Opinion ID: 24822
Heading Depth: 2
Heading Rank: 1

Heading: The Proprietary Exemption Under Cardinal Towing

Text: 29 In Cardinal Towing, this court applied the municipal- proprietor exemption (also known as the market-participant exemption) to the preemptive language of 49 U.S.C. § 14501(c)(1). See 180 F.3d at 694-95. We need not reiterate the careful analysis of this doctrine set forth by the Cardinal Towing court, see id. at 691-95, except insofar as to emphasize the primary legal conclusions necessary to our decision. 30 First, the Cardinal Towing court recognized that preemption policies apply only to state regulation and not to actions that the state takes in its proprietary capacity. See id. at 691 (The law has traditionally recognized a distinction between regulation and actions a state takes in a proprietary capacity - that is to say, actions taken to serve the government's own needs rather than those of society as a whole.); see also Bldg. & Constr. Trades Council v. Assoc. Builders & Contractors of Mass./R.I., Inc., 507 U.S. 218, 227 (1993) (recognizing, in National Labor Relations Act cases, that [o]ur decisions . . . support the distinction between government as regulator and government as proprietor); cf. Wis. Dep't of Indus. Labor & Human Relations v. Gould, Inc., 475 U.S. 282, 289 (1986) (holding, in the Commerce Clause arena, that attempt to use spending power in a manner tantamount to regulation is subject to federal preemption); Petrey, 246 F.3d at 558; Tocher, 219 F.3d at 1049-50. 31 Second, the Cardinal Towing court determined that this distinction between a state acting in its regulatory capacity in contrast to its proprietary capacity is most readily apparent when the government purchases the goods and services that its operations require in the open market. See Cardinal Towing, 180 F.3d at 691, 692 (Most government contracting decisions do not constitute concealed attempts to regulate . . . [because i]n order to function, government entities must have some dealings with the market.). The court cautioned that while the government can exert substantial leverage through its spending power and while this power may create a temptation to take advantage of these interactions to pursue policy goals, id. at 692, that at the same time, the fact of government involvement cannot be assumed to be motivated by a regulatory impulse. Id. 32 Third, the court applied a two-part analysis to aid in distinguishing between proprietary action that is immune from preemption and impermissible attempts to regulate through the spending power. Id. at 693. The court suggested asking two questions to evaluate the government action: 33 First, does the challenged action essentially reflect the entity's own interest in its efficient procurement of needed goods and services, as measured by comparison with the typical behavior of private parties in similar circumstances? Second, does the narrow scope of the challenged action defeat an inference that its primary goal was to encourage a general policy rather than address a specific proprietary problem? 34 Id. The court explained that [b]oth questions seek to isolate a class of government interactions with the market that are so narrowly focused, and so in keeping with the ordinary behavior of private parties, that a regulatory impulse can be safely ruled out. Id. 35 Finally, the court applied this two-part analysis to the nonconsent towing ordinance at issue, and held that Bedford's action of contracting with a single towing service for nonconsent tows was a proprietary action and, therefore, not preempted by federal law. See id. at 697 ([T]he City's actions here did not constitute regulation or have the force and effect of law. Accordingly, they are not preempted by section 14501(c).). 36 As to the first question, whether Bedford acted in its own interest in obtaining services comparable to a private entity in similar circumstances, the Cardinal Towing court recognized that because the ordinance involved only true nonconsent tows where the owner of the vehicle was unwilling or unable to specify a towing company, id. at 694, Bedford was purchasing services from the market in place of the consumer. In this situation, the owner of the vehicle will by necessity be unable to choose a towing company and the only party that can make the type of merit selection inherent in market transactions is the party ordering the tow, namely the City of Bedford. See id. at 695. Because Bedford was purchasing towing services for an incapacitated or unwilling individual, it was in no different position than any other private actor. Thus, the court recognized that the need to purchase towing services in the nonconsent situation was not motivated by a regulatory impulse, but instead was motivated by the need for a service to be performed: 37 [N]onconsensual tows do not involve any opportunity for market interaction on the part of the owner of the vehicle. The real decision is made by the party who ordered the tow, who chooses both to remove the vehicle and the party to perform the service. And whether the ordering party is the City or a private property owner, it seeks out this service in the pursuit of its own interests. 38 Id. at 696. 39 Regarding the second question, the Cardinal Towing court recognized that because the scope of the ordinance was narrow, focused on a single contract covering only a portion of the towing services market, the primary goal of the ordinance was to address a specific problem and not to encourage a general policy. The court distinguished situations involving licensing schemes and ordinances that affect industries as a whole, see id. at 693 n.2. (citing Harris County Wrecker Owners for Equal Opportunity v. City of Houston, 943 F. Supp. 711, 726 (S.D. Tex. 1996)), and held that the limited scope here decisively forecloses an inference that the City sought to change the tow truck industry as a whole, let alone influence society at large. Id. at 694. 40
