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Cato
Policy Analysis No. 322 October
9, 1998
by
George C. Leef, J.D.
Every state except Arizona prohibits the unauthorized
practice of law (UPL); a person must possess an attorney's license to hold
himself out as a lawyer. UPL prohibitions restrict the right to pursue a
legitimate occupation and the right to contract with others. By imposing a
costly barrier to entry, they distort the market for legal services.
Consequently, consumers face higher prices and fewer choices.
UPL prohibitions are part of a wider phenomenon: governmental
limitations on freedom to engage in voluntary economic transactions. Before the
New Deal, the Supreme Court regarded economic liberty as worthy of
constitutional protection. Since 1937, however, the Court has drawn a
distinction between "fundamental" and "nonfundamental"
liberties, with economic liberties consigned to the latter category.
Governmental interference with fundamental liberties faces "strict
scrutiny" from the courts and is frequently invalidated, whereas
interference with economic liberties receives only minimal scrutiny, implying
that legislatures may do virtually anything in the field of economic
regulation. That distinction is without any constitutional basis.
UPL prohibitions are neither necessary nor sufficient to
protect consumers from incompetence. A competitive market, reinforced by
remedies for fraud, breach of contract, and negligence, offers the optimal
combination of price and quality.
Because they infringe upon individual freedom and serve no
legitimate public purpose, UPL prohibitions should be repealed or struck down
by the courts as unconstitutional.
George C. Leef is president of Patrick Henry Associates in
East Lansing, Michigan, and adjunct professor of law and economics at Northwood
University.
Rosemary Furman had for years openly and flagrantly violated
the laws of Florida. Her final appeal was turned down by the Florida Supreme
Court, which ordered that she be jailed. (1) Her crime was to have
helped, by preparing and filing the necessary legal papers, people who wanted a
divorce. Her customers sought her services and willingly paid for them. None
had ever complained about her work.
Before engaging in that "criminal activity," Furman
had been a legal secretary doing exactly the same paperwork, but under the
"supervision" of an attorney. He charged clients $300 to handle a
divorce, then paid her a small fraction of that amount for her work. Furman
thought that high price for filing for divorce was unconscionable, particularly
in cases where battered women were unable to obtain a divorce because they
could not afford the attorney's fees. So she decided to go into business for
herself, charging only $50 for divorce filings. At first, she worked only with
battered women. Later, however, she expanded her business to assist anyone who
wanted her services. She did a large volume of business.
Despite her success--doubtless, because of it--Furman was
headed for trouble: she was acting in violation of the law. Under Florida law,
only licensed attorneys may engage in "the practice of law." She was
not a licensed attorney, and the preparation of divorce papers was regarded by
the Florida Bar as work only attorneys could do. After the bar brought action
against her, she was ordered to cease and desist from her illegal conduct. She
refused. For her unwillingness to stop doing work she wanted to do and her
clients wanted her to do for them, she was ordered by the Florida Supreme Court
to serve 120 days in jail, 90 of which would be suspended if she promised not
to violate the law again. Subsequent intervention by the governor kept her from
doing actual jail time. The point was made, though; she never again competed in
the market for legal services.
The case of Furman, hardly unique, raises several important
questions. Should it be illegal for individuals to enter a field of work and
contract with willing clients without first obtaining governmental permission
to do so? Does the U.S. Constitution give the states unchecked power to restrict
the freedom to choose one's occupation, by imposing onerous and arbitrary
licensing requirements? Does the licensing of attorneys (and other service
providers) rectify some market failure and improve consumer welfare, or does it
merely restrain competition and waste resources? This study will endeavor to
answer those questions.
Every state in the nation except Arizona has a statute or
judicial rule that limits the practice of law to licensed members of the legal
profession. So-called unauthorized practice of law (UPL) prohibitions make it
illegal for any person who does not hold an attorney's license to assist
another person if that assistance is deemed "practicing law." The
statutes or rules do not define exactly what constitutes the practice of law, so
it has been up to the courts to determine on a case-by-case basis what actions
are illegal. Violations are usually misdemeanors, although they may be
punishable as contempt of court. Aggrieved individuals may bring UPL cases, but
that is extremely rare. UPL actions are virtually always brought by a bar
organization seeking a permanent injunction, as in Furman's case, to keep the
violator out of the legal services market in the future.
It is through UPL prohibitions that the legal profession
maintains its "closed shop." They allow state and local bar
organizations to control entry into the market. No one can obtain bar
membership and the accompanying license to practice without passing the state's
bar exam, and in most states no one is allowed to sit for the exam without
having graduated from an "approved" law school. (2)
To be approved under American Bar Association standards,
a school must have a three-year course of study. (3)
Whether one wants to litigate the most complex cases or draft
simple wills, the rite of passage is the same. While UPL prohibitions do not
eliminate competition within the ranks of attorneys, they restrict competition
from the outside. (4)
The desire for a closed shop is certainly not unique to the
legal profession; (5) given the profession's
powerful influence on the law itself, however, it is not surprising that
lawyers have been among the most successful of special interests in
using government to accomplish that objective. Although some prominent
members of the profession have criticized UPL prohibitions and argued for a
free market in legal services, (6) support
for them remains strong and unquestioning in bar organizations. Legislation
that would open the market for legal services is certain to meet with their
vehement opposition.
This study will take a critical look at UPL
prohibitions from both a constitutional and an economic perspective.
The
Constitution and the Right to Pursue an Occupation
Whether state governments have authority to deprive people of
the right to pursue a chosen occupation or engage in other economic endeavors
is a question that has arisen repeatedly in the United States. To prevent an
individual from engaging in a trade or occupation altogether, or to impose
onerous conditions upon his freedom to do so, raises serious constitutional
questions. The Supreme Court has twice done an about-face on the degree
of constitutional protection that must be given to economic liberties,
including occupational freedom.
