Litigation Backgrounder

While consumers across the nation are struggling with high gas prices, Wisconsin’s state government is working to make those prices even higher by quashing competition.

In 2006, small businessman Raj Bhandari purchased a gas station on the verge of bankruptcy.  He quickly turned the business around, in part by offering high quality service at competitive prices.  He also began building ties with the community by offering discounted gas to senior citizens and supporters of a youth sports group.  Raj soon learned that, incredibly, these popular discounts could subject him to thousands of dollars in government-imposed fines.

The Wisconsin Unfair Sales Act, a 1930s relic, makes it illegal to sell gasoline without marking it up either 6 percent over cost or 9.18 percent over the local wholesale price—whichever is higher.  This not only stifles competition and harms consumers; it is unconstitutional. 

Simply put, Raj has a constitutional right to set the price of his gas without arbitrary and irrational government regulation.  Unfortunately, Wisconsin bureaucrats are trying to outlaw a common and beneficial business practice that helps entrepreneurs attract customers by saving them money.  Consumers and entrepreneurs—not officials from the state capital—should set the price of gas in Wisconsin.  More than 30 states allow the kind of competition Wisconsin now outlaws, and three different state supreme courts have struck down similar laws without any negative effects on consumers or small businesses.

That is why on June 26, 2007, the Institute for Justice, a national public interest law firm with a history of defending economic liberty and the rights of entrepreneurs, filed suit in Dane County Circuit Court in Madison on behalf of Raj Bhandari challenging the Wisconsin Unfair Sales Act as a violation of fundamental constitutional rights.

Introduction

In many ways, small entrepreneurs are the engine of American prosperity.  They build unique relationships with their customers and their communities.  They drive costs down for everyone by competing with other businesses on price.  Unfortunately, all too often, entrenched interests and government bureaucrats make these consumer and community benefits more difficult if not impossible to achieve.

No one knows that better than Raj Bhandari.  In 2006, Raj purchased a gas station that was verging on bankruptcy.  In short order, he turned things around.  He increased sales and revenues, and built deeper ties with the surrounding town of Merrill, Wis., which is located about 150 miles due north of Madison.  As a way of accomplishing these goals, he offered discounted gas to senior citizens and supporters of a local youth hockey league.  The discounts were a hit, and Raj was doing what small businessmen do best:  making money while giving something back to his community.

Unfortunately, the Wisconsin Department of Agriculture, Trade and Consumer Protection informed him that he was also risking tens of thousands of dollars in fines.  In Wisconsin, it is illegal to sell any item of merchandise below cost—and it’s illegal to sell gasoline without a mandatory markup of between 6 percent and 9.18 percent.  Even as consumers nationwide are struggling with high gas prices, the state of Wisconsin is imposing anti-competitive regulations to make those prices even higher.

The law Raj violated—the “Wisconsin Unfair Sales Act”—is a relic from the 1930s that prevents Raj and hundreds of small businesspeople like him from offering consumers innovative and cost-effective pricing plans.  More than 30 states allow the kind of competition Wisconsin outlaws and three different state supreme courts have struck down laws like this one in the past 15 years.  Wisconsin insists on hanging onto its outdated scheme even though none of those states has seen any negative effects from allowing price competition on gas. 

Protecting consumers from inexpensive gasoline is like protecting them from pillows that are too soft, and that protection comes at a high price for both the entrepreneurs, who are barred from competing on price, and consumers, who are forced to pay the resulting higher prices.  To protect the public from a danger that doesn’t exist, the government has banned gas stations from engaging in the most basic sort of competition there is:  competition on price.  That is miles (and gallons) away from the state’s legitimate function of protecting the public health and safety.

That’s why on June 26, 2007, the Institute for Justice joined with Raj to file a constitutional challenge to Wisconsin’s arbitrary minimum markup law.  IJ, a public interest law firm that represents entrepreneurs nationwide whose rights are being violated by government, seeks to vindicate Raj’s ability to set his own price for the products he sells without arbitrary and unreasonable government interference.