41 Both parties agree that Cardinal Towing controls our analysis. Stucky argues that the consent/nonconsent distinction is dispositive because it defines the consumer of the towing service and thus clarifies whether the City is acting as a consumer or as a regulator. Stucky concedes that in a nonconsent tow situation, because the driver of the vehicle is, by definition, not available, the City becomes the consumer and plays the market-participant role of choosing a towing service. Stucky contends that, by contrast, in a consent tow situation, the driver of the disabled vehicle is the market actor, and when the City by statute chooses a towing service for that individual, it is regulating, not purchasing services in a proprietary manner. 42 Applying Cardinal Towing's two-part analysis, Stucky argues that there is no need for the City efficiently to procure services in the consent tow situation because private parties are capable of contracting with a towing services themselves. Further, Stucky asserts that the City's decision to define all accident tows as nonconsent tows 11 demonstrates the regulatory, as opposed to the proprietary, nature of the ordinances. As Stucky argues, it is only through its police power to regulate that the City is able to classify all accident tows as nonconsensual, thus empowering itself with the authority to direct which towing service will perform the tow. 43 As to the second part of the Cardinal Towing analysis, Stucky argues that the regulatory policy affects the competitive environment for the entire consent towing industry. Specifically, Stucky contends that the City is preventing all towing companies (except for Texas Towing) from competing in the City-authorized consent towing market. Further, the City is frustrating existing contracts that towing companies may have with vehicle owners (through dealerships, insurance carriers, or automobile organizations). Stucky contends that such regulatory power, which can exclude other competitors from the market, is not a characteristic shared by private economic parties in similar circumstances. 44 In response, the City 12 argues that, as in Cardinal Towing, it shares a similar propriety interest in contracting with a single towing service for all (i.e., consent and nonconsent) City-authorized tows. The City points to issues of efficiency of service, guaranteed response time, twenty-four hour service, training, safety records, a clarification of responsibility, and easier administrative duties as reasons why the City has a proprietary interest in a single contract system. The City does not differentiate between consent tows and nonconsent tows, arguing that the issues of efficiency and safety do not depend on whether the driver is present to make a decision. The City contends that it is a market participant because the City's responsibility to control the public streets, and to ease traffic congestion resulting from car wrecks remain, regardless of whether the tow is a consent or nonconsent tow. Further, the City contends that San Antonio, as the ninth largest city in the United States, spanning 417 square miles, requires a towing service that can address its needs. The City contends that its proprietary interest is heightened because of the large-scale operation involved in providing towing services to such a large city. 45 Regarding the second part of the Cardinal Towing analysis, the City argues that the Ordinances are narrowly drawn to address a single proprietary problem. For example, the challenged Ordinances do not restrict towing services involving customers who request towing from private property or towing services involving consensual tows from accidents in which the car was legally parked prior to the accident (provided it was not a traffic hazard). 46 While we concede that the City has a compelling practical argument for its need for efficient and safe towing services, we cannot ignore the express mandate of Congress to preempt such regulation of towing services. See 49 U.S.C. § 14501(c)(1). As has been demonstrated and will be discussed further infra, § 14501(c)'s purpose was to encourage competition in the intrastate towing services market. See Petrey, 246 F.3d at 554; Tocher, 219 F.3d at 1046; Ace Auto, 171 F.3d at 772; H.R. Conf. Rep. No. 103-677 (1994), reprinted in 1994 U.S.C.C.A.N. 1715, 1758-59. Accident towing, broadly defined as responding to any disabled vehicle on any public street, is without question a significant portion of the towing services market. Thus, a single contract system, which prevents consumers from consenting to hiring a towing service other than the one authorized by the City, does little to foster that market competition. 47 Further, the logic of Cardinal Towing compels us to find that a different market situation exists in the consent towing market than in the nonconsent towing market. Had this distinction not been critical to the court's holding in Cardinal Towing, much of the court's analysis would have been unnecessary. 13 Therefore, applying the two-part analysis, we must agree with Stucky that the City, in enacting and enforcing the Ordinances that control consent tows, cannot be said to be acting as a market participant and, thus, cannot be exempted from § 14501(c)(1) under the municipal-proprietor exemption. 