The Fourteenth Amendment states in part: "No State shall
make or enforce any law which shall abridge the privileges or immunities of
citizens of the United States; nor shall any State deprive any person of life,
liberty or property, without due process of law; nor deny to any person within
its jurisdiction the equal protection of the laws." Ratified in the
aftermath of the Civil War, the amendment imposed broad federal restrictions on
the exercise of state power. As is true of all constitutional language,
however, the Supreme Court's interpretation of the Fourteenth Amendment would
be crucial. Would it read the words as a sweeping protection for the civil and
economic liberty of all citizens; or would it read them restrictively, thereby
allowing the states considerable latitude to enact legislation circumscribing
the freedom to engage in commercial activity? Just five years after the
ratification of the Fourteenth Amendment, the Supreme Court adopted a very
restrictive reading in what have come to be known as the Slaughterhouse
Cases. (7)
The Louisiana legislature had passed a statute granting to
the Crescent City Company a 25-year monopoly on the slaughtering of livestock
in New Orleans and surrounding parishes. A suit was brought by butchers and
other parties adversely affected by the statute on the ground that it infringed
upon liberties guaranteed them under the Privileges or Immunities Clause. A
sharply divided Supreme Court, in an opinion by Justice Samuel F. Miller,
upheld the statute, declaring that the amendment protected only the privileges
and immunities of citizens of the United States -- as opposed to
citizens of a state. The Court held that the former were few and did not
encompass such matters as earning a livelihood, which could be regulated by
state governments. With that holding, the Privileges or Immunities Clause
became a dead letter. (8)
The Court also found no merit in the argument that the
Louisiana statute violated the Due Process Clause. Viewing "due process of
law" as a mere procedural requirement, Justice Miller dismissed the
argument that it barred the legislature from forcing people out of their
occupations and outlawing businesses in which they had invested their money.
Fearing that to decide the case otherwise would make the Court "a
perpetual censor upon all legislation of the states," (9)
the justices allowed Louisiana's monopolistic,
freedom-restricting statute to stand.
In a powerful dissent, Justice Stephen J. Field wrote,
"The privileges and immunities designated are those which of right
belong to the citizens of all free governments. Clearly among these must be
placed the right to pursue a lawful employment in a lawful manner, without
other restraint than such as equally affects all persons." (10)
Justice Joseph P. Bradley also dissented, writing, "In
my view, a law which prohibits a large class of citizens from adopting a lawful
employment, or from following lawful employment previously adopted, does
deprive them of liberty as well as property, without due process of law. Their
right of choice is a portion of their liberty; their occupation is their
property." (11)
The dissenters would have extended constitutional protection
to the economic liberty of the excluded owners and workers. In the majority
view, however, there was nothing constitutionally impermissible in state
legislation that deprived citizens of the freedom to pursue their chosen
businesses and occupations.
The Era of
Constitutional Protection for Economic Liberties
The Court's acquiescence in allowing states to deprive
individuals of economic liberty, as expressed in the Slaughterhouse Cases,
would shortly be called into question. In 1887 the Court reviewed a Kansas
statute that put liquor dealers out of business. The Court upheld the statute,
but Justice John Marshall Harlan's majority opinion announced that state economic
regulation would not pass without careful scrutiny of the fit between means and
ends:
It does not follow that every statute enacted ostensibly for
the promotion of [public morals, health, or safety] is to be accepted as a
legitimate exertion of the police powers of the State. . . . If, therefore, a
statute purporting to have been enacted to protect the public health, the
public morals, or the public safety, has no real or substantial relation to those
objects, it is the duty of the courts to so adjudge, and thereby give effect to
the Constitution. (12)
The Court thus signaled that it would not assume that every
statute or regulation claimed to be necessary to protect the public in some way
actually did so, or was even intended to do so. Understanding the proclivity of
legislatures to enact liberty-destroying measures that do nothing to advance
the public interest, Justice Harlan warned that the Court would strike down
legislation infringing upon "rights secured by the fundamental law."
The Court's indifference to economic liberties was about to
change. The change became explicit in 1897. Louisiana had enacted a statute
making it illegal for any individual or business in the state to obtain marine
insurance from an out-of-state insurance company not licensed to do business in
the state. The Allgeyer Company, which had contracted for marine insurance with
an unlicensed New York insurance company, was charged with a violation of the
statute. Allgeyer argued that the statute was invalid under the Fourteenth
Amendment's Due Process and Equal Protection Clauses. After the Supreme Court
of Louisiana had upheld the law, Allgeyer appealed to the U.S. Supreme Court.
Justice Rufus W. Peckham's opinion for the Court, declaring
the statute unconstitutional, ushered in what has come to be known as the era
of substantive due process. In the opinion, he laid out a broad understanding
of the Fourteenth Amendment:
The liberty mentioned in that amendment means not only the
right of the citizen to be free from the mere physical restraint of his person,
as by incarceration, but the term is deemed to embrace the right of the citizen
to be free in the enjoyment of all his faculties; to be free to use them in
all lawful ways; to live and work where he will; to earn his livelihood by any
lawful calling; to pursue any livelihood or avocation, and for that purpose to
enter into all contracts which may be proper, necessary and essential to his
carrying out to a successful conclusion the purposes above mentioned. (13)
The Court thus extended the reach of the Fourteenth
Amendment, holding that it encompasses the rights to work, production,
contract, and trade. Those rights are included in the liberty protected by
the Fourteenth Amendment and entitled to judicial protection against
legislative interference no less than rights specifically mentioned in the
Constitution, such as freedom of speech. After Allgeyer, legislatures
were on notice that statutes interfering with economic liberties would face
hard analysis from the courts.