Unfortunately for Raj, his discounts, which were literally pennies on the gallon, sparked a harsh warning from the state’s Department of Agriculture, Trade and Consumer Protection.  An auditor from the Department sent Raj a memorandum warning him that his discounts might be in violation of the Wisconsin Unfair Sales Act, a minimum markup law that authorizes fines up to $2,500 for every gallon of gasoline sold below the minimum price floor.[1]  So selling 10 gallons of discounted gas could cost Raj $25,000 in government-issued fines.

Raj was aware of the law before he received the memorandum from the state, and even tried to work within the system, sending the Department a letter to make sure the law was enforced even-handedly.  But ultimately, the law’s restrictions proved so contrary to the free market system Raj came to America to employ as a means of achieving a better life that he decided to challenge the government-imposed price-setting scheme in court.  He decided to stand up for his right to compete.  He joined with the Institute for Justice to file suit in Wisconsin’s Dane County Circuit Court in hopes of allowing businesses and their customers—rather than the government—to set prices.

 

Wisconsin’s Minimum Markup Law

The Wisconsin Unfair Sales Act is about more than just gasoline—it actually bans the sale of any merchandise whatsoever below cost.[2]  The statute, however, plays tricks with the definition of “cost.”  A few products—tobacco, alcohol and gasoline—are singled out and required to include arbitrary government-imposed minimum markups in their retail price.[3]  For retail gas stations like Raj’s, that markup is at least 9.18 percent over the local wholesale price.[4]

Raj, like all entrepreneurs, has the right to earn an honest living free from unreasonable government interference.  Wisconsin’s law does nothing but protect gas retailers from price competition while blocking consumers from discounted prices.  Nothing could be more unreasonable.

In essence, Wisconsin has outlawed a common and beneficial business practice that has traditionally helped entrepreneurs attract customers and saved consumers money.  Retailers nationwide lose money on individual sales all the time, and they do so for perfectly respectable reasons—to build customer loyalty, to improve their reputation or to launch a new type of product.[5]

The law not only stopped Raj from offering his community-spirited discounts, but there also are other banned discount programs he would love to offer his customers.  Even something as simple as a customer loyalty program—for example, giving his customers four free gallons for every 10^th purchase—would be illegal in Wisconsin.  Because Raj cannot know in advance when someone would buy gas (or what the exact price would be when they did so), even simple programs like that would expose him to the risk of tens of thousands of dollars in fines.  Raj is not asking for special government protection—all he wants is the opportunity to use his work ethic and business judgment to provide his customers with the best service at the lowest price he can.

The state of Wisconsin’s arbitrary markup on gasoline is not made any better by the fact that Governor Jim Doyle ordered the Department not to enforce the price-setting law against retailers who sell ethanol-blended gas, meaning that ethanol retailers are temporarily not subject to the mandatory markup.[6]  Because the statute allows Raj to lower his prices to meet (but never beat) the price of a competitor within his market,[7] Raj can match the price of an ethanol retailer in Merrill—even dropping below the supposedly mandated markup above the wholesale cost—but he cannot drop his price below that amount.  Even when he lowers prices to match the local ethanol retailer, he is still selling the gas for more than his cost, so Raj wants the opportunity to offer an even better deal than his competition.  Raj and his customers—not state capital bureaucrats—are in the best position to decide the best price for his gas.

 

Wisconsin’s Minimum Markups:  Unconstitutional and Unwise

Wisconsin’s Unfair Sales Act violates the state constitution’s guarantee of equal protection and due process in two ways. [8]  First, it singles out gasoline for an arbitrary minimum markup—Wisconsin’s merchants are free to sell fertilizer, pharmaceuticals or jet fuel for exactly their wholesale price, but gasoline must be sold above its unique and arbitrary government-imposed price floor.  The Wisconsin Constitution forbids such arbitrary classifications.[9]  The law protects nothing but the profit margins of gas stations (at great expense to the state’s gas consumers), and the state government has no business protecting gas station owners from price competition by their business rivals.[10]