48 First, in the consent tow situation, unlike the nonconsent tow situation, there are two competing market actors attempting to purchase services. Each market actor may wish to obtain towing services in keeping with the ordinary behavior of private parties. Cardinal Towing, 180 F.3d at 693. The challenged Ordinances, however, frustrate the normal working of private decisionmaking in a market. Under the Ordinances, if a private party wishes to employ the services of Towing Company A and the City wishes to employ the services of Towing Company B, the City's choice controls. This is so, not because the City needs to purchase the service for its own proprietary interest (i.e., to serve the government's own [towing] needs), but for the related safety interests of society as a whole (i.e., controlling public streets and easing traffic congestion). See id. at 691. Thus, if we are to compare the City's actions to the typical behavior of private parties, as Cardinal Towing instructs us to do, the conflict is readily apparent. In the consent tow situation, by countermanding a private party's choice of towing company, the City is acting at cross-purposes with the private party's market decision. 49 Furthermore, the City's market power cannot be said to be typical of similar private actors. In utilizing its police power to control a significant portion of the towing industry, the City's actions have the direct economic effect of contracting the market. This effect does not speak to a private proprietary purchase, but rather to a public regulatory plan. See Tocher, 219 F.3d at 1049 (In analyzing the [municipal-proprietor] exception, it is vital to examine the substance of the transaction because a city may not use the guise of privity of contract to conduct otherwise forbidden regulatory activity. (citations and internal quotations omitted)). 50 Second, this court in Cardinal Towing relied on the narrow scope of the ordinance whereby the City limited itself only to true nonconsent tows. Id. at 694. 14 Also important, was the fact that the ordinance involved a single discreet [sic] contract. See id. at 693; see also Bldg. & Constr. Trades Council, 507 U.S. at 227 ([T]he challenged action in this litigation was specifically tailored to one particular job.). 51 In the instant case, the scope of the Ordinances is obviously broader than the ordinance involved in Cardinal Towing because the Ordinances encompass all City-authorized (consent and nonconsent) tows. This scope, however, does not reach the level of industry licensing schemes and other industry-wide regulations previously held to be preempted by § 14501(c)(1). See Petrey, 246 F.3d at 564; Tocher, 219 F.3d at 1050. The scope of the Ordinances, therefore, falls somewhere in between these two established poles of existing precedent. Because we are unable to determine, based on an analytically satisfying continuum, 15 whether the instant Ordinances are within Cardinal Towing's narrow scope, we turn to evaluate the purpose of the regulation. See Cardinal Towing, 180 F.3d at 692 (recognizing that courts have looked to whether government entities seek to advance general societal goals rather than narrow proprietary interests through the use of their contracting power). 52 As originally conceived, the Ordinances were a response to safety concerns affecting the City at large and were intended to be regulatory, and not proprietary, in nature. The enabling language of the original Ordinance No. 31977 (now codified as § 19-391), provides that the reason for enacting the Ordinances was to regulate and control the practice of tow truck drivers from racing to the scenes of accidents. 16 Ordinance No. 31977 explicitly stated that the City was acting as the guardian of the public rights in the public streets, ways and public property and that its purpose was to protect the public peace, safety and welfare of the City of San Antonio. Ordinance No. 31977 then explicitly provided that the City deemed it expedient, desirable and necessary to adopt regulations controlling the operation of automobile wreckers upon the public streets and ways of the City (emphasis added). 53 The original Ordinance No. 31977 has been amended and codified, but nothing in the record contradicts the conclusion that safety considerations to benefit general societal interests controlled all subsequent amendments to the Ordinances. Affidavits from the Chief of Police, the Police Captain in charge of vehicle storage, and the Deputy Chief of Police of the Support Services Division, in charge of overseeing the Vehicle Storage Unit, all support the understanding that the reason the City chose to regulate towing and selected a single-vendor system was to improve public safety. 17 In both the City's and Texas Towing's briefs and at oral argument, the parties agreed that safety was the primary consideration behind the passage and continued enforcement of the Ordinances. 18 Thus, unlike the proprietary-focused ordinance at issue in Cardinal Towing, the City's Ordinances have a broader regulatory purpose. 19 54 Therefore, because the Ordinances restrict market competition, because the primary goal of the Ordinances is to regulate and improve the safety of the towing services on City streets, and because the Ordinances affect a significant portion of the towing industry in San Antonio, we conclude that the challenged actions of the City are regulatory in nature and cannot escape federal preemption under § 14501(c)(1) by way of the municipal-proprietor exemption. Simply stated, the government interaction with the market is not so narrowly focused that we can safely rule out the regulatory impulse of the City. See Cardinal Towing, 180 F.3d at 693. 55 Having determined that the municipal-proprietor/market- participant rationale applied in Cardinal Towing cannot be applied to the consensual towing situation in the City of San Antonio, we next turn to whether the Ordinances can be exempted under the statutory safety exception provided for in § 14501(c)(2)(A). 56