The decision in Allgeyer was grounded in the Due
Process Clause. Due process of law, the Court held, was not merely a procedural
concept, a requirement that government correctly follow certain steps
before taking life, liberty, or property from individuals. Due process was also
a substantive concept: even if enacted and enforced following
correct procedures, a statute would still run afoul of the Fourteenth
Amendment if its substance unjustifiably deprived people of their economic
liberties. In this interpretation, the Court followed Justice Thomas Cooley
of the Supreme Court of Michigan, who wrote in 1868,
When the government, through its established agencies,
interferes with the title to one's property, or with his independent enjoyment
of it, and its act is called in question as not in accordance with the law
of the land, we are to test its validity by those principles of civil
liberty and constitutional defense which have become established in our system of
law and not by any rules that pertain to forms of procedure merely. (14)
Substantive due process would become the principal
constitutional shield for economic liberties for 40 years after Allgeyer.
Arguably the most important and controversial case in that
line was decided in 1905. Lochner v. New York (15)
involved a New York statute that prohibited bakery employees
from working more than 10 hours a day or 60 hours a week. The statute was
described by counsel for the state as a public health and safety measure,
designed to protect the welfare of bakery employees by putting a reasonable
ceiling on the number of hours they could work. (16) The Court's majority,
however, held that workers have a right, protected by the Fourteenth Amendment,
to contract to work as they think best, not to be overridden
by paternalistic legislation. Justice Peckham, writing the Court's opinion,
asked, "Is this a fair, reasonable and appropriate exercise of the
police power . . . or is it an unreasonable, unnecessary and arbitrary
interference with the right of the individual to his personal liberty, or to
enter into those contracts in relation to labor which may seem to him
appropriate or necessary for the support of himself and his family?"
His answer: "There is no reasonable ground for interfering with the
liberty of a person or the right of free contract, by determining the hours of
labor, in the occupation of a baker." (17) Freedom
of contract trumped this paternalistic exercise of the police powers.
Nor could the statute be saved by an appeal to an alleged
need to ensure good quality bread for the public. Justice Peckham dismissed
that argument, writing, "Clean and wholesome bread does not depend upon
whether the baker works but ten hours per day or only sixty hours a week."
(18) Thus,
the mere assertion that a law was intended to have a favorable impact on
public health or safety was not sufficient. Where constitutionally
protected rights were involved, the Court would insist on much more than
assertions and intentions. Finding scant connection between the purported
objective of the statute and the liberty-restricting means employed, the Court
declared it unconstitutional.
Lochner has been a much criticized opinion. (19)
It is attacked as an example of an arrogant judiciary substituting
its own social policy for that of the democratically elected
legislature. But that criticism misses the mark. The Court was not substituting
its own policy for that of the New York legislature on the number of hours
bakers could work; rather it was declaring that under the Constitution there
could be no policy on the matter at all, that people have the right to decide
for themselves how many hours they want to work and the right to contract
accordingly.
Liberty guaranteed under the Fourteenth Amendment secures the
rights of individuals to set their own policy when contracting out their labor.
In Lochner, the Court held that such decisions are not subject to political
control. Defending individual rights against overreaching legislative power
is exactly what appellate courts are supposed to do. In a similar manner,
striking down a law under the First Amendment doesn't establish an alternative
publishing policy; it says government may not have a policy about what
can be published.
Allgeyer and Lochner were followed by
many other cases upholding individual rights over state attempts to legislate
them away. (20) In Louis K. Liggett
Co. v. Baldridge, for example, the Court held that a statute providing that
only licensed pharmacists could open pharmacy businesses was "an
unreasonable and unnecessary restriction upon private business" that had
"no real or substantial relation to the public health." (21)
And in New State Ice Co. v. Liebmann, (22)
the Court struck down a statute prohibiting anyone from entering the ice
business unless he could demonstrate to a state commission that existing
facilities were inadequate to meet the public's needs.
During this period, however, the Court was not entirely hostile
to economic regulation. Thus, in Muller v. Oregon, (23)
it sustained a statute regulating the number of hours women
might work, and in Bunting v. Oregon, (24) the
Court extended Muller by upholding a statute that established maximum
hours for all factory and mill workers. The case distinctions are not very
compelling. Nevertheless, before the New Deal, legislation that curtailed
economic liberties faced difficult constitutional obstacles, and the
"substantive due process" cases, in the words of Christopher Wonnell
of the University of San Diego, "helped prevent a regression toward a
medieval economy of privileged merchants and guilds." (25)
The
Decline and Fall of Constitutional
Protection
for Economic Liberty
Substantive due process came to an end during the national
upheavals of the Great Depression, when legislators turned to
liberty-constricting measures in an attempt to restore prosperity. Economic
liberty was the principal casualty of the movement toward governmental control
and planning.
The first case indicating a change in the Supreme Court's
view of the relationship between the Fourteenth Amendment and economic liberty
was Nebbia v. New York in 1934. (26) After
New York had established a Milk Control Board empowered to determine milk
prices in the state, a grocer named Nebbia was convicted of having sold two
quarts of milk at a price below the board's established minimum. Adopting the
state's theory that price control was necessary to save the dairy industry from
"destruction," a five-member majority upheld the constitutionality of
the statute. Justice Owen J. Roberts declared, "With the wisdom of the
policy adopted, with the adequacy or practicability of the law enacted to
forward it, the courts are both incompetent and unauthorized to deal." (27)
Rejecting Nebbia's due process argument, he wrote that "due
process . . . demands only that the law shall not be unreasonable, arbitrary or
capricious, and that the means selected shall have a real and substantial
relation to the object sought to be attained." (28)
New York, therefore, could punish dealers for selling their
property to willing customers at prices different from those decreed by the
state. Nebbia's freedom to set his own prices and contract with customers was
swallowed up by the Court's willingness to defer to the legislature's
presumed competence.
Justice James C. McReynolds's dissent expressed the
now-abandoned view that freedom to trade was a right of constitutional
magnitude: "Grave concern for embarrassed farmers is everywhere; but this
should neither obscure the rights of others nor obstruct judicial appraisement
of measures proposed for relief. The ultimate welfare of the producer, like
that of every other class, requires the dominance of the Constitution. And
zealously to uphold this in all its parts is the highest duty intrusted to the
courts." (29) The tide, however, had
turned against the philosophy of limited government and the view
that the Constitution protects the citizen's liberty to make business and
occupational decisions for himself.
