Petition — United Home Rentals, Inc. v. Texas Real Estate Commission

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| | Ottice- Supreme Court US

83-136 hp hg

1 FE8 13 1984

No. ALEXA: iat

IN THE

Supreme Court of the Anited States

OcToBer TERM, 1983

UNITED HOME RENTALS, INC., ET AL.,

Petitioners,

Vv.

Texas REAL ESTATE COMMISSION, ET AL.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

‘JOHN E. KENNEDY H. Bartow Farr III

3315 Daniel ONEK, KLEIN & Farr

Dallas, Texas 75275 2550 M. St. N.W.

(214) 692-2588 Washi n, D.C. 20037

(202) 775-0184

Of Counsel

* STEVE BRUTSCHE .

Jones & BRUTSCHE

3000 Turtle Creek Plaza #116

Dallas, Texas 75219

(214) 522-4870

* Counsel of Record

for Petitioners

February 13, 1984

QUESTIONS PRESENTED FOR REVIEW

1. Whether, in a civil rights action, the federal courts may

abstain under Railroad Commission v. Pullman Co., 312 US.

496 (1941), without identifying an important state interest to

be served by dismissal of the action?

2. Whether a federal court of appéals may use a de novo

standard of review to disregard the views of the district court

regarding abstention and to order the district court to abstain?

‘3

PARTIES TO THE PROCEEDINGS

The Petitioners are United Home Rentals, Inc., Michael A.

Livingston and W. Eugene Bushman. The Respondents are the

Texas Real Estate Commission and the State of Texas.

TABLE OF CONTENTS

PAGE

;

1. A Feperat Court May Not AsstaiIn UNDER

PULLMAN N A Crvit RIGHTS ACTION WITHOUT

IDENTIFYING AN IMPORTANT STATE INTEREST TO BE

SERVED BY DISMISSAL 7

2. A Panesat Counr op Apress, Arm a Tea.

AND DECISION ON THE Merits, May Not EmpPLoy

A De Novo STANDARD OF REVIEW TO REVERSE

THE TRIAL JuDGe’s DECISION NOT TO ABSTAIN........ 14

CONCLUSION 19

APPENDIX

Appendix A (Opinion of the Court of Appeals for the

Fifth Circuit ) A-l

Appendix B (Opinion of the District Court for the

Northern District of Texas) A-24

Appendix C (Judgment of the Court of Appeals for the

Fifth Circuit) A-42

Appendix D (Order of the Court of Appeals for the

Fifth Circuit Denying Rehearing ) A-43

Appendix E (Tex. Rev. Civ. Stat. art. 6573(a)

$2(2)(D) and (H) and Texas Real Estate Commis-

sion Rule 402.03.02) A-45

ae?

OF eas

TABLE OF AUTHORITIES

CaSEs:

Babbitt vy. United Farm Workers National Union, 442 U.S.

289 (1979)

Baggett v. Bullitt, 377 U.S. 360 (1964)

Burford v. Sun Oil Co., 319 U.S. 315 (1943)

C-Y Development Co. v. City of Redlands, 703 F.2d 375

(9th Cir. 1983)

Canton v. Spokane School District No. 81, 498 F.2d 840

(9th Cir. 1974) ....

Cate v. Oldham, 707 F.2d 1176 (Lith Cir. 1983) .................

Central Hudson Gas & Electric Corp. v. Public Service

Commission, 447 U.S. 557 (1980) ............ccceesseecseeeseeeeeeees

Citizens Energy Coalition v. Sendak, 594 F.2d 1158 (7th

Cir. 1979), cert. denied, 444 U.S. 842 (1979) 0000.0...

City Investing Co. v. Simcox, 633 F.2d 56 (7th Cir. 1980) ..

Colorado River Water Conservation District vy. United

States, 424 U.S. 800 (1976)

Couny gf Allegheny v. Frank Mashuda Co., 360 US. 185

)

go cama ieaacnmeeb eases ste in: US. 406

On, County of Delaware, 592 F.2d 681 (3d Cir.

Dori Enterprises, Inc. v. Texas, CA No. H-80-291 (S.D.

Tex. Houston June 4, 1980

Duke v. James, 713 F.2d 1506 (11th Cir. 1983)...................

Fair Assessment in Real Estate Association, Inc. v.

McNary, 454 U.S. 100 (1981)

Fornaris v. Ridge Tool Co., 400 U.S. 41 (1970) <cveoocee-sno-

George v. Parratt, 602 F.2d 818 (8th Cir. 1979) .cccccsssooo

Gibson v. Berryhill, 411 US. 564 (1973)

Harman v. Forssenius, 380 U.S. 528 (1965)

Harris County Commissioners Court v. Moore, 420 U.S. 77

(1975)

Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 US.

324 (1964)

Inwood Laboratories, Inc. v. Ives Laboratories, Inc. 456

US. 844 (1982)

Lindsey v. Normet, 405 U.S. 56 (1972)

Luecke v. Mercantile Bank, 720 F.2d 15 (8th Cir. 1983) ..

McRedmond v. Wilson, 533 F.2d 757 (2d Cir. 1976)...........

Manney v. Cabell, 654 F.2d 1280 (9th Cir. 1980), cert

denied, 455 U.S. 1000 ( 1982 ) .............eccccccceesssersserereeeeeenes

Middlesex County Ethics Committee v. Garden State Bar

Association, 457 U.S. 423 (1982) ........ccccceeseeeesevees

Midkiff v. Tom, 702 F.2d 788 (9th Cir. 1983), prob. juris.

noted, sub. nom., HI Housing Authority v. Midkiff, 52

U.S.L.W. 3342 (Oct. 31, 1983) isdenltatinnteeniatiains

Moses H. Cone Memorial Hospital v. Mercury Construction

co FE RE 2A. . SER ESE aa

NAACP v. Bennett, 360 U.S. 471 (1959) .

National City Lines, Inc. v. LLC Corp., 687 F.2d 1122 (8th

Roe IE Da adv inhdapecenesdithennaicinpaepigeantemanienaceenictanbighi

O’Hair v. White, 675 F.2d 680 (Sth Cir. 1982) .............-0.0-0

Ohio Bureau of Employment Services v. Hodory, 431 US.

471 (1977)

Patsy v. Board of Regents, 457 U.S. 496 (1982) 0.0.0...

Procunier v. Martinez, 416 U.S. 396 (1974)

Pue v. Sillas, 632 F.2d 74 ( 9th Cir. 1980)

Railroad Commission v. Pullman Co., 312 U.S. 496 (1941)

Ramos v. Lamm, 639 F.2d 559 (10th Cir. 1980), cert

denied, 450 U.S. 1041 (1981)

Record Revolution No. 6, Inc. v. City of Parma, 638 F.2d

916 (6th Cir. 1980), vacated, 456 U.S. 968 ( 1982); rev'd

on other grounds, 709 F.2d 534 (6th Cir. 1983)................

Santa Fe Land Improvement Co. v. City of Chula Vista,

596 F.2d 838 ( 9th Cir. 1979)

Smith v. Paulk, 705 F.2d 1279 ( 10th Cir. 1983) ..................

Turf Paradise, Inc. vy. Arizona Downs, 670 F.2d 813 (9th

Cir. 1982), cert. denied, 456 U.S. 1011 (1982) .................

PAGE

7,15

7,9,12

6,15,16

i,2,10,15

6,16

6,11

Two Guys From Harrison-Allentown, Inc. v. — 366

US. 582 (1961)

United Home Rentals, Inc. v. Texas Real Estate Commis-

sion, CA No. 3-80-0485-F (N.D. Tex. Dallas Apr. 15,

| SR See

United States vy. National Association of Real Estate

Boards, 339 U.S. 485 (1950) a wn RE ED

Vinyard v. King, 655 F.2d 1016 (10th Cir. 1981) .......ccccssse-.

Younger v. Harris, 401 U.S. 37 (1971) c.ccccccccccccvsvesssssssseeeeen

Zwickler v, Koota, 389 U.S. 241 (1967) ....ccccccccccssssssseeeeeeee

STATUTES, REGULATIONS, AND RULES:

TEX. REV. CIV. STAT. ANN. art. 6573a § 2(2) ( Vernon

1982) (The Real Estate License Act) ................:ccceccceeseees

Texas Real Estate Commission Rule 402.03.02....................

42 US.C. § 1983 (Supp. TV 1980) 00... ......cccccseeseeereeeeeeeensees

SRD) oa

Ns SE Se asedleictndibtentsactttarinden wesinuiesennsceensnsitbetiaennmenl

OTHER AUTHORITIES:

Field, The Abstention Doctrine Today, 125 U. Pa. L. Rev.

590 (1977)

Op. Att'y. Gen. of Tex. H1271 (1978) ............cccccoseseeseeeeveee

IN THE

Supreme Court of the United States

OcTOBER TERM, 1983

No.

UNITED HOME RENTALS, INC., ET AL.,

Petitioners,

Vv.

Texas REAL ESTATE COMMISSION, ET AL.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

United Home Rentals, Inc., et al., petition for a writ of

certiorari to review the judgment of the United States Court of

Appeals for the Fifth Circuit in this case.

OPINIONS BELOW

The opinion of the court of appeals is reported at 716 F.2d

324. The opinion is reprinted as Appendix A to this petition.

The opinion of the district court is reported at 548 F.Supp. 566.

It is reprinted as Appendix B to this petition.

JURISDICTION

The court of appeals entered judgment on October 3, 1983,

A. 42, and denied a petition for rehearing and rehearing en

banc on October’31, 1983, A. 43-44. On January 20, 1984,

Justice White extended the time for filing a petition for a writ of

certiorari to and including February 14, 1984. The jurisdiction

of this Court is invoked under 28 U.S.C. § 1254(1) (1976).