Second, by enacting a blanket ban on price competition below a certain floor, Wisconsin has arbitrarily blocked people who sell goods from engaging in a common and beneficial business practice.  Entrepreneurs who provide services, such as a car wash, may offer their customers whatever price they choose, giving them the opportunity to build customer loyalty.  Entrepreneurs like Raj, whose primary business is selling goods, are arbitrarily banned from making such offers.  The state of Wisconsin has decreed that sellers of goods, unlike service providers, must turn a profit on every single transaction or face steep fines.  The Wisconsin Constitution requires laws to advance some legitimate government purpose,[11] a standard that the blanket requirement that a retailer turn a profit on every transaction, regardless of the circumstances, cannot meet.[12]  

Wisconsin’s law is hopelessly arbitrary and outdated.  Not only have most states recognized the irrationality of minimum markup laws like Wisconsin’s, three different state supreme courts have struck down laws similar to this one within the past 15 years.[13]  Together, IJ and Raj will make Wisconsin the fourth as a result of the suit they filed in Dane County Circuit Court.

 

About Raj Bhandari

Raj is, in many ways, the epitome of the American Dream.  Born in India, he first came to the United States in 2000, and has been doggedly working his way up the entrepreneurial ladder ever since.  He first came to Merrill in 2004 to pursue his long-term dream of owning his own business.

Raj believes in the principles of economic liberty and free market competition.  He is fighting not just for his own rights, but for the rights of entrepreneurs like him across Wisconsin.

 

The Importance of Economic Liberty

Raj’s struggle to provide creative discounts to his customers is about more than saving senior citizens in Merrill a few cents a gallon on gas.  It is also about getting the government of Wisconsin to respect a fundamental right at the very core of the American way of life:  the right to earn an honest living free from unreasonable government interference.  America’s history and tradition recognizes the dignity inherent in honest work and entrepreneurship and that pointless—or blatantly discriminatory—government interference insults this dignity.  The right to engage in honest work and competition is also fundamental to good citizenship because it is the cornerstone of independence and responsibility.

The demise of economic liberty began almost as soon as it first reached full bloom.  After the Civil War, emancipated slaves counted economic liberty as among the most significant of their new civil rights.  However, to protect entrenched white businessmen from competition, southern governments soon suppressed economic opportunities for their newest citizens by heavily regulating entry into trades and business. 

The national government tried to curtail these abuses by enacting the Civil Rights Act of 1866 and the 14^th Amendment to the U.S. Constitution, both of which sought to protect the economic liberty of all Americans by forbidding states from abridging the “privileges or immunities” of American citizenship, which included the right to earn an honest living without unreasonable or discriminatory interference by the government.

But in the 1873 Slaughter-House Cases, a sharply divided U.S. Supreme Court read the Privileges or Immunities Clause out of the U.S. Constitution by a mere 5-4 vote.  That decision gave states carte blanche to enact shameful Jim Crow-era laws that restricted economic opportunities for black Americans.  In addition to oppressing black citizens, the states also used their now-unchecked regulatory power to protect all sorts of entrenched interests.  Relying on the line of cases going back through the New Deal to the Slaughter-House Cases, states continue to erect arbitrary barriers to entry in common occupations and irrational limits on competition.  As is the case with Wisconsin’s minimum markup statute, these laws often far exceed the government’s legitimate interest in protecting the public health and safety, serving only to protect the profit margins of politically connected business interests.

 

Litigation Team

The Institute for Justice filed its complaint in this case, Bhandari v. Nilsestuen, on June 26, 2007, in Dane County Circuit Court in Madison.  The lead attorney for the Institute for Justice in this case is Staff Attorney Robert McNamara, whose practice focuses on property rights, free speech and economic liberty.  IJ Senior Attorney Dana Berliner, who has a long history of defending individuals whose economic liberty and property rights were violated by the government, joins him in litigating this case. Assisting the Institute for Justice as local counsel is Michael Dean, General Counsel to the First Freedoms Foundation in Waukesha, Wis.