With the Nebbia decision, the Court's resistance to
legislative interference with economic liberties began to crumble. In the
following years, a dizzying array of statutes and regulations telling people
what they must or must not do in the marketplace was enacted. Most of the
federal legislation, when challenged, was upheld under the Court's new and
expansive reading of the Commerce Clause of Article I, Section 8, of the
Constitution. Originally, congressional power to regulate "commerce among the
states" was limited to trade that crossed state lines; it was not thought
to reach the conditions under which the traded goods were produced. But in N.L.R.B.
v. Jones & Laughlin Steel, (30) the
Court held that the regulatory power of Congress extended to anything that
might affect interstate commerce. Since almost anything a producer may do can
conceivably "affect" interstate commerce, the decision
virtually eliminated any constitutional restraint on congressional regulatory
power. (31)
With Nebbia, Jones & Laughlin Steel, and
decisions that followed them, the Court demoted economic liberties from their
older, protected status--which required government to cite an objective of
great public importance and demonstrate that the regulation was the least intrusive
means of achieving that objective--to a new, unprotected status--which only
required government to allege that there was some reason to believe
the legislation would achieve a legitimate end. The demotion was made explicit
in United States v. Carolene Products Co., (32)
a decision upholding a federal statute outlawing the sale of
"filled milk" (milk with nonmilk fats added). Justice Harlan Fiske
Stone wrote that "regulatory legislation affecting ordinary commercial
transactions is not to be pronounced unconstitutional unless in the light of
the facts made known or generally assumed it is of such a character as
to preclude the assumption that it rests upon some rational basis."
(33)
The "rational basis" test proved to be exceedingly
easy to meet. In numerous cases following Carolene Products, the Court
upheld statutes that curtailed economic liberty, uncritically accepting
government rationales offered in their defense, and sometimes even itself
suggesting rationales that might have animated the legislators. In Railway
Express Agency v. New York, (34) the
Court sustained a New York traffic ordinance that prohibited the sale of
advertising space on trucks but allowed truck owners to advertise their
businesses on their own vehicles. Challenged as a denial of equal protection by
Railway Express, which wanted the freedom to contract to sell
advertising space on its trucks rather than just advertise itself, the
ordinance was upheld by the Court. Justice William O. Douglas wrote, "The
local authorities may well have concluded that those who advertised their own
wares on their trucks do not present the same traffic problem in view of the
nature or extent of the advertising which they use." (35)
The contrast with Allgeyer and Lochner was
striking. Freedom of contract can be restricted, under the "rational
basis" test, provided only that the justices can imagine some
reason that the legislators might have had in mind when they enacted the law.
Similarly, in Williamson v. Lee Optical Co., (36)
the Court rescued a patently anti-competitive statute with
its own speculations on what the legislators might have thought. In that case,
an Oklahoma statute prohibited opticians from fitting new lenses into old
eyeglass frames unless they first obtained a prescription from an optometrist
or ophthalmologist. The Court brushed aside the Fourteenth Amendment challenge
to the law. It was enough for Justice Douglas to muse that the
legislature might have thought the enactment would do something to "protect
public health." One critic caustically observed that a "state statute
that, on grounds of public health, forbids opticians to replace eyeglass frames
without a prescription signed by an optometrist or ophthalmologist can have no
real purpose other than to increase the income of optometrists and
ophthalmologists at the expense of opticians--and consumers." (37)
The special-interest nature of the law must have been
apparent to the members of the Court, but they were adamant in wanting to
preserve legislative authority in the economic realm.
A case that is particularly relevant to UPL prohibitions is Ferguson
v. Skrupa, (38) involving a Kansas
statute prohibiting the business of debt adjusting. Under that practice, a
debtor and a debt adjuster enter into a contract whereby the debtor makes
periodic payments to the debt adjuster, who then pays creditors pursuant to an
agreed-upon plan, keeping a percentage for himself. The statute allowed only
lawyers to practice debt adjusting, if done pursuant to the "practice
of law." Skrupa, who had been in the debt-adjusting business, challenged
the statute, arguing that a complete prohibition was unreasonable, since the
occasional abuses that might arise in debt adjusting could be remedied in
other, less restrictive ways than putting nonlawyer debt adjusters out of
business. The federal court that heard the case agreed and struck down the
statute as a violation of the Fourteenth Amendment. (39)
Kansas appealed to the Supreme Court, knowing that under the rational
basis test it was certain to win. It did. Justice Hugo L. Black, writing
for the Court, scolded the lower court for having "adopted the philosophy
that it is the province of courts to draw on their own views as to the
morality, legitimacy, and usefulness of a particular business in order to
decide whether a statute bears too heavily upon that business and by so doing
violates due process. . . . [I]t is up to legislatures, not courts, to
decide on the wisdom and utility of legislation." (40)
Hammering home the point that the Court was utterly
indifferent to assaults on economic liberty, Black added, "Whether the
legislature takes for its textbook Adam Smith, Herbert Spencer, Lord Keynes, or
some other is no concern of ours." (41)
Skrupa had also argued that because the statute permitted
lawyers to engage in debt adjusting, his right to equal protection of the
law was violated. Justice Black dismissed that argument under the rational
basis test: Kansas legislators might have thought that it was reasonable to allow
lawyers to engage in debt adjusting because the debtor might need legal advice
that a layman could not lawfully give him under the Kansas UPL statute. (42)
One monopoly served to justify another.
The Court's message in Ferguson v. Skrupa could not
have been more clear: If legislation destroys honest businesses and creates
monopolies for favored interest groups, the judiciary must allow it
because courts are not to "substitute their social and economic beliefs
for the judgment of legislative bodies, who are elected to pass laws." (43)
The precedent of deferring to the legislature whenever there
is or might be some rational basis for assaults on economic liberties continues
to this day. (44)
The Court's rubber stamping of legislation restricting
or abrogating economic liberties contrasts sharply with its strict scrutiny
of legislation affecting what the justices regard as fundamental rights.