CONSTITUTIONAL PROVISIONS, STATUTES AND

REGULATIONS INVOLVED IN THIS CASE

The First and Fourteenth Amendments to the United

States Constitution and 42 U.S.C. § 1983 (Supp. IV 1980) are

not reprinted here. The pertinent portions of Texas’ Real

Estate License Act and the Texas Real Estate Commission

regulations adopted pursuant thereto are reprinted in Appendix

E to this petition.

STATEMENT OF THE CASE

Petitioners, a rental information service, its president, and

a former employee,’ filed this civil rights action in 1981 against

the State of Texas and the Texas Real Estate Commission (the

“Commission” ) to prevent them from interfering with petition-

ers’ right to collect and publish information. The district court,

after deciding noi to abstain and proceeding to the merits, held

that the Commission was violating petitioners’ First Amend-

ment rights by requiring licenses for protected activity. Nearly

three years after the action was filed, however, a divided panel

of the Fifth Circuit held that the district court should have

abstained from reaching the merits under Railroad Commission

v. Pullman Co., 312 U.S. 496 (1941).

The facts are not in dispute. Petitioner United Home

Rentals, Inc. (“United”) is a subscription information service.

United publishes and sells access to catalogues describing

available rental housing for several Texas metropolitan areas.

Although United compiles the information, it does not inspect

the property or act in any way as an agent for either landlords

or customers. Except for petitioner Livingston, no licensed

agents or brokers are presently employed by United.

‘ Petitioner Michael A. Livingston is licensed as a broker by the Texas

Real Estate Commission and is the sole shareholder and president of United

Home Rentals, Inc. Petitioner W. Eugene Bushman is a broker licensed by the

Commission who was employed by United Home Rentals, Inc. but now

operates a competing rental service.

- a a en! es. Soe ye > BER id

EG Se Ve Se eR OE Mate pe OG eR ye Se geen, ET NE) Ou, RO

Ae like <2 RN AEE. Le TERS ORS RT ea lige ot a Gee ore,

Texas’ Real Estate License Act, TEX. REV. CIV. STAT.

ANN. art. 6573a § 2(2) (Vernon 1982) and the regulations

promulgated thereunder by the Commission, define brokering

activities to include the gathering, verifying, compiling and sale

. of information relating to available rental properties.2 To

perform “brokering” activities legally, therefore, an individual

must possess a real estate license issued by the Commission.

Because each employee of petitioner United compiles, verifies,

and sells rental information, the Commission has insisted that

each be a licensed real estate salesman or broker.

Although petitioners objected to this requirement, they

nevertheless asked the Commission to give them time to get

into compliance and to modify the Commission’s regulation to

permit non-supervisory employees to remain unlicensed. The

Commission refused to alter its rules or to grant any time period

in which United could get into compliance. Furthermore, it

denied licensure applications by three United employees who

otherwise qualified for licensure, but whose “integrity” was

questioned because they performed “brokering” activities (i.e.,

worked for United) while they were unlicensed. The Commis-

sion also began administrative action to revoke theglicenses of

petitioners Livingston and Bushman based solely upon their

association with “unlicensed” United personnel (i.e., the three

employees whose licenses were denied) and also threatened

criminal prosecution of petitioners and their agents.

After one unsuccessful suit,3 petitioners filed this action on -

May 19, 1981, under 42 U.S.C. § 1983, challenging the statute

2 The statute and regulations are set forth as Appendix E to this petition.

See summaries in the district court opinion, A. 36-38, and the court of appeals

opinion, A. 3-7.

3 Petitioners filed suit in April 1980, challenging the statute and regu-

lations based upon the equal protection clause of the Fourteenth Amendment.

The court found that the statute and regulations covered the activities of

rational basis standard. The court refused to grant petitioners leave to assert

First Amendment grounds for relief, and issues involving freedoms of the

press and speech were expressly reserved. United Home Rentals, Inc. v.

Texas Real Estate Commission, CA No. 3-80-0485-F (N.D. Tex. Dallas Apr.

15, 1981) described at A. 7, 9, 13.

ag -

|. < le Pa

and regulations based upon First Amendment guarantees of

commercial free speech and freedom of the press. Eight

months after trial, the trial court requested briefing from the

parties as to whether or not the holding in Gibson v. Berryhill,

411 U.S. 564 (1973), required abstention. All parties then filed

a joint motion requesting the court to rule on the merits. The

State expressly waived application of the doctrines of absten-

tion and exhaustion of administrative remedies, and stipulated

that agency action was “final.” A. 29, 31.

Noting that neither petitioners nor the State saw any

purpose to be served by abstention, the trial court decided to

address the merits. A. 31. The court then held that the statutes

and*regulations at issue violated petitioners’ First Amendment

rights. The court pointed out that petitioners “offer only an

exchange of information for a set fee. They or their employees

do not counsel either landlords or tenants. They do not show

properties. They get involved in neither lease negotiations nor

contract legalities.” A. 40. Concluding that petitioners “offer

the same service that newspapers do, an exchange of informa-

tion,” id., the court determined that Texas could not require a

license to compile and publish the information.

On appeal, the parties briefed and argued only the merits.

After submission, the court of appeals, on its own motion,

decided the district court should have abstained and ordered

dismissal. Stating that “[o]Jur review of the district court’s

refusal to abstain is predicated on a de novo standard,” A. 17 n.

19, the court of appeals gave no weight to the waiver by the

State or the decision by the district court to exercise jurisdic-

tion.* The court instead announced:

Pullman mandates that a federal court faced with an

initial review of a state agency’s application of its own

regulations, where that application is challenged on

constitutional grounds, should abstain, absent com-

4 The court of appeals, also on its own mution, raised the issues whether

principles of res judicata and collateral estoppel barred the suit and held they

did not. A. 8-14.

pelling circumstances, in order to allow the state

agency and the state courts first review of the inter-

pretation of state law at issue and to avoid unneces-

sary constitutional adjudication.

A. 21.

Applying this rule, the court of appeals found abstention

appropriate for two reasons. First, contrary to the views of both

petitioners and the State, the court suggested possible readings

of state law that might eliminate the need for some but not all

employees of United to be licensed. A. 18-19. Second, it

indicated that the delay caused by abstention might renew “a

process of negotiation and compromise as to the scope of the

licensing requirement.” A. 20-21 & n.29. The court noted that

judicial intervention “would indicate to other parties engaged in

similar discussions with state agencies—and to the agencics

themselves—that the federal courts will provide a ready solu-

tion to local disputes over state regulations.” A. 20.

Judge Tate dissented, saying that “[a]pplication here of

the Pullman principle, expressly eschewed by the appellant

State, serves only to delay and fragment decision of the central

issue squarely raised by this litigation... .” A. 22. Judge Tate

noted that the State had left no doubt about its position “that

{the State] is entitled to exact licenses from employees before

permitting them to exercise the free speech rights here at issue,

under the unambiguous terms of the statute as authoritatively

construed and consistently applied by the Texas agency ent-

rusted with its administration.” Jd. He agreed with the district

court that such requirements “infringe[d] on the [ petitioners’]

first amendment rights.” A. 21.

= ¢

e 5 ; 3

REASONS FOR GRANTING THE WRIT

The decision below, holding that a federal court was

required to abstain in a civil rights case raising non-frivolous

First Amendment claims, inverts the principles of federalism on

which the abstention doctrine stands. Contrary to the practice

in at least five other circuits, the Fifth Circuit ordered absten-

tion without making any inquiry into whether resort to state

courts would serve an important state interest. Compare A.

15-21 with C-Y Development Co. v. City of Redlands, 703 F.2d

375, 377 (9th Cir. 1983); D’Iorio v. County of Delaware, 592

F.2d 681, 686, 691 (3d Cir. 1978); Vinyard v. King, 655 F.2d

1016 (10th Cir. 1981); Record Revolution No. 6, Inc. v. City of

Parma, 638 F.2d 916, 926 (6th Cir. 1980), vacated, 456 US.

968 (1982), rev’d on other grounds, 709 F.2d 534 (6th Cir.

1983); George v. Parratt, 602 F.2d 818, 822 (8th Cir. 1979).

This omission is particularly significant in light of the fact that

the Commission sought to waive any claim for abstention, a

factor given no weight whatsoever by the court of appeals. The

result is a significant intrusion on First Amendment rights

without any compensating benefit to state sovereignty.

The court of appeals also applied the wrong standard of

review on appeal. Although this Court and most other courts of

appeals appear to review decisions regarding abstention under

an abuse of discretion standard, e.g., Pue v. Sillas, 632 F.2d 74,

78 (9th Cir. 1980); Ramos v. Lamm, 639 F.2d 559, 564 (10th

Cir. 1980), cert. denied, 450 U.S. 1041 (1981); Luecke v.

Mercantile Bank, 720 F.2d 15, 18 (8th Cir. 1983); City f

Investing Co. v. Simcox, 633 F.2d 56, 64 (7th Cir. 1980), or a i

variation thereof, D’Jorio v. County of Delaware, 592 F.2d at :

686, the Fifth Circuit conducted a complete de novo review. :

This disregard of the findings of the district court not only

unsettles the relationship between trial and appellate courts but

leads to needlessly harsh consequences.

A FEDERAL COURT MAY NOT ABSTAIN UNDER PULL-

MAN IN A CIVIL RIGHTS ACTION WITHOUT IDENTI-

FYING AN IMPORTANT STATE INTEREST TO BE

SERVED BY DISMISSAL.

It is by now well-recognized that “[a]bstention from the

exercise of federal jurisdiction is the exception, not the rule.”

Colorado River Water Conservation District v. United States,

424 U.S. 800, 814 (1976) (dictum) (quoting County of Alle-

gheny v. Frank Mashuda Co., 360 U.S. 185, 188-89 (1959)).