Founded in 1991, the Institute for Justice is a public interest law firm that advances a rule of law under which individuals can control their destinies as free and responsible members of society.  Through litigation, communication and outreach, IJ secures protection for individual liberty and extends the benefits of freedom to those whose full enjoyment is denied by government. IJ has successfully represented entrepreneurs nationwide who fought arbitrary government regulation:

• Swedenburg v. Kelly— The Institute for Justice successfully waged the nation’s leading legal battle to reestablish the American ideal of economic liberty when, on May 16, 2005, the U.S. Supreme Court struck down discriminatory laws that existed only to protect the monopoly power of large, politically connected liquor wholesalers.  Vintner entrepreneurs Juanita Swedenburg and David Lucas joined wine consumers and IJ in filing this federal lawsuit as a challenge to the ban on direct interstate wine shipments in New York.  The case raised issues of Internet commerce, free trade among the states, and regulations that hamper small businesses and the consumers they seek to serve.

• Craigmiles v. Giles—The Institute for Justice successfully led a federal court to strike down Tennessee’s casket sales licensing scheme as unconstitutional, a decision that was upheld unanimously in December 2002 by the 6^th U.S. Circuit Court of Appeals and not appealed.  This marked the first federal appeals court victory for economic liberty since the New Deal.

• Franzoy v. Templeman—IJ represented two interior designers in successfully challenging New Mexico’s titling law, which prohibited anyone except government-licensed interior designers from using the terms “interior design” or “interior designer.”  The New Mexico Legislature amended the law doing away with the speech restriction.  The Governor signed the bill into law in April 2007.

• Rissmiller v. Arizona Structural Pest Control Commission—In the fall of 2006, the Institute for Justice Arizona Chapter (IJ-AZ) challenged the state’s requirement that gardeners and landscape maintenance workers obtain three separate licenses simply to kill weeds with over the counter products.  As a result of this litigation, gardeners throughout the state are now free to control weeds using products available to the average consumer.

• Diaw v. Washington State Cosmetology, Barbering, Esthetics, and Manicuring Advisory Board—In March 2005, after being sued by the Institute for Justice Washington Chapter (IJ-WA) just seven months earlier, state bureaucrats exempted braiders from discriminatory cosmetology licensing requirements.

• Armstrong v. Lunsford—The Institute for Justice opened the hairbraiding profession in Mississippi in 2005 when the state Legislature responded to this lawsuit, filed in federal court in 2004, by allowing IJ’s clients to continue their entrepreneurship without obtaining a needless government license.

• Alf v. Arizona Structural Pest Control Commission—In 2004, IJ-AZ persuaded Arizona bureaucrats to change their position on requiring teenage entrepreneur Christian Alf to obtain a government-issued license for his after-school handyman business helping local residents prevent roof rats.

• Farmer v. Arizona Board of Cosmetology—In 2004, as a result of an IJ-AZ lawsuit, the Arizona Legislature exempted hairbraiders from the state’s outdated cosmetology scheme.

• ForSaleByOwner.com Corp. v. Zinnemann—Also in 2004, the Institute for Justice prevailed in persuading the U.S. District Court for the Eastern District of California to stop the state of California’s efforts to impose real estate broker licensing requirements on an informational website.

• Wexler v. City of New Orleans—In 2003, the Institute for Justice successfully persuaded a federal court to strike down an absurd ordinance that prohibited booksellers from selling books on city sidewalks without a government issued permit.

• Clutter v. Transportation Services Authority—In 2001, IJ defeated Nevada’s Transportation Services Authority and its entrenched limousine cartel that had stifled competition in the Las Vegas limousine market.

• Cornwell v. California Board of Barbering and Cosmetology—In 1999, IJ defeated California’s arbitrary cosmetology licensing requirement for African braiders.

• Ricketts v. City of New York—The Institute for Justice successfully defended commuter van entrepreneurs in 1999 in a fight against the government bus monopoly that would not allow any jitney entrepreneurs to provide service to consumers in underserved metropolitan neighborhoods in New York City.

• Jones v. Temmer—In 1995, IJ helped three entrepreneurs overcome Colorado’s protectionist taxicab monopoly to open Denver’s first new cab company in nearly 50 years. IJ used this victory to help break open government-sanctioned taxicab monopolies in Indianapolis and Cincinnati.

• Uqdah v. D.C. Board of Cosmetology—In 1993, IJ’s work in court and the court of public opinion led the District of Columbia to eliminate a 1938 Jim Crow-era licensing law against African hairbraiders.

 

For more information contact:

Bob Ewing
Communications Coordinator 
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Robert McNamara
Staff Attorney
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