Consider, for example, Griswold v. Connecticut, (45)
which declared a statute forbidding the sale of
contraceptives unconstitutional. Justice Douglas, writing the majority opinion,
justified the result on the ground that the statute violated the
"fundamental" right of privacy that he found in
"penumbras" of the First, Third, Fourth, Fifth, and Ninth Amendments.
For the majority, privacy, although not mentioned in the Constitution, was a
fundamental right, which the ban on the sale of contraceptives violated.
Because the Court regarded the right of privacy as fundamental, it applied
strict scrutiny in analyzing the case.
Statutes analyzed under strict scrutiny are doomed.
Under this analysis, the government is required to show (a) that it is
attempting to achieve an objective of vital public interest, (b) that
the statute in question will in fact do so, and (c) that it has
chosen the least intrusive means possible of doing so. The presumption
is strongly against the constitutionality of the law. Just as the rational
basis test makes it easy to find a reason to uphold a statute, strict
scrutiny makes it easy to find a reason to strike it down. As Justice Douglas
wrote, if regulations "sweep unnecessarily broadly and thereby
invade the area of protected freedoms," they are invalid. (46)
Connecticut's statute banning the pill "swept too
broadly" and was therefore unconstitutional.
It is instructive to compare Griswold with Ferguson
v. Skrupa. The Kansas statute banning debt adjusting was allowed to stand,
even though it could easily be argued that less restrictive means could have
been employed. The Connecticut statute was declared unconstitutional because it
did not employ a less restrictive means. The outcomes are explained solely by
the fact that the Court pinned the "fundamental" label on the
"right of marital privacy" in Griswold but did not pin it on
Skrupa's right to continue in business.
Another right the Court has graced with the
"fundamental" designation is voting. State laws that fail to comply
with the Court's rules on voting rights and optimal apportionment will be
invalidated. Thus, in Reynolds v. Sims, (47) a
case involving the apportionment of the Alabama legislature, Chief Justice Earl
Warren wrote, "Undoubtedly, the right of suffrage is a fundamental
matter in a free and democratic society. Especially since the right to exercise
the franchise in a free and unimpaired manner is preservative of other basic civil
and political rights, any alleged infringement of the right of citizens to
vote must be carefully and meticulously scrutinized." (48)
Whether the right to exercise the franchise in a free
and unimpaired manner is "preservative of other basic civil and political
rights" is debatable. What is not in debate is that a large percentage of
Americans eligible to vote do not choose to do so. A right that the
Supreme Court considers fundamental is one that many citizens view with
complete indifference. Voting, privacy, freedom of speech, and other rights
for which the Court shows great solicitude may indeed be fundamental, but most
people regard the right to engage in a chosen occupation, the right to contract
for the purchase or sale of goods and services, and economic liberties
generally, as being at least as important to their success and happiness as are
the Court's preferred rights. Unfortunately, the Court has not seen fit to
protect those other rights.
Arguably, that rights dichotomy reflects the prejudice of
jurists, educated in elite law schools, who apparently believe that voting,
privacy, speech, press, and other rights denominated as fundamental are of far
greater significance to people and the well-being of the nation than are mere
economic rights. Nobel laureate Ronald Coase offers this view on the reason for
the Court's hierarchy of rights:
The market for ideas is the market in which the intellectual
conducts his trade. The explanation of the paradox is self-interest and
self-esteem. Self-esteem leads intellectuals to magnify the importance of their
own market. That others should be regulated seems natural, particularly as
many of the intellectuals see themselves as doing the regulating. But
self-interest combines with self-esteem to ensure that, while others are
regulated, regulation should not apply to them. (49)
The Court's distinction between fundamental personal, political,
and intellectual rights, which the government must respect, and
nonfundamental economic rights, which the government may disregard under almost
any pretext, may appeal to some intellectuals, but does it have any basis in
the Constitution?
The Importance
of Economic Liberty
F. A. Hayek has argued that economic rights, reduced by the
Supreme Court to conditional privileges, are as essential to human
welfare and progress as are fundamental rights. Human well-being depends as
much on the freedom to work, to trade, or to contract as on the freedom to
think, to speak, or to vote. In Hayek's words,
The importance of freedom . . . does not depend on the
elevated character of the activities it makes possible. Freedom of action,
even in humble things, is as important as freedom of thought. It has become a
common practice to disparage freedom of action by calling it "economic
liberty." But the concept of freedom of action is much wider than that of
economic liberty, which it includes; and what is more important, it is very
questionable whether there are any actions that can be called merely
"economic" and whether any restrictions on liberty can be confined to
what are merely "economic" aspects. (50)
Economic liberty is the foundation for the realization of
nearly all human goals. The ability to earn a living and thereby acquire
the goods, services, and resources that we need for everything from raising a
family and enjoying a vacation to supporting the fine arts and writing
political tracts is impeded, and sometimes eliminated, by the kind of
statutes that easily pass by the Court's rational basis test.
Consider, for example, the case of Nancy Dukes. She had
operated a hot-dog pushcart business in New Orleans until the City Council
enacted a law that prohibited push-cart vendors who had not been licensed and
operating continuously for eight years. Dukes was forced out of business
because she had only operated for two years. One hot-dog vendor was
"grandfathered" in under the eight-year rule and thereafter
enjoyed a monopoly.
Dukes challenged the law, arguing that it was an
unconstitutional deprivation of her liberty and property. The Fifth Circuit
Court of Appeals agreed with her, (51) but
this victory for economic liberty was short-lived. New Orleans appealed and the
Supreme Court reversed. Again emphasizing the constitutional insignificance of
economic liberty, the Court declared that "in the local economic sphere, it
is only the invidious discrimination, the wholly arbitrary act, which cannot
stand consistently with the Fourteenth Amendment." (52)
Dukes was deprived of her livelihood because the Court did
not regard the New Orleans law to be "wholly arbitrary."