As a general matter, the federal courts shoula be highly

reluctant to decline or even postpone jurisdiction expressly

conferred upon them by Congress. See, e.g., Patsy v. Board of

Regents, 457 U.S. 496 (1982). Moreover, “abstention operates

to require piecemeal adjudication in many courts, ... thereby

delaying ultimate adjudication on the merits for an undue

length of time ....” Baggett v. Bullitt, 377 U.S. 360, 378-79

(1964). Thus, “[a]bdication of the obligation to decide cases

can be justified under this doctrine only in the exceptional

circumstances where the order to the parties to repair to the

state court would clearly serve an important countervailing

interest,” Colorado River Water Conservation District, 424 U.S.

at 813 (quoting County of Allegheny v. Frank Mashuda Co., 360

U.S. 185, 188-89 (1959)) (emphasis added), quoted with

approval in Moses H. Cone Memorial Hospital vy. Mercury

Construction Corp., 103 S. Ct.-927, 936 (1983).

The Second Circuit has noted that the obligation to decide

cases “has been repeatedly recognized as carrying special force

in civil rights actions under $1983,” basing that view on the

“duty upon all levels of the federal judiciary to give due respect

‘ to a suitor’s choice of a federal forum for the hearing and

decision of his federal constitutional claims ... .” McRedmond

v. Wilson, 533 F.2d 757, 760 (2d Cir. 1976) (quoting Zwickler

v. Koota, 389 U.S. 241, 248 (1967)). Because of this mandate,

“federal courts have generally regarded vital questions of civil

rights as the least likely candidates for abstention . . . .” George

v. Parratt, 602 F.2d 818, 819-20 (8th Cir. 1979); see also

Manngy v. Cabell, 654 F.2d 1280, 1284 (9th Cir. 1980), cert.

denied, 455 U.S. 1000 (1982) (“We bear in mind that the

federal courts are particularly hesitant to abstain in section 1983

cases.”). By the same token, this Court has cautioned against

casual use of abstention where rights to free speech or other

fundamental rights are at risk. See Baggett v. Bullitt, 377 U.S.

at 378-79; Babbitt v. United Farm Workers National Union, 442

U.S. 289 (1979); Procunier v. Martinez, 416 U.S. 396 (1974);

Harman vy. Forssenius, 380 U.S. 528, 537 (1965). The Eleventh

Circuit has thus recently noted: “Abstention is to be invoked

particularly sparingly in actions involving alleged deprivations

of First Amendment rights ... and other constitutional rights

deemed fundamental ... even though the state law issue has

not been resolved by the state supreme court.” Cate v. Oldham,

707 F.2d 1176, 1184 (11th Cir. 1983).

The threat to First Amendment rights in this case is not

merely theoretical. Although the Commission, acting pursuant

to statute and its own regulations, has demanded that employ-

ees of petitioner United seek licenses to acquire and convey

rental information, the district court held that this demand was

invalid under the First and Fourteenth Amendments. The

court found that, despite respondents’ claims to the contrary,

petitioners “offer the same service that newspapers do, an

exchange of information.” A. 40, 32. Comparing petitioners to

“a newspaper that solicits classified advertisements listing

homes for lease or sale,” id., the court found that the Commis-

sion had no legitimate basis in regulating that protected

activity. A. 40-41.5

5 Although the speech at issue here plainly has a commercial purpose,

that fact does not extinguish First Amendment protection. See, e.g., Central

Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557

(1980). For example, the State could hardly demand that a newspaper

- obtain a license in order to:publish classified or other advertising.

”

Notwithstanding these findings, the Fifth Circuit held that

petitioners’ suit should have been dismissed on the basis of

Pullman. A. 15-21. In so doing, the court gave no heed to the

nature of the claim or the rights at issue. Nor did the court

make any effort to identify a state interest that would be

advanced by use of abstention. The court simply announced a

general rule, purportedly based on Pullman, that

[a] federal court faced with an initial review of a

State agency’s application of its own regulations,

where that application is challenged on constitutional

grounds, should abstain, absent compelling circum-

stances, in order to allow the state agency and the

state courts first review of the interpretation of state

law at issue and to avoid unnecessary constitutional

adjudication.

A.21.

There are several distinct, though related, problems with

this rule. To begin with, given the court’s suggestion that the

state agency might reverse itself,® the rule smacks strongly of a

requirement that administrative remedies be exhausted. That

inference is reinforced by the unattractive and inappropriate

suggestion that the delay caused by abstention could revive the

“process of negotiation and compromise as to the scope of the

licensing requirement.” A. 19-20 & nn. 28-29.7 This Court,

however, has recently adhered to the principle that plaintiffs

need not exhaust administrative remedies in civil rights actions

and rejected the Fifth Circuit’s attempt to require exhaustion.

Patsy v. Board of Regents, 457 U.S. 496.

The second problem with the Fifth Circuit’s rule is that it

disregards a central, if not the central, purpose of the Pullman

doctrine. For, while it is true that the doctrine allows federal

s parties had stipulated that the administrative proceedings were

“final.” A. 29, 31.

7 It is possible, of course, that the effect of multiple suits and extended

delay will be to cause plaintiffs to compromise or abandon their rights, as the

Fifth Circuit apparently contemplated. But, whatever may be the merit of this

result when it is the consequence of adherence to principles of comity, it is

wholly out of place when no corresponding state interest is served. In the

latter case, plaintiffs have been forced to surrender rights so that the federal

courts do not have to consider them.

courts to avoid constitutional decisions, such an end in itself

should not justify abstention in the absence of an important

state interest to be served. See Colorado River Water Con-

servation District, 424 U.S. at 813. Principles of federalism do

not require federal courts to turn away from constitutional

questions except where, as the Court in Pullman observed, the

case “touches a sensitive area of social policy upon which the

federal courts ought not to enter unless no alternative to its

adjudication is open,” 312 U.S. at 498. It is in those areas that

deference to state sovereignty is uniquely appropriate.

The correct test for abstention, therefore, involves not just

the identification of a state law issue, but also a scrutiny of the

state interest to be affected. “Since the judicially created

doctrine of abstention involves duplication of effort and ex-

pense and an attendant delay ... , this Court has emphasized

that it would be applied only ‘where the issue of state law is

uncertain’ ... and ‘only in narrowly limited “special circum-

stances”’....” Lindsey v. Normet, 405 U.S. 56, 62 n.5 (1972)

(emphasis added). Indeed, the Court in other abstention

contexts has specifically cited the need for “important state

interests,” see Middlesex County Ethics Committee v. Garden

State Bar Association, 457 U.S. 423, 432 (1982) (applying

Younger v. Harris, 401 U.S. 37 (1971) to civil context), or a

“matter of substantial public concern,” Colorado River Water

Conservation District, 424 U.S. at 814 (discussing abstention

under Burford v. Sun Oil Co., 319 U.S. 315 (1943)). In the

absence of such interests, the resort to Pullman abstention

amounts, to little more than a policy of convenience for the

federal courts and the automatic avoidance of constitutional

challenges to state law.

The inattention of the Fifth Circuit to these principles puts

it in direct or indirect conflict with at least five other courts of

appeals. The Ninth Circuit, for example, uses a three-part test

to determine whether Pullman abstention is proper:

(1) The complaint touches a sensitive area of

social policy upon which the federal courts ought not

to enter unless no alternative to its adjudication is

open.

(2) Such constitutional adjudication plainly can

be avoided if a definitive ruling on the state issue

would terminate the controversy.

(3) The possibly determinative issue of state law

is doubtful.

C-Y Development Co. v. City of Redlands, 703 F.2d at 377

(quoting Canton v. Spokane School District No. 81, 498 F.2d

840, 845 (9th Cir. 1974)); see also, e.g., Manney v. Cabell, 654

F.2d 1280, 1283 (quoting and relying on same passage).

Ordinarily, all three of these exceptional circumstances ex-

tracted from the Pullman opinion must be present to justify

abstention. E.g., Canton v. Spokane School District No. 81, 498

F.2d at 845; Manney v. Cabell, 654 F.2d at 1283.

The Third and Tenth Circuits apply a similar three-part

test. See D’Iorio v. County of Delaware, 592 F.2d 681, 686 (3rd

Cir. 1978); Vinyard v. King, 655 F.2d 1016, 1018 (10th Cir.

1981). Discussing the “special circumstances generally pre-

requisite to the application of this doctrine,” the Third Circuit

has said: “it must appear that an erroneous decision of state law

by the federal court would be disruptive of important state

policies.” D’Iorio v. County of Delaware, 592 F.2d at 686; see

also Vinyard v. King, 655 F.2d at 1018. The Sixth and Eighth

Circuits, while somewhat less explicit about the test to be used,

require attention to “whether the federal court’s decision would

unduly interfere with important state policies or regulatory

programs,” Record Revolution No. 6, Inc. v. City of Parma, 638

F.2d 916, 925 (6th Cir. 1980), vacated, 456 U.S. 968 (1982),

rev'd on other grounds, 709 F.2d 534 (6th Cir. 1983); or

“whether federal intervention would interfere ... with state

procedures and policies in areas of special state interest,”

George v. Parratt, 602 F.2d at 822.

These standards recognize that the doctrine of abstention,

while grounded in a “scrupulous regard for the rightful in-

dependence of state governments,” see Fair Assessment in Real

Estate Association, Inc. v. McNary, 454 U.S. 100, 111 (1981),

does not preempt the federal courts from tackling challenges to

state law. As the Court has recently reaffirmed, “[t]he very

purpose of § 1983 was to interpose the federal courts between

the states and the people, as guardians of the people’s federal

rights—to protect the people from unconstitutional action under

color of state law, whether that action be executive, legislative,

or judicial.” Patsy v. Board of Regents, 457 U.S. at 503. The

Court in Patsy then pointed out three recurring themes in the

debates over the Civil Rights Act of 1871: First, that “Congress

assigned to the federal courts a paramount role in protecting

constitutional rights,” 457 U.S. at 503. Second, that Congress

believed “that the state authorities had been unable or unwil-

ling to protect the constitutional rights of individuals or to

punish those who violated these rights,” 457 U.S. at 505.

