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The People Versus LaLa Wang
[December 16, 2003]

By S. M. Oliva

Business regulation is the bread-and-butter of state government. As fast as individuals can create whole new professions, local regulators can pass a bunch of rules that stunt professional growth. The regulators claim their presence is necessary to protect the “public interest” by “protecting consumers” and “ensuring competition”. In almost any context, however, the stated objectives conflict with the regulators’ real mission—to obtain more power for themselves at the expense of private businessmen.

In 1975, the New York State legislature discovered a problem in the apartment rental market. It seemed a number of unsavory characters were selling customers fraudulent “apartment information” lists. The lists promised information on the location and availability of apartments for rent. In reality, many of the apartments were unavailable or non-existent. Often the people selling the lists did nothing more than copy out-of-date listings from the newspaper classifieds. Accordingly, the state legislature felt the need to act.

The legislature might simply have banned any person from selling fraudulent apartment information. But that would do little for the interests of Albany’s professional regulators. Instead, the legislature decided to judge all persons selling apartment lists—including licensed real estate brokers, people already subject to strict regulatory requirements—guilty of a crime unless they obtained a new professional license. This is a classic regulatory paradigm: No person can be presumed honest without prior government approval. In this case, no person is trustworthy to sell apartment listings unless he or she is a licensed “apartment information vendor”.

The apartment information vendor (AIV) law was enacted for a limited purpose: To prevent the sale of lists of apartments except under strict state guidelines. But when has a regulator ever stuck to the strict language of its authorizing statute? The regulator in charge of AIVs, the New York Department of State, decided three years ago that an AIV, a business model born of the 1970s, must also include 21st century Internet businesses that do far more than sell apartment “lists” for an advance fee. We’ve all seen large websites like Yahoo Real Estate and homestore.com that offer online apartment listings. Conventional real estate brokers throughout the country have developed their own “virtual office” websites to give their customers 24/7 access to information that was once the exclusive province of brokers. This is precisely the type of market-directed innovation that renders traditional regulatory regimes like New York’s AIV law moot. But try telling that to the Department of State, which saw innovation not as a consumer savior, but as an affront to the government’s regulatory prerogative. Accordingly, the Department’s leadership decided to make an example out of the new, Internet-based real estate market.

LaLa Wang became New York’s chief target under the newly reinterpreted AIV law. Wang is the founder of MLX.com, an interactive portal site that allows customers to access a real-time database of real estate listings, as well as a host of other traditional brokerage services, all for a one-time advance fee. In her years as a real estate broker, Wang never faced a single consumer complaint. But her perfect record and satisfied customer base did nothing to dissuade the New York Department of State from trying to shut down her business. The Department claimed Wang’s Internet database was, in fact, an unlicensed AIV. Wang disagreed, arguing that a real-time, interactive web portal was about as far from the static AIV lists of the 1970s as you could get. Her service had none of the consumer fraud pitfalls of those older, largely extinct businesses. But the Department would not waiver, and they suspended her real estate broker’s license until she agreed to rid herself of MLX.com.

Wang appealed her license suspension through the New York courts, all of whom turned her away. Now she’s launched a final appeal to the United States Supreme Court. In a petition filed last week, Wang argued that New York Secretary of State Randy Daniels violated Wang’s federal constitutional rights by suspending her license because of the alleged AIV violation. The petition raises three specific issues:

First, Wang was denied due process under the Fourteenth Amendment, because she was never able to defend herself against the actual charges. The Secretary found Wang “untrustworthy” to hold a real estate broker’s license because she was running an illegal AIV. The Secretary, however, does not have the authority to decide that Wang—or anyone, for that matter—is running an illegal AIV. Any such act is considered a criminal misdemeanor, which means that the state attorney general must prosecute her in criminal court; the Secretary only possesses civil jurisdiction to deny, suspend, or revoke AIV licenses. This means the Secretary pulled a bait-and-switch: He revoked Wang’s broker’s license after improperly finding her guilty of violating another licensing law.

Second, the AIV law itself violates Wang’s First Amendment rights. Since the Secretary never alleged Wang’s business mislead or harmed consumers, it’s presumed MLX.com offered customers nothing more than truthful, non-misleading information about apartments. This means the state’s decision to regulate Wang’s business is subject to the Supreme Court’s tests for regulating “commercial speech”. Under these tests, the state may not restrict commercial speech unless the restraint is narrowly tailored to meet a necessary state objective. New York has never shown how shutting down MLX.com will meet the state’s interests in protecting consumers from fraud.

Third, the New York State courts improperly refused to hear Wang’s constitutional challenges in earlier proceedings. The state’s intermediate appellate court found Wang lacked standing to raise any constitutional challenge to the AIV law. But this makes no sense: The only allegation made against Wang was that she broke the AIV law. The state (and the courts) countered that Wang’s license was suspended for being “untrustworthy,” not for violating the AIV law. But that’s just a shell game. Without the AIV violation, there were no grounds to declare her untrustworthy.

Wang now awaits New York’s reply to her Supreme Court petition. The Court will decide whether to accept the case sometime in February 2004. Even if her appeal is unsuccessful, Wang’s case raises important issues that deserve greater attention. Throughout the country, business regulation is crippling small businesses. This is particularly ironic when you consider the initial demand for regulation was motivated by a desire to restrict the growth and economic power of large corporations. But now regulation serves mainly as a tool of restricting competition and innovation. New York wants Wang out of business, presumably so the more established (and politically connected) real estate brokers won’t have to face Wang’s cheaper, more effective online competition. This hardly serves consumer interests, and it certainly violates the principle of individual rights that underlies our nation’s Constitution.

This case must serve as a wake-up call to the people of New York, and every other state where regulation has run amok. When the Secretary of State brings down the force of law on businesswomen like LaLa Wang, he’s doing it in the name of “the people”. Is it any wonder the majority of persecuted businesses settle without a fight? What rational entrepreneur wants to risk his livelihood against the political will of an entire state? As it turns out, LaLa Wang is just that kind of entrepreneur. She’s put her money behind her principles—something you rarely see from Fortune 500 companies these days. The only question now is, will the people of New York stand with her in support of individual rights and economic liberty, or will they stand behind the petty tyrants trying to shut her down?

 

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