The Court's distinction between rights it treats as
fundamental and those it consigns to the nether regions of
constitutional jurisprudence is untenable. Voting rights, freedom of
speech, and other political-intellectual rights are indeed important,
but no more so than the right to pursue one's chosen livelihood and engage in
other economic activities. The Founders took pains to protect the liberty of
the citizens in all its many aspects, not just those that the Court has chosen
to favor. As Professor Bernard Siegan of the University of San Diego observed,
When the Constitution was framed, separation of powers,
checks and balances, and judicial review were political and economic ideas.
They would safeguard the individual in his personal, business, or professional
life from governmental oppression. Society would benefit because liberty was
regarded as the greatest encouragement to wisdom, productivity, creativity, and
contentment. The same reasoning remains applicable today. We still rely on
freedom to advance understanding and culture as well as to supply food,
clothing, and shelter. But those constitutional aspects now operate to augment
liberty in one area and not the other. (53)
Economic liberties were unquestionably important to the
framers of the Constitution. Professor Richard Levy of the University of Kansas
notes that "economic rights are fundamental in terms of the importance
attached to them by the framers, their role in the traditions and collective
conscience that underlay our conceptions of ordered liberty, and their
contribution to individual and societal well-being." (54)
Applying the rational basis test and taking Justice Black at
his word--that the Court should remain indifferent to any and all economic
controls a legislature may want to enact--leaves a vast sphere of liberty
entirely at the mercy of majoritarian politics. That is at odds with the
letter and spirit of the Constitution.
The best approach for the Court to take in restoring economic
liberties to their proper constitutional place is an inquiry beyond the scope
of this paper. (55) What is vital is that,
wherever in the Constitution the Court chooses to ground protection for freedom
to engage in economic transactions, including the freedom to pursue an
occupation, the Court abandon the minimal scrutiny standard that has so often
allowed legislation to deprive people of economic liberty upon the flimsiest
of pretexts. When a legislative body seeks to place obstacles in the way of
people who desire to earn an honest living, it should be prepared for judicial
review asking whether the law in question is one that is necessary to advance
an important public purpose and does so in the least intrusive way.
The Court has never decided a case challenging the
constitutionality of UPL prohibitions.
Under the current rational basis analysis, the outcome of such a case is
obvious--the state wins. But when the state wins, a large number of individuals
lose. People who might have become successful legal practitioners, such as
Rosemary Furman, are compelled to pursue some other line of work. People who
might have benefited from their services, as those who dealt with Furman did,
will have to choose among fewer and more expensive service options. The
freedom to decide who is authorized to serve another is removed from the hands
of the would-be contracting parties and placed in the hands of an organization
of practitioners with a strong interest in limiting competition and
protecting the status quo.
The freedom to engage in useful work should not be treated as
simply a matter of legislative prerogative, like setting speed limits. It is
a matter of liberty and justice. As James Madison wrote in 1792,
That is not a just government, nor is property secure under
it, where arbitrary restrictions, exemptions, and monopolies deny to part of
the citizenry that free use of their faculties, and the free choice of their
occupations, which not only constitute their property in the general sense of
the word; but are the means of acquiring property strictly so-called.
(56)
If the Court were to restore constitutional protection for
economic liberties and ask hard questions about UPL prohibitions, could they
survive the scrutiny? To that question, we now turn.
Early American history was characterized by a laissez faire
attitude toward labor and the market for services. During the colonial period,
bar organizations in some cities succeeded in establishing a measure of control
over entrance into the legal services field, but in the years after the
Revolution, most restrictions on legal practice were abolished. Legal historian
Barlow Christensen writes that "the close of the Revolutionary War saw a
concerted attack upon the privileges of the legal profession, a movement that
was exacerbated by the rising spirit of 'Jacksonian democracy. '" (57)
By the time of the Civil War, no significant restrictions
remained, and several states had statutes or even
constitutional provisions specifically stating that every citizen was entitled
to practice law. (58) The market for legal
services was virtually free of government regulation.
Individuals who wanted to earn a living (or merely supplement
other income) by providing legal assistance were free to decide how to prepare
themselves: One might read law on his own, as Abraham Lincoln did; serve an
apprenticeship with a lawyer, as Clarence Darrow did; (59)
or attend one of the small number of law schools then in
operation. (60) No law specified the
kind or duration of preparation for legal practice and, according to legal
historian Albert Harno, "A substantial portion
of the practicing bar was unconvinced, if not distrustful, of the benefits that
might flow to a lawyer from either a university or law school education."
(61) Aspiring lawyers weighed the costs and
benefits of the various human capital investments they could make to further
their careers and chose among them, searching for the optimal education and
training investment, given their particular circumstances.
Beginning in the latter decades of the 19th century, the
legal profession began to assert its growing political influence and
pressed for legislation to set minimum educational qualifications for bar
membership. (62) By 1902, 27 of the 45
states had established such qualifications. The argument made by the bar in
favor of minimum educational requirements was that they would improve the
quality of legal representation. Although that public-interest rationale may
have been sincerely believed by some, raising admission standards was clearly
in the interest of lawyers. During the laissez faire years, the
lawyer-to-population ratio had been steadily rising, leading lawyers to
complain about overcrowding at the bar. Christensen comments that "the
effort to impose and to raise educational standards for admission to law
practice carried with it the added attraction of limiting the number of new
lawyers admitted. That it in fact did so is perhaps reflected in the drop
in the lawyer-to-population ratio in the years following." (63)
Reducing the number of lawyers, however, left the bar facing
increasing competition from laymen and corporations, such as title insurance
companies. The legal profession next turned its attention to that
"problem." In 1930 the ABA appointed its first Committee on
Unauthorized Practice of Law; many state and local bar organizations also did
so and began to lobby for the enactment of statutes prohibiting
"unauthorized" practice of law. UPL prohibitions were sought,
successfully in every state, by the bar, with the argument that they were
needed to prevent consumers from being harmed by incompetent practitioners. The
consumer protection rationale, however, has met with much skepticism. Professor
Deborah Rhode of Stanford University, for example, has written, "Although
the organized bar has often suggested that the campaign against lay practice
arose as a result of a public demand, the consensus among historians is to
the contrary." (64)
The UPL statutes effectively cartelized
the legal profession. Only licensed attorneys were thereafter permitted to
"practice law," a term that was never carefully defined, which left
it up to a generally sympathetic judiciary to determine on a case-by-case
basis just where a person's conduct encroached upon forbidden turf.