Third, that the Act “provide[d] dual and concurrent forums in

the state and federal system, enabling the plaintiff to choose the

' forum in which to seek relief,” 457 U.S. at 506. All three of

these factors, which weighed against a requirement of exhaus-

tion of administrative remedies, also weigh against use of

abstention in the absence of a strong state interest to be

respected in the particular case.

At the very least, the standards throughout the federal

courts should be uniform. From the evidence of the cases cited

above, it is apparent that, had petitioners been fortunate

enough to conduct business in the Ninth Circuit or the Third

Circuit or the Tenth Circuit, their First Amendment rights

would have received full federal protection. The award of state

‘real estate licenses, while concededly a proper area for state

regulation, is not an area of unusual sensitivity where the

federal courts must fear to tread. Indeed, the State has never

urged that the federal courts should abstain in this case to

protect state programs. To the contrary, the State expressly

waived its right to assert abstention. A. 31.

The Fifth Circuit’s treatment of that waiver, amounting to

a rejection out-of-hand, A. 17, only emphasizes the problems

with its mechanical use of abstention. It is well-established that

states may waive doctrines of abstention and exhaustion

adopted for their benefit. This Court specifically recognized

that fact in Ohio Bureau of Employment Services v. Hodory, 431

U.S. 471 (1977), by saying: “If the State voluntarily chooses to

submit to a federal forum, principles of comity do not demand

that the federal court force the case back into the State’s own

system.” Jd. at 480.

There is no reason for a different rule in Pullman cases.

This Court in Hostetter v. Idlewild Bon Voyage Liquor Corp.,

377 U.S. 324 (1964), in fact, agreed that abstention was

unwarranted “where neither party requested it and where the

litigation had been long delayed ... ,” id. at 329. Noting that

“(t}he doctrine of abstention is equitable in its origins,” the

Court observed that “even though constitutional issues be

involved, ‘reference to state courts for construction of a statute

should not automatically be made.’” Jd. at 328-29 (quoting

NAACP v. Bennett, 360 U.S. 471 (1959)).

Here, both petitioners and the State have taken the

position that the Texas statute and regulations unambiguously

apply to the activities at issue.® If they are correct, then the

decision of the court of appeals will lead to nothing more than a

tedious exhaustion of administrative and judicial remedies, at

® The views of the parties are reinforced by prior rulings by the state

attorney general, Op. Att'y Gen. of Tex. H1271 (1978), and by two

district court opinions, Dori Enterprises, Inc. v. Texas, CA No. H-

80-291 (S.D. Tex.-Houston, June 4, 1980); United Home Rentals, Inc. v.

Texas Real Estate Commission, CA No. 3-80-0485-F (N.D. Tex.-Dallas Apr.

15, 1981). In any event, even the readings suggested by the court of appeals

would not settle the constitutional question since they depend on the premise

that licenses can be required for some, if not all, employees, A. 18, a position

that petitioners dispute and that was rejected by the district court on the

Satine :

considerable expense to both sides, and a belated federal

review of an issue that both sides believe to be ripe for

immediate decision and that, in fact, has already been decided

by the district court. In the meantime, petitioners’ rights remain

at risk without any protection from the federal courts where

they have been litigating for nearly three years.® Before impo-

sing such an onerous burden on petitioners and the State, the

court of appeals at least should have inquired whether a federal

decision would disrupt state policies or programs in any signifi-

cant way. That inquiry was totally lacking here. '°

These issues are of more than academic importance. If

abstention is to be available without regard to the need to

protect state interests, then the role of the federal courts in

enforcing federal rights will be diminished without any benefit

to state sovereignty. rious a change should be an-

nounced, if at all, only by Court.

A FEDERAL COURT OF APPEALS, AFTER A TRIAL AND

DECISION ON THE MERITS, MAY NOT EMPLOY A

DE NOVO STANDARD OF REVIEW TO REVERSE THE

TRIAL JUDGE’S DECISION NOT TO ABSTAIN.

The court of appeals, in overturning the decision of the

district court, also announced that “[its] review of the district

court’s refusal to abstain is predicated on a de novo standard.”

* The problem is made worse in cases involving Texas law because the

federal courts must dismiss the case outright, a circumstance that presumably

eliminates the possibility of interim federal court relief. See Harris County

Commissioners Court v. Moore, 420 U.S. 77, 88 (1975).

general rule rather than as the exception, as its formulation tends automati-

cally to raise an initial presumption favoring abstention and thus too easily

requires the plaintiff to show “compelling circumstances” in order to rebut

abstention and to justify the exercise of jurisdiction. The Fifth Circuit's

imposition of this burden on the plaintiff underscores the importance of

defining the essential preconditions that should be established before the

federal courts resort to Pullman abstention.

A. 17 2.19 (citing O’Hair v. White, 675 F.2d 680 (Sth Cir.

1982). This standard, too has several defects. First, it alters

the traditional relationship between trial and appellate courts in

matters of this kind. Second, it takes no account of the unusual

delay and the denial of interim relief caused by abstention

dismissal once a district court has ruled on the merits.

The doctrine of abstention originally evolved out of the

discretion of the equity chancellor in granting or refusing the

extraordinary remedy of injunction. Railroad Commission v.

Pullman Co., 312 U.S. 496, 500-01 (1941). Although it has

since been held that abstention may be invoked in actions for

damages, see Fornaris v. Ridge Tool Co., 400 U.S. 41 (1970), it

has generally been accepted that the standard for appellate

review of a decision to abstain or not abstain is the same as that

for equity generally and for injunctions specifically—“abuse of

discretion.” While this Court has not directly discussed the

standard, the Court has applied the abuse of discretion stan-

dard in numerous cases. See e.g., Gibson v. Berryhill, 411 U.S.

564, 580 (1973); Harman v. Forssenius, 380 U.S. 528, 534, 537

(1965); Two Guys From Harrison-Allentown, Inc. v. McGinley,

366 U.S. 582, 589 (1961). This equitable review standard

implicitly incorporates the “clearly erroneous” standard for

review of fact determinations by the trial judge. Fed. R. Civ. P.

52; cf. Moses H. Cone Memorial Hospital v. Mercury Construc-

tion Corp., 103 S. Ct. 927, 940 (1983) (reviewing by an abuse

of discretion standard a district court’s granting a stay under the

Colorado River doctrine and deciding that the refusal to

proceed was “plainly erroneous”).

The courts of appeals have addressed the issue with

varying degrees of attention and varying degrees of success.

The Ninth Circuit, for example, has expressly, held that,

because “[t]he decision to abstain involves a dstentianers

exercise of a court’s equity power,” Pue v. Sillas, 632 F.2d 74,

78 (1980) (quoting Baggett v. Bullitt, 377 U.S. at 375), “[t}he

test we apply in reviewing district court abstention decisions is

whether there has been an abuse of discretion,” id. (quoting

Santa Fe Land Improvement Co. v. City of Chula Vista, 596

F.2d 838, 839 (9th Cir. 1979); see also Turf Paradise, Inc. v.

Arizona Downs, 670 F.2d 813, 819 (9th Cir. 1982), cert. denied,

456 U.S. 1011 (1982); Midkiff v. Tom, 702 F.2d 788, 789 n.1,

799 (9h Cir. 1983); prob. juris noted, sub. nom., HI Housing

Authority v. Midkiff, 52 U.S.L.W. 3342 (Oct. 31, 1983). That

standard, as explained by the Ninth Circuit, allows reversal

“only when there is a definite and firm conviction that the court

below committed a clear error of judgment in the conclusion it

reached upon a weighing of the relevant factors.” Pue v. Sillas,

632 F.2d at 78. (internal quotes omitted). The Tenth Circuit

has also made its views explicit: “The decision to abstain is

largely committed to the discretion of the district court.” Ramos

v. Lamm, 639 F.2d 559, 564 & n.4 (10th Cir. 1980), cert.

denied, 450 U.S. 1041 (1981); accord Smith v. Paulk, 705 F.2d

1279, 1282 (10th Cir. 1983).

Other circuits appear to have adopted an “abuse of

discretion” standard without any particular analysis. E.g.,

National City Lines, Inc. v. LLC Corp., 687 F.2d 1122, 1126

(8th Cir. 1981); Luecke v. Mercantile Bank, 720 F.2d 15, 18

(8th Cir. 1983); City Investing Co. v. Simcox, 633 F.2d 45, 64

(7th Cir. 1980); Citizens Energy Coalition v. Sendak, 594 F.2d

1158, 1162 (7th Cir. 1979), cert. denied, 444 U.S. 842 (1979).

Still another court of appeals has tried to break the standard

down into component parts, applying a de novo standard to

more purely legal issues and an abuse of discretion standard to

the rest. See D’Iorio v. County of Delaware, 592 F.2d 681, 686

(3rd Cir. 1978).

The Eleventh Circuit, surveying the field, has recently

concluded: “No clear articulation of the standard of review

emerges from this body of precedent.” Duke v. James, 713 F.2d

1506, 1509 n.16 (11th Cir. 1983). However, no other circuit

has gone to the extreme of adopting a de novo standard of

review across the board as to all issues in all cases. That

doctrine, as this case amply demonstrates, makes the district

courts nothing more than bystanders in the ultimate determina-

tion of whether they should exercise or decline the jurisdiction

given them by Congress.

