

Caller 1:  Of course this 10,000 cab oligopoly was created at the behest of the cab drivers to increase the value of these medallions, to give them a monopoly over [inaudible 20:26] so there wouldn’t be too much supply to keep the price up. And that’s kind of a wrongful thing to begin with. That should factor into it. I don't know how it would, but what are your considerations on that?

 

Prof. Ilya Somin:  So I certainly agree it was wrongful, and as I said before, the creation of a monopoly is actually something that, at least under the original meaning of private property both in the 18th century and also in the 19th century when the Takings Clause was made applicable to state governments, the creation of a monopoly like this would not have been thought of as private property protected by the Constitution. That said, I think we should be cautious about saying that anything that results from special interest lobbying that, therefore, can never create a property right that’s protected by  the Takings Clause, imagine if, for instance, special interests lobby the government to privatize some public land, and the government does that. And they end up owning the property, even though, arguably, it might not be in the public interest to this. In that event, I think if the privatization was otherwise legal, in that event I think they would have private property rights in the land. And if the government later turned around and said, “You know, we made a mistake. WE shouldn’t have privatized this particular land,” if they try to take it back, they winnow compensation.

 

      But I totally agree that what was done in many cities was, in fact, harmful. There were public interest rationales for this that were put forward, but they were pretty weak. What actually happened was the consumers were exploited, and by the way, a lot of producers, particularly lower income ones and minorities, were locked out of this market as the result of the creation of the medallion system which eliminated the previous jitney system where it was much easier for both companies and even individuals to just drive on their own.

 

      What Uber and Lyft have done to some extent is create a new technological path to restore and even extend the kind of competition that existed before the medallion systems were introduced that existed in many places in the early 20th century.

 

Caller 1:  And also eliminates the excuse that his regulation is necessary to make sure that, say, rapists don’t drive cabs because rapists would get a bad review under Uber and Lyft.

 

Prof. Ilya Somin:  Yeah, so this argument is still being made, and there have been some awful incidents where an Uber or Lyft driver did assault somebody or even try to rape somebody. But as I understand it, the incidents of such cases with Uber and Lyft is no higher than with traditional taxi companies and is actually maybe lower. So when you have many thousands of drivers taking hundreds of thousands of rides, it’s almost inevitable that there will be some horrible, tragic incidents. But my understanding is that it’s lower with Uber and Lyft than with traditional taxi companies, though, tragically in neither case can it be reduced to zero. 

 

Caller 1:  What I often tell people who advocate stronger zoning is that zoning is a very weak protection. All you need to do is bribe somebody on the zoning board to change the zoning from something that all the neighbors like to something that they don’t. Whereas if you get a mutual covenant that runs through the land, in order to overcome that, you’ve got to get the agreement of every property owner, that we do want skunk farms or concrete factories in our neighborhood.

 

Prof. Ilya Somin:  Yeah, there’s some truth to that, although in some cases zoning regulations are pretty strict and do impose major constraints. I think often that’s part of the problem.

 

Micah Wallen:  It also seems on the zoning issue one of the more credible arguments that they can make against Uber and Lyft is the congestion argument. The fact that when they were initially brought up, it was deemed as a ride sharing service that would cut down on city traffic. And a lot of cities are finding now that they're causing traffic problems, and that the medallion system was sort of a way to put a cap on taxis in order to avoid that problem. Does that public policy argument come into play at all?

 

Prof. Ilya Somin:  I don't think it affects whether this is a taking or not. I think, also, if you have a problem with congestion, I think there’s no reason to single out one particular type of car or one particular type of ride share services for special regulation or restriction. Rather, economists have long recognized that the best way to deal with congestion is just to put a price on it – have peak time tolls as some cities and localities are introducing them, and that should apply equally to Uber, Lyft, traditional taxis, ordinary private cars, and so forth.

 

      I would also note in some areas Uber and Lyft actually reduce the extent to which people use their own private cars, and thereby that could actually reduce congestion to some degree. Uber and Lyft also operate services where they have several passengers at once, and that can reduce the number of cars on the street relative to what you with have if everybody just used their private cars or if some of these people were using taxis.

 

      But the solution to congestion, the best one, is not to say, “We’re just going to impose special restrictions on a particular type of car, a particular type of ride share services.” It’s congestion pricing, to put a price on using the roads at that time. And then instead of the government trying to determine which traffic is more valuable or which is less valuable, the least valued traffic would be the one most likely to get off the road or drive at a different time. And those who most value the ability to drive at this particular time, they would pay the toll.

 

Micah Wallen:  We have another question coming in, so without further ado, we’ll move on to that caller.

 

Caller 2:  I don't remember the name of the case, but would this be comparable to the big case from the [inaudible 26:23] era where the government gave a charter for a second bridge, and the opinion discussed how they need to allow room for railroads without [inaudible 26:34] and people who owned toll roads?

 

Prof. Ilya Somin:  So you may be referring to the Charles River Bridge case, which was decided by the Supreme Court?

 

Caller 2:  Yeah.

 

Prof. Ilya Somin:  A contractor, or a private owner, had built a bridge over the Charles River at the behest of the government. And in his understanding, at least, he had a contractual right to have the only bridge in that area. But later, the state permitted somebody else to build a new bridge. It’s been a while since I’ve read the details of this case, so I apologize in advance if I am overlooking something. But the Supreme Court ultimately decided that there was no legal right to prevent another bridge from being built. And the fact that it was a monopoly played an important role in the Court’s decision.

 

      There was a strong dissent by Justice Joseph Story arguing that the government’s decision to allow the other bridge was a violation of the contract clause because there was a kind of contractual relationship. Even in Story was right, I don't think that applies in these cases where there isn’t a specific contract saying all other competition will be excluded. Moreover, even if there was a breach of the contract clause, that’s not the same things a breach of the Takings Clause, and it would raise different kinds of issues.

 

      Over time, the Court has, to a large extent, gutted the contracts clause, and therefore it would no longer be much of a constraint. I would finally add that the Charles River Bridge case is different from this current case, or from the current set of cases, because in the case of the Charles River Bridge case, you could reasonably argue that absent a monopoly right, this valuable infrastructure would not have been built. That the monopoly was, in effect, a kind of incentive to incentivize the person to build it without being paid as much by the government to build it as they would be otherwise.

 

      On the other hand, no one seriously argued that there would be no taxis absent the medallion system. In fact, the whole reason why it was instituted was because there were, in fact, lots of taxis, and the taxi companies and some other people wanted there to be fewer. In that respect, you can’t really make an argument that this is somehow compensation to people for providing a valuable public service. To the contrary, it’s a way of ensuring that there will be less of that service than there will be otherwise.

 

Micah Wallen:  Professor, did you have any closing remarks?

 

Prof. Ilya Somin:  I would just emphasize the point that this case raises broader issues about the relationship between property rights and competition. I think some of them have been well addressed by the courts. In the cases, other ones remain out there, such as what would happen if there was a contractual right to -- that explicitly said you’re allowed to keep out potential new competitors.

 

      So hopefully, this litigation will continue to develop in the right way. But it’s worthwhile to keep an eye on the broader issues that it raises.

 

Micah Wallen:  And on behalf of The Federalist Society, I want to thank our expert for the benefit of his valuable time and expertise today. We welcome listener feedback by email at [email protected]. Thank you all for joining us. We are adjourned.

 

Operator:  Thank you for listening. We hope you enjoyed this practice group podcast. For materials related to this podcast and other Federalist Society multimedia, please visit The Federalist Society's website at fedsoc.org/multimedia.