Many courts took their lead from a very general formulation by then-judge
Justice Benjamin N. Cardozo, that "the practice of law encompasses all
those services traditionally rendered by lawyers." (65)
The law and zealous unauthorized practice committees would
shield lawyers from unwanted outside competition as much as possible.
Over the years, courts have identified many activities as UPL
(66) and, less frequently, ruled some lay
activities to be free of UPL restraints. (67)
No case, however, can do more than fix a single point on the
boundary between the practice of law and activities that laymen may undertake.
The imprecision of the law makes it easy for unauthorized practice committees
to threaten legal action against nonlawyers whose activities could plausibly be
called "services traditionally rendered by lawyers."
For the most part, the bar has tried to make its UPL
enforcement unobtrusive. Rhode explains, "By design or neglect, the
organized bar has settled on an approach involving low-visibility enforcement
efforts by state and local unauthorized practice committees, attended by as
little public discussion as possible." (68) Where
UPL cases have garnered media attention, they have been a public relations
headache for the bar. The Florida Bar's prosecution of Furman,
as noted earlier, is a case in point.
In recent years, the bar's attempts to expand the boundaries
of UPL have led to "turf wars" with other professions. In
1996, for example, the State Bar of Virginia managed to get legislation
introduced that would have declared real estate closings to be unauthorized
practice if handled solely by real estate agents. When it became apparent that
the bill would fail in the legislature, the bar sought an opinion from the
Virginia Supreme Court to the effect that real estate closings could not be
done without an attorney.
The Virginia Bar's effort was opposed not only by a coalition
of realtors and bankers but by the Federal Trade Commission and the
Department of Justice. Anne Bingaman, head of the Antitrust
Division, and William J. Baer, director of the Federal Trade Commission,
argued in a joint letter to the executive director of the Virginia State Bar,
"By ending competition from lay settlement services, the Opinion would
likely increase the cost of real estate closings for consumers. . . . The
restriction would adversely affect all consumers who might prefer the
combination of price, quality, and services that a lay settlement service
offers." (69) Bingaman and Baer cited
the New Jersey Supreme Court's 1995 ruling, in a similar controversy, that
competition benefited consumers, who saved money but suffered no demonstrable
harm from conducting real estate closings without legal counsel. (70)
After the Virginia legislature passed a bill declaring that
real estate closing work was not the practice of law, the Virginia Bar withdrew
its proposed ruling to the contrary.
Notwithstanding that setback, we can anticipate an on-going
effort by bar associations to prevent consumers from contracting with
nonattorneys for legal services, always in the name of consumer protection. As
we shall see, however, UPL restrictions do not protect or benefit consumers; on
the contrary, they harm them.
Do UPL prohibitions serve any valid purpose? Although it is
commonly believed that they improve consumer welfare by ensuring standards of
competency, we will see in this section that they are in fact
counterproductive.
Occupational Licensure, Market Standards,
and Quality of Service
In the United States, many occupations are subject to
licensing requirements. (71) Licensing statutes
provide that only those individuals who have obtained a license as prescribed
by law are permitted to offer their services to others. If an unlicensed
individual attempts to enter the market, he can be enjoined from doing
so and may be subject to other penalties, whether or
not any person he serves suffers an injury. The legal profession is
just one of many service markets to which entry has been foreclosed to anyone
who has not undertaken a politically determined course of preparation.
Among economists, licensure is widely understood as a form
of rent seeking by special-interest groups--that is, an endeavor to use the
power of the government to secure higher earnings than would be possible in a
free market. Thomas Sowell writes,
Escalating qualification standards in the licensed occupation
almost invariably exempt existing practitioners, who thereby reap increased
earnings from the contrived scarcity, without having to pay the costs
they impose on new entrants in the form of longer schooling, tougher qualifying
examinations, or more extended apprenticeship. . . . Although "the public
interest" is a prominent rhetorical feature of occupational licensing laws
and pronouncements, historically the impetus for such licensing comes almost
invariably from practitioners rather than the public, and it almost
invariably reduces the quantity of new practitioners through various
restrictive devices, and the result is higher prices. (72)
Licensing thus leads to higher earnings for a few and higher costs
for many.
With less competition, licensees can charge higher prices.
Because there are fewer lawyers than clients, monopoly gains are concentrated
while costs, higher prices, and reduced contracting options are widely diffused
among the public. As public-choice economists have pointed out, in the arena of
democratic politics, organized interest groups seeking concentrated
benefits for their members have a great advantage over their opponents. The interest
group is well informed about the issue and will devote considerable
resources to lobbying and public relations to sway legislators, but members of
the public who will be made worse off as a consequence of the licensing statute
will have little incentive to organize opposition. Few even know about the
legislation, much less comprehend its adverse impact on them. (73)
The public rationale given by the profession seeking
restrictive licensure and the politicians who sponsor and advance the legislation
is that it is needed to protect consumers against harm they might suffer from
dealing with incompetent service providers. In the absence of licensing, the
argument goes, there would be no guarantee that individuals holding themselves
out as competent to perform certain services would in fact be competent.
Licensing, its defenders argue, protects consumers by imposing standards where
there would otherwise be none.
On a superficial level, the argument seems plausible. Without
licensing statutes, no legally articulated standards restrict entry into
a business or profession. If there were no attorney licensing statutes backed
up with UPL prohibitions, it would be legal for a person with little or no
training in the law to hold himself out as an attorney. Still, the absence of
statutory standards does not mean there are no standards at all. The market
imposes the unarticulated--but very real--standard that those who enter
it must be able to meet the competition. This is the test of the
marketplace: can you earn enough, in the face of free choice among consumers,
to remain in the field?