This Court has made clear in other contexts the importance

of principles restraining the courts of appeals in their ability to

substitute their judgment for that of district courts. For

example, this Court has admonished that “[t]he proper obser-

vance of the division of functions between the federal trial

courts and the federal appellate courts is important in every

case.”” Dayton Board of Education v. Brinkman, 433 U.S. 406,

410 (1977). Two terms ago, the Court emphasized the

importance of the “clearly erroneous” standard applicable to

findings of fact, remarking that “[a]n appellate court cannot

substitute its interpretation of the evidence for that of the trial

court simply because the reviewing court ‘might give the facts

another construction, resolve the ambiguities differently, and

find a more sinister cast to actions which the District Court

apparently deemed innocent.’” Inwood Laboratories, Inc. v.

Ives Laboratories, Inc., 456 U.S. 844, 857-58 (1982) (quoting

United States v. National Association of Real Estate Boards,

339 U.S. 485, 495 (1950)).

While a decision regarding abstention obviously does not

rest on matters of demeanor or credibility, other equitable

factors counsel in favor of deference to the judgment of district

courts, particularly where a decision not to abstain has been

made and a trial on the merits has been held. First, where there

is no demonstrable abuse of discretion, de novo appellate

review and reversal of a decision not to abstain wastes trial

court judicial resources without promoting the policies under-

lying the Pullman abstention doctrine. Second, and more

important, however, are delay and the impairment of individual

rights arising from it. One leading commentator on appellate

review of abstention decisions has said that “declining to

abstain in a case appropriate for abstention is not nearly as

serious as abstaining erroneously ....” Field, The Abstention

Doctrine Today, 125 U. Pa. L. Rev. 590, 600 (1977). A

reversal of the decision not to abstain is especially severe

because it turns away a plaintiff who has already been forced

through two levels of the federal courts, including a trial on the

merits in district court. The hardship of being left without

protection for federal rights in such a case is self-evident.

This case provides ample evidence of that hardship on

persons who want to engage in commercial free speech. As

Judge Tate noted in his dissent, Texas believes “that it is

entitled to exact licenses from employees before permitting

them to exercise the free speech rights here at issue, under the

unambiguous terms of the statute as authoritatively construed

and consistently applied by the Texas agency entrusted with its

administration.” A. 22. Yet, two and one-half years after filing

suit to prevent such exaction and despite a trial ruling that their

rights were being violated, petitioners have been remitted to

state court to argue a position that does not solve the problem,

appears doubtful on its face, and has been foresworn by them

in their federal pleadings. That bizarre result in itself suggests

that the findings of the district court deserved greater weight

and respect from the court of appeals. |

The standard of appellate review, as well as the elements

of the Pullman doctrine itself, merit the attention of this Court.

The balance between the rights of plaintiffs raising con-

stitutional claims and the sovereignty of state governments is

too important to be struck on a haphazard basis throughout the

federal judiciary.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

JOHN E. KENNEDY H. BARTOW Farr III

3315 Daniel ONEK, KLEIN & Farr

Dallas, Texas 75275 2550 M. St. N.W.

(214) 692-2588 Washington, D.C. 20037

(202) 775-0184

Of Counsel :

* STEVE BRUTSCHE .

Jones & BRUTSCHE

3000 Turtle Creek Plaza #116

Dallas, Texas 75219

(214) 522-4870

* Counsel of Record

for Petitioners

Ce eee Mase. Oe ole a. Ve Pr) a? oy Ce Pl a

TABLE OF CONTENTS

PAGE

: ndix A (Opinion of the Court of Appeals for the

ifth Circuit) A-1

. Appendix B (Opinion of the District Court for the

Northern District of Texas ) A-24

3. ppendix C (Judgment of the Court of Appeals for

—

Fifth Circuit ) A-42

. —— D (Order of the Court of Appeals for the

ifth Circuit Denying Rehearing) A-43

ndix E (Tex. Rev. Civ. Stat. art. 6573(a)

2(2)(D) and (H) and Texas Real Estate Com-

mission Rule 402.03.02 ) .0..........ccccccsscceseeeecereeeeeeeseees A-45

A-l

APPENDIX A

UnrTrepD Home RENTALS, INC.,

MICHAEL A. LIVINGSTON and

W. EUGENE BUSHMAN,

Plaintiffs-Appellees,

z3 + No. 82-1672

Texas REAL EstaTe COMMISSION

and THE STATE OF TEXAS,

Defendants-Appellants.

United States Court of Appeals, Fifth Circuit.

Oct. 3, 1983.

The Texas Real Estate Commission and the state of Texas

appealed from judgment of the United States District Court for

the Northern District of Texas, William M. Taylor, Jr., J., 548

F.Supp. 566, holding that rules promulgated by the Texas Real

Estate Commission pursuant to the Texas Real Estate License

Act requiring licensure of employees of rental information

service violated the First Amendment rights of commercial

speech of the service’s employees. The Court of Appeals, Gee,

Circuit Judge, held that: (1) Court would not invoke res

judicata or collateral estoppel for first time on appeal, and (2)

District Court should have abstained from considering con-

stitutionality of the statute’s interpretation pending review of

the interpretation by the state agency or Texas state courts.

Reversed and remanded.

Tate, Circuit Judge, dissented and filed opinion.

Appeal from the United States District Court for the

Northern District of Texas.

St ee

A-2

Before GEE, GARZA and TATE, Circuit Judges.

GEE, Circuit Judge:

On this appeal we are asked to perform the initial review

of a decision by the Texas Real Estate Commission that its

rules, promulgated pursuant to the Texas Real Estate License

Act,’ require licensure of employees of a rental information

service who telephone landlords to obtain rental information, or

to verify the continued accuracy of rental listings, or who

describe the service offered by the rental information agency to

prospective subscribers. Appellees contend that this inter-

pretation of the Act and regulations promulgated thereunder

violate their rights of commercial speech guaranteed by the first

amendment. For the reasons set out below, we conclude that

the district court should have abstained from considering the

constitutionality of the statute’s interpretation by the state real

estate licensing agency pending review of this administrative

interpretation by the state agency or the state courts.

Appellee United Home Rentals (UHR) is a Texas corpo-

ration that owns and operates a real estate information service.2

UHR places advertisements in newspapers indicating that real

estate of a certain description is available for rent and listing the

UHR office telephone number. Potential consumers may

respond to the advertisement by calling UHR and requesting

information about the property. The UHR employee who

answers the telephone will inform the potential consumer that

he must come to the office personally and purchase a

“membership” or subscription to the service before any more

1. Tex.Rev.Civ.Stat.Ann. art. 6573a, (West Supp. 1983).

2. Appellee Livingston, a licensed real estate salesman, is the sole

shareholder and director of UHR. Appellee Bushman is a licensed real estate

broker employed full time by UHR but has no ownership interest in the

company.

_ i aaa

A-3

information will be released. Payment of the membership fee

entitles the customer to examine a catalogue of rental property

infornfation.maintained by UHR which contains the names and

addresses of owners o1 landlords.

According to the s ipulated facts, UHR employees perform

the following functions

(1) Gathering rental information from landlords,

classified ads, and other sources;

(2) Verifying the information on catalogued property

and periodically checking its continued accuracy;

(3) Handling incoming telephone calls in response to

ads or to give information regarding newly catalogued

rental properties to subscribers;

(4) Explaining the information service and selling

memberships to customers.

The same employee may perform one or more of these

functions.

Approximately half of UHR’s employees, primarily those

in supervisory and counseling positions, are licensed under the

Texas Real Estate License Act (“the Act”). Section 2 of the

Act defines the activities requiring licensure:

(2) “Real estate broker” means a person who, for

another person and for a fee, commission, or other valu-

able consideration, or with the intention or in the ex-

pectation or on the promise of receiving or collecting a fee,

commission, or other valuable consideration from another

person:

(A) sells, exchanges, purchases, rents, or leases

real estate;

(B) offers to sell, exchange, purchase, rent, or

lease real estate;

A-4

ing, sale, exchange, purchase, rental, or leasing of real

estate;

(D) lists or offers or attempts or agrees to list real

estate for sale, rental, lease, exchange, or trade;

(E) appraises or offers or attempts or agrees to

appraise real estate;

(F) auctions, or offers or attempts or agrees to

auction, real estate;

(G) buys or sells or offers to buy or sell, or

otherwise deals in options on real estate;

(H) aids, attempts, or offers to aid in locating or

obtaining for purchase, rent, or lease any real estate;

(1) procures or assists in procuring of prospects

for the purpose of effecting the sale, exchange, lease,

or rental of real estate; or

(J) procures or assists in the procuring of proper-

ties for the purpose of effecting the sale, exchange,

lease, or rental of real estate.

(3) “Broker” also includes a person employed by or

on behalf of the owner or owners of lots or other parcels of

real estate, at a salary, fee, commission, or any other

valuable consideration, to sell the real estate or any part

thereof, in lots or parcels or other disposition thereof. It

also includes a person who engages in the business of

charging an advance fee or contracting for collection of a

fee in connection with a contract whereby he undertakes

primarily to promote the sale of real estate either through

its listing in a publication issued primarily for such pur-

pose, or for referral of information concerning the real

estate to brokers, or both.

i v

lamin <a

re"

eee

A-5

(4) “Real estate salesman” means a person associ-

ated with a Texas licensed real estate broker for the

purposes of performing acts or transactions comprehended

by the definition of “‘real estate broker” as defined in this

Act.

Tex.Rev.Civ.Stat.Ann. art. 6573a § 2 (West Supp.1983) (em-

phasis added).

Section 6 of the Act specifies the licensing requirements:

(b) To be eligible for a license, an individual

must...satisfy the commission as to his honesty,

trustworthiness, integrity, and competency. However, the

competency of the individual, for the purpose of qualifying

for the granting of licensure privileges, shall be judged

solely on the basis of the examination referred to in Section

7 of this Act.

