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Differing Levels of Scrutiny for Economic Regulations: “Anything Goes” Rational Basis v. Rational Basis “With Bite”

Jarrett Dieterle April 26, 2017
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Recently, the South Carolina Supreme Court issued a decision striking down a state law that limited the number of liquor retail outlets that a single owner could operate within state boundaries. The Court held that the law’s sole justification was economic protectionism, which made it an improper use of the state’s police powers to regulate alcohol. R Street Institute fellow Jarrett Dieterle takes an in-depth look at case in this three-part blog series.

The first part of the series analyzed the reasoning used by the South Carolina Supreme Court in reaching its decision. Part two will explore the differing levels of constitutional scrutiny that economic regulations have received during our nation’s history.

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The fight over how to treat economic liberty under the Constitution has been as lengthy as it has been acrimonious. Under current constitutional jurisprudence, certain types of recognized rights—so-called “fundamental rights”—receive more robust judicial protection (known as “strict scrutiny”) than other rights. In order for a government to infringe upon these “fundamental” rights, it must have a compelling interest and adopt the least intrusive means to advance that interest. This requires an inquiry into both the goals of the infringing law and the means the law adopts to achieve those goals.

In contrast, other rights—like economic liberty rights—are accorded a lesser level of protection known as “rational basis” review, which merely asks whether a law is “rationally related” to a “legitimate” government interest. In practice, rational basis review is even more watered down than it appears on paper. In the words of professor Randy Barnett, infringements on economic liberty are routinely upheld so long as a court can “identify any hypothetical reason for why a legislature might have enacted the restriction.”

However, Barnett and others have argued this multitiered approach to rights protection was not always predominant in constitutional jurisprudence. Traditionally, courts would engage in an in-depth analysis of the objective and justification of challenged laws to determine whether their purpose was a proper one. If the law in question was enacted “genuinely to serve the public welfare,” then it would be deemed legitimate, but if the court found the law to be “arbitrary, unreasonable, or discriminatory,” the law could properly be struck down as beyond the proper scope of the government’s powers.

Determining whether a certain state law was proper or “arbitrary, unreasonable, or discriminatory” depended upon how broad one considered a state’s “police powers.” In his book Restoring the Lost Constitution, Barnett retraces the historical meaning of the term “police powers,” finding that it generally was taken to mean that states could protect the general public's health, safety and, in some instances, morals. Laws that could not be justified on these grounds were deemed beyond the scope of a state’s authority.

During this pre-New Deal time period, economic regulations were treated no differently than laws abridging other liberties, which meant they could not arbitrarily benefit certain classes of individuals (or economic actors) over others. Such favoritism often amounted to nothing more than discriminatory economic protectionism, which was viewed as outside of a state’s police powers, since it had no obvious health or safety rationale.

The most famous example of a court striking down economic-based legislation was of course the U.S. Supreme Court’s decision in Lochner v. New York, which ruled unconstitutional a New York law that limited how many hours bakers could work. While the State of New York argued its baking-hour restrictions were justified on health and safety grounds—i.e., that limiting the number of hours bakers worked could improve their health—the court found this rationale unconvincing and likely a pretext for what it referred to as “other motives” (such as economic protectionism).

 Lochner proved to be a highly controversial decision, drawing ire from many legal scholars. Despite the fact that the Supreme Court ultimately repudiated Lochner, legal observers today are still quick to invoke the “Ghost of Lochner,” accusing some libertarians and conservatives of trying to engender a return to the “Lochner Era” of increased judicial scrutiny of economic regulations.

In modern times, courts frequently uphold economic legislation that arbitrarily benefits certain economic actors over others, with some courts even going so far as to hold that economic protectionism is a proper purpose of governmental action that sits squarely within a state’s police powers. The switch from scrutinizing economic regulations to ensure they were not “arbitrary, unreasonable, or discriminatory,” to rubber-stamping such infringements for “any hypothetical reason” occurred during the U.S. Supreme Court’s New Deal era.

Specifically, in the case of Williamson v. Lee Optical, the U.S. Supreme Court “withd[rew] from policing economic legislation,” reversing what Barnett characterizes as “150 years” of “traditional police powers jurisprudence.” Barnett has summarized the switch as follows:

[W]here does modern “anything goes” rational basis scrutiny come from? . . . [It comes from] the 1955 Warren Court case of Williamson v. Lee Optical in which Justice Douglas replaces the realistic actual rational basis scrutiny that was employed by the lower court with a formalist hypothetical rational basis that is satisfied so long as a judge can imagine any possible rational basis for a statute.

Recently, however, there has been renewed legal scholarship critiquing the move away from more rigorous scrutiny of economic regulations, along with several recent judicial opinions that have resuscitated this pre-New Deal variety of economic liberty jurisprudence.

For example, in the D.C. Circuit case of Hettinga v. United States, involving the regulation of milk under federal law, Judges Janice Rogers Brown and David Sentelle issued a concurring opinion criticizing the judiciary’s abdication of even modest scrutiny of economic regulations. They summarized the history of economic liberty jurisprudence as follows:

[T]he judiciary’s [modern] refusal to consider the wisdom of legislative acts—at least to inquire whether its purpose and the means proposed are “within legislative power”—[would] lead to only one result: “[R]ights guaranteed by the Constitution [would] exist only so long as supposed public interest does not require their extinction.” . . . [T]he [Supreme C]ourt ratified minimalist review of economic regulations, holding that a rational basis for economic legislation would be presumed and more searching inquiry would be reserved for intrusions on political rights.

This resuscitation has happened in state courts, as well. In Patel v. Texas Dep’t of Licensing and Regulation, the Supreme Court of Texas, in an opinion authored by Justice Don Willett, struck down a protectionist licensing scheme for eyebrow threaders. After recounting the judicial history that lead to the current anything-goes version of the rational basis test for economic liberty concerns, the court adopted what it termed “rational basis with bite,” which demands “actual rationality, scrutinizing the law’s actual basis, and applying an actual test.”

 

Like the South Carolina Supreme Court in Retail Services, the Texas Supreme Court rejected economic protectionism as a proper end of government:

Government’s conception of its own power as limitless is hard-wired. But under the Texas Constitution, government may only pursue constitutionally permissible ends. Naked economic protectionism, strangling hopes and dreams with bureaucratic red tape, is not one of them.”

In other words, the Texas Supreme Court restored at least some constitutional safeguards against arbitrary and discriminatory economic regulations, and held that the state’s police powers were not unlimited.

The South Carolina Supreme Court’s majority and dissenting opinions in Retail Services reflect the fissure between the currently dominant anything-goes version of rational basis and the growing support to restore a rational basis “with bite” test for economic legislation. The Retail Services majority simply extended this recent trend of heightened scrutiny for economic regulations into the realm of alcohol, holding that promoting raw economic protectionism is not a legitimate objective of government.

Rather than a straightforward application of this revived economic liberty jurisprudence, however, the Retail Services opinion raises novel legal questions, given the long-accepted role of states in regulating and controlling alcoholic beverages.

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Part three of this series will analyze how this renewed interest in economic liberty litigation could apply to the world of alcohol.

C. Jarrett Dieterle is an attorney and fellow at the R Street Institute in Washington, DC. He also is an editor of DrinksReform.org, which tracks and analyzes alcohol laws from around the country.

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