The market's standard is one of performance.
The consumer is usually not concerned with the means by which practitioners
acquire their skills. He cares only that he receives good value for his money.
In any occupation, licensed or not, practitioners have to prepare adequately or
they will quickly find themselves unable to handle the demands made on
them. Failure to satisfy enough customers will threaten the ability to remain
in business. Some new practitioners prepare by serving an apprenticeship with
an established professional; others choose to take courses. In either case,
each individual has a strong incentive to prepare well enough to be able to
perform satisfactorily when he is on his own.
How do practitioners-in-training know when they are competent
to handle work on their own? Schools that provide training courses, whether in
law, hair cutting, truck driving, or anything else, have an incentive to
provide an adequate level of preparation. It would be ruinous to their
reputations to be known as places that took money from students but failed to
train them well enough to succeed. Schools might desire to overtrain
students to increase their revenues, but competing schools would eventually
arise to offer more cost-effective alternatives. A competitive market for
training drives out training programs that are not a good value for the time
and money the student invests. In the free market, ineffective education and
training programs can no more survive than can any other product that doesn't
work.
The question is not whether there will be standards but
whether they will be politically determined or
market determined. The weakness of politically determined
standards is that they are set by people who do not bear the cost of, and
indeed may gain from, setting them too high or basing them on irrelevant
criteria. The politically determined
licensing standard for beauticians in Oregon mandates 2,500 hours of training.
In California, candidates for an architect's license must be able to discuss
the tomb of Queen Hatshepshut. After analyzing many licensing requirements, S.
David Young wrote that written exams often "test little more than the
ability to memorize irrelevant facts." (74) Whereas
the nonarticulated standards of the market focus on the ability to do
satisfactory work, political standards are too often motivated by the desire to
artificially raise costs and restrict entry into the field.
In the legal services market, the licensing criteria are
fulfilled by law school graduation, passage of the state bar exam, and (in
most states) membership in the state bar association. A free market in
legal services, according to a typical statement, would "result in the
most unwary, guileless members of the public being incompetently represented
and advised, if not victimized and defrauded." (75)
The demand for high standards to protect the public seems
appealing. As we shall see, however, the benefit to consumers of having
government--or, more accurately, the organization that represents legal
practitioners--set training and competence criteria is exaggerated, if it
exists at all. Moreover, the consumer protection rationale overlooks the
significant costs that this policy imposes. UPL prohibitions are, in fact, neither
necessary nor sufficient to protect consumers from incompetent or unscrupulous
practitioners.
A free market in legal services combined with consumer
remedies for fraud, breach of contract, and negligence gives consumers at least
as much protection against incompetent and unscrupulous practitioners as does
the prohibition against UPL.
The need to pass the test of the market imposes
unarticulated, but nevertheless powerful, standards on those who wish to
succeed. To enter any service market requires an investment of time and
capital. Self-interest drives people to search for the most profitable uses for
their time and capital. An ill-considered investment will mean, at the minimum,
forgoing better opportunities; often, it entails partial or complete loss of
the individual's capital. The prospective cost of failure deters people from
entering markets in which they are not competent. Someone who can barely
play a C major scale does not invest the time and money necessary to enter the
market as a piano teacher, despite the absence of any licensing requirements
for that profession. People rationally spend their time and money in pursuit of
the career that is most apt to be profitable and eschew the many that are
apt to end with dissatisfied customers suing to get their money back.
Because people do not want to fail, they desire information
about the standards that the market has established. How good is good enough?
They also desire the training necessary to reach that level of ability. Those
demands give rise to a supply of training opportunities to develop the human
capital needed for success. To prepare to enter the legal services market in
1900, for example, a person could have chosen from full-time or part-time law
schools offering courses of study ranging from one to three years. Or he might
have chosen to become an apprentice in a law office and learn the law in a more
hands-on setting. That choice was left to the individual, yet there is no
evidence that public dissatisfaction with the services rendered by lawyers was
higher then than it is today.
In the states where UPL prohibitions have been
repealed or relaxed, (76) unlicensed
legal practitioners, mostly paralegals and legal secretaries, handle work that
is within their capabilities and commonly refer more difficult or unfamiliar
legal work to lawyers. They do so for the same reason that lawyers refer cases
outside their area of expertise to other lawyers, even though they are not
legally bound to do so: it is not in their interest to try and possibly fail
at work that is beyond their capabilities.
There is no law to prevent a patent lawyer from handling litigation
under the Uniform Commercial Code, for example, but lawyers very seldom take
cases in fields in which they have no expertise. (77)
More time is required to prepare a case in an unfamiliar area
of the law; the risk of malpractice is increased; and unsatisfactory
performance could damage the lawyer's reputation. (78)
Those same considerations deter other legal practitioners
from straying outside of their areas of competence.
Marketplace incentives and disincentives work to filter out
most incompetence prospectively. Individuals rarely enter a field unless
they know they are good enough to compete. Moreover, consumers have a further
protective resource -- their own information-gathering ability. Self-interest
drives them to search for information about the reliability of service
providers with whom they would contract. Consumers can and do obtain such
information by asking others who have needed the same kind of service. They can
check with the Better Business Bureau or the state Office of Consumer
Protection. They may inquire about the length of time a service provider has
been in business, duration being an indicator of success. The
presence or absence of advertising is another. Service providers probably
would not invest in advertising only to squander that investment by performing
incompetently. When consumers search for evidence of reliability, they are
usually able to screen out charlatans.
The market process thus minimizes the problem of incompetent
practitioners. The likelihood of incompetent service is greatest where the
consumer does not go into the market for help but instead seeks advice from
persons not in the market--friends or relatives, for instance--who are not
concerned about repeat business because they are not trying to earn a living in
that field. Market incentives will not deter nonmarket transactions.
Neither, however, will laws prohibiting such dealings deter them. If Person A asks