Tex.Rev.Civ.Stat.Ann. art. 6573a § 6 ( West Supp.1983).

Section 7(a), Tex.Rev.Civ.Stat.Ann. art. 6573a § 7(a)

( West Supp.1983), sets out nine “core real estate courses” that

an applicant must have studied before he or she may take an

examination for the real estate license. The core courses include

subjects such as: principles of real estate, real estate appraisal,

real estate law, real estate finance, real estate marketing, real

estate mathematics, real estate brokerage, property manage-

ment, and real estate investments.

Pursuant to the rulemaking power granted it in Section 2 of

the Act, appellant Texas Real Estate Commission (“the Com-

mission”) has enacted the following relevant regulations:

Rule 402.03.02

.003.4 Real estate broker licensure is required for the

operation of a rental agency. This section does not

prohibit employment of an answering service which is

identified to callers as such and which provides informa-

tion concerning the size, price and terms of property

advertised.

A-6

.005.1 Locating and bringing together a buyer and

seller through correspondence or telephone constitutes

negotiation if done from within the borders of Texas.

005.5 Real estate licensure is required of rental agents

doing all solicitation by telephone unless such agents are

employees of the owner of the property concerned.

.005.6 A clerical employee of a real estate broker is

not required to be licensed if such employee engages in no

solicitation work and does not hold himself or herself out

as authorized to act as a real estate agent.

.005.7 Answering of the telephone and acts of a

secretarial nature done in a broker’s office do not require

real estate licensure.

.010.1 (a) Real estate licensure is required for the

operation of an apartment selector/locator service or

home-finding service in Texas.

.010.2 (b) The compilation and sale of listings of

rental vacancies available in an area is activity requiring

real estate licensure. This is true even if the property is not

shown, sold, leased or managed.

011.1 This section prohibits a person not licensed as

a Texas real estate broker or salesman from receiving a

referral fee from another concerning the sale, exchange,

purchase, rental or lease of real estate.

011.2 Real estate licensure is required for one to

procure or assist in the procuring of prospective tenants of

real property for compensation in any form, including but

not limited to rent bonuses, discounts, gifts or other things

of value.

011.3 The referral of a prospective purchaser, for

compensation, is an act requiring real estate licensure.

.013.1 Real estate licensure is required of those who

advertise for others regarding real property, accept calls

A-7

received in response to such advertisements, and refer the

callers to the owner of the property.

The Commission has interpreted the Act and the regu-

lations promulgated pursuant to it to require licensure of UHR

employees performing the clerical tasks described above ((.e.

gathering, verifying and distributing rental information). Ac-

cordingly, the Commission has commenced administrative pro-

ceedings to revoke the licenses of appellees Livingston and

Bushman on the grounds that they had associated with unli-

censed persons who had performed acts requiring a license.*

Pursuit of these administrative actions has been deferred until

the present litigation is resolved. Also, the Commission initially

denied applications for licenses by three UHR employees on

the.ground that they misrepresented their activities as UHR

employees in their applications.4 However, during the pendency

of this appeal, these licenses have in fact been issued.

In a previous federal action, UHR challenged the statute

and regulations as applied on first amendment and equal

protection grounds. Applying a due process analysis, the

district court in that case ruled that the regulations did encom-

pass UHR’s activities, and that as applied to UHR, the

regulations bore a rational relationship to the legitimate state

goal of consumer protection. United Home Rentals, Inc. v.

Texas Real Estate Commission, No. CA 3-80-0485-F

(N.D.Tex. April 16, 1981) (“UHR I”). The court refused to

consider UHR’s first amendment argument.

3. Section 15(4)(S) of the Act authorizes the Commission to suspend or

revoke a real estate license on proof that a licensee is guilty of “establishing

an association, by employment or otherwise, with an unlicensed person who is

expected or required to act as a real estate licensee, or aiding or abetting or

conspiring with a person to circumvent the requirements of this Act.”

4. Applicants for a real estate license must pledge that they have not

performed and will not perform activities requiring a license until they obtain

such license. According to the Commission, the employees of UHR violated

this pledge by working for UHR prior to obtaining a license.

A-8

UHR then refiled in the same federal district court,5

mounting the same first amendment and equal protection

attacks on the statute as applied. Without any reference to the

earlier action, the district court below ruled that the statute and

regulations encompassed UHR’s activities, and that as applied

the statute violated UHR’s first amendment rights of com-

mercial speech. United Home Rentals v. Texas Real Estate

Commission, 548 F.Supp. 566 (N.D.Tex.1982). The district

court also held that the parties had “settled any questions

abstention” by stipulating that they waived their rights to

demand abstention. Jd. at 570.

IL.

While we are impressed by the parties’ maneuvers to get

an initial ruling on the first amendment question from a federal

court, we cannot overlook the serious and repeated procedural

transgressions that have taken place in the course of this action.

Arguably, the claim advanced in this second federal action is

precluded by the first federal judgment. Certainly, the initial

review of the constitutionality of a state agency’s interpretation

of its own rules is a matter that the federal courts should

undertake only when circumstances warrant it and abstention

would serve no purpose. The instant case presents a paradigm

of a situation in which the correct action for the federal courts is

to abstain. In short, we should not.entertain this case.

Res Judicata

Res judicata is a judicially-created doctrine designed to

avoid repeated litigation of the same claims by the same

parties. “True” res judicata, or “claim preclusion,” as aptly

defined by Judge Rubin of our court,

treats a judgment once rendered, as the full measure of

relief to be accorded between the same parties on the same

5. The case was assigned two a different judge.

A-9

“claim” or “cause of action.”... When the plaintiff ob-

tains a judgment in his favor, his claim “merges” in the

judgment; he may seek no further relief on that claim in a

separate action. Conversely, when a judgment is rendered -

for a defendant, the plaintiff's claim is extinguished; the

judgment then acts as a “bar.... Under these rules of

claim preclusion, the effect of a judgment extends to the

litigation of all issues relevant to the same claim between

the same parties, whether or not raised at trial.®

In its earlier action, UHR asserted that the statute was

unconstitutional as applied on both first amendment and equal

protection grounds. The record indicates that the UHR I court

refused to decide the first amendment question. Nonetheless, if

on these facts UHR’s first amendment and equal protection

arguments are part of the same “claim” for res judicata

purposes, the judgment of the district court in UHR I may bar

UHR from subsequently attacking the statute on either theory.

The definition of a claim or cause of action for res judicata

purposes in the federal system, where joinder of claims is not

mandatory,” has been much debated.® This Circuit has defini-

tively established as the standard to be applied in determining

whether the substance of the two actions is the same for res

judicata purposes the transactional test of a “claim” enunciated

in the Second Restatement of Judgments. Nilsen v. City of Moss

6. Kaspar Wire Works, Inc. v. Leco Engineering & Machine, Inc., 575

F.2d 530, 535 (Sth Cir.1978). In this opinion we likewise use the term “res

judicata” to refer to claim preclusion, as opposed to collateral estoppel, or

issue preclusion. See Kaspar Wire Works, 575 F.2d at 535-36 (discussing

distinction ).

7. Fed.R.Civ.Proc. 18 provides for permissive joinder of claims in the

federal courts.

8. See generally Wright & Miller, Federal Practice and Procedure:

ene ee 1978) (advocating transactional definition ).

A-10

Point, 701 F.2d 556, 559-60 & n. 4 (Sth Cir.1983) (en banc).®

The transaction involved here is the Commission’s demand that

all UHR employees “that communicate with the public” be

9. § 24. Dimensions of “Claim for Purposes of Merger or Bar—General

Rule Concerning “Splitting”

(1) When a valid and final judgment rendered in an action

extinguishes the plaintiff's claim pursuant to the rules of merger or bar

(see §§18, 19), the claim extinguished includes all rights of the plaintiff

to remedies against the defendant with respect to all or any part of the

transaction, or series of connected transactions, out of which the action

arose

Restatement (Second) of Judgments ( 1982).

The drafters of the Second Restatement offer the following comment:

A. Rationale of a transactional view of claim. In defining claim to

embrace all the remedial rights of the plaintiff against the defendant

growing out of the relevant transaction (or series of connected transac-

tions), this Section responds to modern procedural ideas which have

found expression in the Federal Rules of Civil Procedure and other

procedural systems.

“Claim,” in the context of res judicata, has never been broader than

the transaction to which it related. But in the days when civil procedure

still bore the imprint of the forms of action and the division between the

law and equity, the courts were prone to associate claim with a single

theory of recovery, so that, with respect to one transaction, « plaintiff

might have as many claims as there were :heories of the substantive law

upon which he could seek relief against the defendant. Thus, defeated in

an action based on one theory, the plaintiff might be able to maintain

another action based on a different theory, even though both actions

were grounded upon the defendant's identical act or connected acts

forming a single life-situation. In those earlier days there was also some

adherence to a view that associated claim with the assertion of a single

primary right as accorded by the substantive law, so that if it appeared

that the defendant had invaded a number of primary rights conceived to

be held by the plaintiff, the plaintiff had the same number of claims, even

though they all sprang from a unitary concurrence [sic]. There was

difficulty in knowing which rights were primary and what was their

extent, but a primary right and the corresponding claim might turn out to

be narrow. Thus it was held by some courts that a judgment for or

against the plaintiff in an action for personal injuries did not preclude an

action by him for property damage occasioned by the same negligent

conduct on the part of the defendant—this deriving from the idea that

the right to be free of bodily injury was distinct from the property right.

Still another view of claim looked to sameness of evidence; a second

action was precluded where the evidence to support it was the same as

that needed to support the first. Sometimes this was made the sole test of

A-11

licensed'® and UHR’s contention that the federal Constitution

bars the Commission from interpreting the statute in this

fashion. Applying this test, it appears that the “cause of action”

sought to be asserted by UHR in this action is the same as that

decided adversely to UHR in UHR I."' Cf. Jones v. Texas Tech

Univ., 656 F.2d 1137 (Sth Cir.1981) (affirming district court

dismissal of second suit as barred by res judicata where plaintiff

denied permission to demonstrate without restriction alleged

first amendment and due process violations in first suit, consent

judgment was entered, and plaintiff subsequently asserted due

process claim based on University’s conduct of disciplinary

proceedings ); Southern Jam, Inc. v. Robinson, 675 F.2d 94 (Sth

identity of claim; sometimes it figured as a positive but not as a negative

test; that is, in certain situations a second action might be precluded

although the evidence material to it varied from that in the first action.

Even so, claim was not coterminous with the transaction itself.

The present trend is to see claim in factual terms and to make it

coterminous with the transaction regardless of the number of substantive

theories, or variant forms of relief flowing from those theories, that may

be available to the plaintiff; regardless of the number of primary rights

that may have been invaded; and regardless of the variations in the

evidence needed to support the theories or rights. The transaction is the

basis of the litigative unit or entity which may not be split.

Restatement (Second) of Judgments, §24 comment A. (1982).

The Restatement further specifies:

6. C. Transaction may be single despite different harms, substan-

tive theories, measures or kinds of relief. That a number of different legal

theories casting liability on an actor may apply to a given episode does

not create multiple transactions and hence multiple claims. This remains

true although the several legal theories depend on different shadiigs of

the facts, or would emphasize different elements of the facts, or would

call for different measures of liability or different kinds of relief... .

Restatement (Second) of Judgments, §24 comment C. ( 1932).

10. Counsel for the Commission so defined at oral argument the group of

employees whom the Commission feels require licensure.

11. As counsel for UHR conceded at trial, discussing the prior action:

“The facts haven't changed a whit really. You have a different standard.” Tr.

at 7.

A-12

Cir.1982) (affirming district court dismissial on res judicata

grounds where plaintiff challenged regulation preventing it

from holding concert on federal equal protection and due

process grounds in state court, received adverse judgment, and

subsequently filed first amendment claim in federal court)

(applying Georgia law).

As we stated in Nilson:

That the issue presented here was never decided in the

former case does not signify; accordingly to general theo-

ries of judicial estoppel, to which “federal courts have

traditionally adhered,” it is blackletter law that res judi-

cata, by contrast to narrower doctrines of issue preclusion,

bars all claims that were or could have been advanced in

support of the cause of action on the occasion of its former

adjudication, Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct.

411, 414, 66 L.Ed.2d 308 (1980) (issue preclusion by state

judgment in $1983 action, dicta that claim preclusion

doctrine equally applicable), not merely those that were

adjudicated. And it is equally settled that one who has a

choice of more than one remedy for a given wrong . . . may

not assert them serially, in successive actions, but must

advance all at once on pain of bar.

701 F.2d at 560.

Despite our conviction that these plaintiffs have had two

bites at the apple, we are reluctant to dispose of this appeal on

res judicata grounds. First, res judicata is an affirmative

defense, and the Commission has not raised it either at trial or

before us. Rather, both parties have treated UHR I simply as

precedent, using it for the proposition that the statutes in

question as applied to rental information agencies have sur-

vived a rational relationship test. This failure to assert res

judicata as a defense does not determine the issue, however,

since in the interest of judicial economy res judicata may

ee te ee ee particularly

A-13

where both actions are brought in the courts of the same

district. See Boone v. Kurtz, 617 F.2d 435, 436 (Sth Cir.1980)

(affirming district court sua sponte dismissal on res judicata

grounds); Willis v. Fournier, 418 F.Supp. 265, (D.C.Ga.), aff'd

537 F.2d 1142 (Sth Cir. 1976); Hicks v. Holland, 235 F.2d 183

(6th Cir. ), cert. denied, 352 U.S. 855, 77 S.Ct. 83, 1 L.Ed.2d 66

(1966) (same). On occasion, appellate courts have raised the

issue for the first time on appeal. See Robertson v. Interstate

Securities Co., 435 F.2d 784, 787 n. 4 (8th Cir. 1971); Wilson v.

United States, 166 F.2d 527, 529 (8th Cir.1948). In these

cases, however, the appellate court considered applying res

judicata as a means to affirm the district court decision below.

On these facts, we decline to take the drastic step of

invoking res judicata for the first time on appeal and reversing

the district court below as a consequence. What scanty

evidence of the prior action appears on this record indicates

that, far from having a full and fair opportunity to litigate the

first amendment issue in the prior action,'? plaintiffs were

expressly denied that opportunity by the district court. '? While

the proper course for UHR’s counsel would have been to

appeal the refusal of the district court to hear his first amend-

12. Compare Nilson, 701 F.2d at 564 (claims of second suit barred by res

judicata “since . . . the procedural system offered a full and fair opportunity

for litigation of [the theory asserted in the second suit] had it been

tiga gtn Aatatrree Arcaglen page ep pene te oe

it looks *m taking two bi apple. yc poaleale gy ad

Porter to hear this argument. When he wouldn't it

reserved

A-14

ment claim, rather than to refile, it appears unduly harsh to

preclude UHR from having its first amendment argument

heard because of this procedural error. See Howell v. State Bar

of Texas, 674 F.2d 1027 (Sth Cir.1982) vacated and remanded

on other grounds,—U.S.—, 103 S.Ct. 1515, 75 L.Ed.2d 942

(1983) (where plaintiff withheld his federal constitutional

arguments from the state courts after the federal district court

erroneously relegated him to the state system with a promise

that he could return with his federal claims, plaintiff did not

have a full and fair opportunity to litigate those claims and

would not be barred by res judicata.)

We must also consider whether the prior federal judgment

has any collateral estoppel effects in this action. Collateral

estoppel, or issue preclusion, bars relitigation of issues actually

litigated and necessarily adjudicated in a prior proceeding

between the same parties. Here, the district court in UHR I

ruled: 1) that the statute did require plaintiffs employees

performing the activities in question to be licensed, and 2) that

this interpretation of the licensing requirement bore a rational

relationship to a legitimate state end of consumer protection.

Thus, in this second suit, the affirmative defense of collateral

estoppel, if asserted, would bar the plaintiffs from relitigating

either 1) that the statute did not require licensure of their

clerical-type employees, or 2) that such a requirement violated

their due process rights. Neither the parties nor the court

below, however, raised any estoppel issue. Rather, the court

below implicitly redetermined, de novo, the question of the

Statute’s applicability in ruling that as applied to UHR’s

clerical-type employees the statute violated UHR’s first amend-

ment rights of commercial speech.

The parties to this litigation and the court below have

consistently treated the prior litigation as of no more than

precedential effect. We see no occasion to declare on our own

motion that the prior judgment has more than precedential

value. Accordingly we decline to ourselves raise and apply

collateral estoppel to the court’s findings in UHR I.

A-15

Abstention

The landmark case of Railroad Commission of Texas v.

Pullman Co., 312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971 (1941),

established the principle that “a federal court may, and ordina-

rily should, refrain from deciding a case in which state action is

challenged in federal court as contrary to the federal con-

stitution if there are unsettled questions of state law that may be

dispositive of the case and avoid the need for deciding the

constitutional question.”'4 While the doctrine of abstention has

developed extensively over the years since Pullman,'5 Pullman

abstention remains the best-settled of the abstention variants.

One type of case almost universally recognized as

appropriate for abstention is that of a state statute, not

yet construed by the state courts, which is susceptible

of one construction that would render it free from

14. “Abstention in such circumstances not only serves to minimize

federal-state friction, but also avoids premature and perhaps unnecessary

constitutional adjudication.” Kusper v. Pontikes, 414 U.S. 51, 94 S.Ct. 303, 38

L.Ed.2d 260 (1973), citing Harman v. Forssenius, 380 U.S. 528, 534, 85 S.Ct.

1177, 14 L.Ed.2d 50 (1965). See generally Wright & Miller, supra, at $4242,

and cases cited id. in notes 3 and 4.

15. The principal abstention doctrines that have been recognized in

addition to Pullman abstention are Burford and Younger abstention. Burford

abstention is appropriate where a major case presents issues of state law such

that the state has an overriding interest in their determination. See Colorado

River Water Conservation District v. United States, 424 U.S. 800, 814, 96

S.Ct. 1236, 1244, 47 L.Ed.2d 483 (1976); Burford v. Sun Oil Co., 319 US.

315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943); BT Investment Managers, Inc. v.

Lewis, 559 F.2d 950, 955 (Sth Cir. 1977). A federal court may invoke

Burford abstention “to avoid needless conflict with the administration by the

state of its own affairs.” Wright, Federal Courts §52, at 222 (3d ed. 1976).

Younger abstention is appropriate “where absent bad faith, harassment, or a

patently invalid state statute, federal jurisdiction has been invoked for the

purpose of restraining state criminal proceedings.” Colorado River Water

Conservation District v. United States, 424 U.S. at 816, 96 S.Ct. at 1245; see

Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971). See

generally Field, The Abstention Doctrine Today, 125 U.Pa.L.Rev. 590

(1977). We do not attempt a full discussion of abstention doctrine in its

myriad variations here; it is not necessary. This opinion merely discusses the

applicability of Pullman-type abstention to the facts of this case.

A-16

federal constitutional objection and another that

would not. A federal court should not place itself in

the position of holding the statute unconstitutional by

bs it the latter construction, only to find that the

ighest court of the state will render the decision futile

and unnecessary by adopting the former. Such a

decision not only is a waste of judicial resources but

provokes a needless collision between state and feder-

al power.

Friendly, Federal Jurisdiction: A General View, 93 (1973).16

The facts of this case fall squarely within the well-defined

ambit of Pullman abstention. “In the bulk of abstention cases

in this Court, the unsettled issue of state law principally

concerned the applicability of the challenged statute to a certain

persons or a defined course of conduct, whose resolution in a

particular manner would eliminate the constitutional issue and

terminate the litigation.” Baggett v. Bullitt, 377 U.S. 360, 376-

78, 84 S.Ct. 1316, 1325-26, 12 L.Ed.2d 377 (1964) (citations

omitted ) see cases cited id., n. 12. Here, UHR asserts that the

Commission’s interpretation of the statute, which would require

licensure of UHR employees engaged in clerical tasks, is

unconstitutional. As with any constitutional challenge to a

statute “as applied,” this claim involves two questions: | ) Is the

Commission’s interpretation of the statute correct? 2) Does that

interpretation violate the federal constitution?

The former is a question of state law which, as far as this

record indicates, has not been reviewed by the state courts. It

is, moreover, a question dispositive of the constitutional ques-

tions: if a state agency or court were to find that the Commis-

sion had erred in concluding that UHR’s clerical employees had

to be licensed, the constitutional issues hotly contested here

16. See, e.g.. Pullman, supra; Colorado River Water Conservation

District v. United States, 424 U.S. at 814, 96 S.Ct. at 1244 (1976); Reetz v.

Bozanich, 397 U.S. 82, 85-87, 90 S.Ct. 788, 789-790, 25 L.Ed.2d 68 (1970);

Babbitt v. United Farm Workers, National Union, 442 U.S. 289, 99 S.Ct. 2301,

60 L.Ed.2d 895 (1979); Palmer v. Jackson, 617 F.2d 424 (Sth Cir.1980);

Ibarra v. Bexar County Hospital District, 624 F.2d 44 (Sth Cir.1980); Central

Power and Light Co. v. P.U.C. of Texas, 592 F.2d 234 ( Sth Cir.1979).

A-17

would obviously be moot. The outcome of the administrative

proceedings now pending against Mssrs. Livingston and Bush-

man—or a state court appeal from those proceedings—could

moot or significantly modify the constitutional question before

us. 17

In the proceedings below, the parties attempted to pre-

clude abstention and force a resolution of the constitutional

issue in the federal courts by stipulating that they waived “their

right to assert or demand abstention by the Court.” UHR I,

supra, at 570. The district court concluded that this stipulation

“settled any questions of abstention.” Jd. This was error.

Because the abstention doctrine is designed to balance the

interests of the federal and state judicial systems and to avoid

unnecessary adjudication of constitutional issues, a federal

court should decide for itself whether to abstain on its own

motion in Pullman-type cases, regardless of the wishes of the

parties. '® Accordingly, we now consider the propriety of absten-

tion’? on the facts of this case.2°

17. Our holdings on the res judicata and collateral estoppel questions

leave the state agency or courts free to make the initial review of the

Commission’s action.

18. See Ohio Bureau of Employment Services v. Hodory, 431 U.S. 471,

480 n. 11, 97 S.Ct. 1898, 1904 n. 11, 52 L.Ed.2d 513 (1977); Bellotti v. Baird,

428 US. 132 n. 10, 96 S.Ct. 2857, 49 L_Ed.2d 844; Empire Distributing Co. v.

City of Fort Worth, 273 F.2d 529 (Sth Cir.1960).

19. Our review of the district court's refusal to abstain is predicated on a

de novo standard. This circuit adopted a de novo standard of review of a

district court’s dicision to invoke or refuse to invoke Pullman abstention in its

recent en banc decision in O’Hair v. White, 675 F.2d 680 ( Sth Cir.1982). See

also Ziegler v. Ziegler, 632 F.2d 535 (Sth Cir.1980) (de novo review); cf.

Brooks v. Walker County Hospital District, 688 F.2d 334, 336 n. 4 (Sth

Cir.1982), cert. denied, — US. —, 103 S.Ct. 2452, 77 L-Ed.2d 1332 (1983)

. (discussing correct standard of review ).

20. “The necessity for abstention is to be determined by principled

discretion not doctrinaire adherence; its application must, therefore, be

decided on a case-by-case basis.” Gibson v. Jackson, 578 F.2d 1045, 1048 ( Sth

Cir.1978), cert. denied, 439 U.S. 1119, 99 S.Ct. 1028, 59 L.Ed. 2d 79 (1979)

(citations omitted ).

A-18

Initially, we note that the ambiguity of state law necessary

to Pullman abstention exists here. We do not agree with the

parties that the Real Estate License Act and the regulations

promulgated thereunder clearly require licensing of UHR em-

ployees performing clerical tasks.2'

The rules specifically authorize a real estate broker to

employ unlicensed clerical employees and to have an answering

service which gives out information as to properties available.22

Arguably, UHR’s employees who answer the telephone do no

more than the clerical or secretarial employees of any broker

who also “communicate with the public” by answering the

phone.

The other rules which the state attempts to apply to UHR

employees are similarly ambiguous. For example, the rules

state that the compilation and sale of rental information is “an

activity requiring licensure,”23 but this language does not

preclude the reasonable interpretation that while this activity

must be done in the office of a licensed broker fully accountable

for the acts of his employees, not every physical act involved in

the compilation need be performed by a licensed broker.24

Again, the rules require licensure of rental agents engaging in

“solicitation” —“unless such agents are employees of the owner

of the property concerned.”25 This rule apparently refers to

“solicitation” on behalf of property owners—i.e. solicitation of

prospective fenants—not the gathering of information about

21. Nor are we bound, as the district court mistakenly believed, by the

parties’ stipulation to that effect. See UHR I, supra, at 570.

22. See Rule 402.03.02.003.4 ( permitting answering services) and Rule

A02.03.02.005.6 (permitting the employment of unlicensed clerical employ-

ees. ).

23. See Rule 402.03.010.2(b).

24. Indeed, the state admitted at oral argument that portions of the act

of compilation may be performed without a real estate license.

25. See Rule 402.03.02.005.5.

et 2 oS ,

= ee ae ae es ee eae ee OY ie ees eee 4 ee mT LP eee

—

A-19

other rental properties. The record indicates that UHR does

not solicit tentants for a particular landlord, but rather sub-

scribes to its information service. We express no opinion on

how the rules ought to be interpreted;26 we seek only to show

that, taken together, the rules are susceptible of a construction

which would moot or significantly modify the constitutional

issue.27

We cannot rule out the strong possibility that the state

agency or the state courts will interpret the regulations at issue

so as to obviate any potential first amendment violation.2®

In reaching the decision that abstention is necessitated by

the facts of this case, we have taken into account the dis-

advantages usually considered consequent to abstention: “pie-

cemeal results and delay.” Ross v. Houston Independent School

Dist., 559 F.2d 937, 942 (Sth Cir.1977). A review of the facts

of this case, however, reveals that those very problems would

be exacerbated by our entertaining the claims presented here.

The record reveals that before bringing this quarrel to federal

26. The parties have not cited, nor has our own research disclosed, any

decision from a Texas court construing the specific regulations at issue. Nor

have we fould any cases dealing with situations so analogous that we could

predict, with a reasonable degree of certainty, how the question would be

resolved by the highest court of the state. The rules themselves are

sufficiently vague and contradictory that they could reasonably be interpreted

to require licensure of all UHR employees “communicating with the public,”

of only some of those employees, or of none. We therefore find that this case

presents an unsettled issue of state law. See Field, Abstention in Con-

stitutional Cases: The Scope of the Pullman Abstention Doctrine, 122 U.Pa.L.

Rev. 1071, 1090-91 (1974).

27. Cf. Brooks, 688 F.2d at 336-7 (analyzing ambiguities of statute

which allow Pullman abstention ).

28. We note that during these proceedings the Commission has already

reversed itself and granted licenses to those UHR employees ’

denied licenses on the ground that as UHR employees they were in

activities requiring licensure without having a license. Perhaps the Commis-

sion is similarly willing to reconsider its position vis-a-vis the revocation of the

licenses of Mssrs. Livingston and Bushman and to reach an accommodation

with UHR.

A-20

court as a constitutional matter, the parties were engaged in a

process of negotiation and compromise as to the scope of the

licensing requirement.2® This action has halted not only that

process but state proceedings in which the parties could have

arrived at a mutually satisfactory interpretation of the licensing

requirements. For a federal court to adjudicate this controversy

as a constitutional matter at this stage would indicate to other

parties engaged in similar discussions with state agencies—and

to the agencies themselves—that the federal courts will provide

a ready solution to local disputes over state regulations.

If [such state proceedings] are stayed, whether by

stipulation or otherwise, while these issues are litigated

over the course of several years through the tiers of the

federal system, the possibilities of delay and piecemeal

resolutions are interminably expanded. Such an encroach-

ment of the federal government into ongoing state pro-

Indeed, cases cited by the parties demonstrate that several state

appellate courts have mooted any potential first amendment issue in

similar fact situations either by ruling that the state licensing statute in

question did not require licensure of clerical-type employees of rental

information agencies, see Real Estate Commission of Maryland v. Phares,

268 Md. 344, 302 A.2d | (Md.1973) (rental information services not

brokering within real estate licensing statute); State of Minnesota v.

Beslanoviwitch, 311 Minn. 56, 248 N.W.2d 286 (Minn.1976) (same); or

by enjoining such an application of the statute on state or federal

constitutional grounds. See Anderson v. Department of Real Estate, 155

Cal.Rptr. 307, 93 Cal App.3d 696, 699 (1979) (first amendment

grounds); United Interchange v. Spellacy, 144 Conn. 647, 136 A.2d 801

(1957) (due process grounds); United Interchange, Inc. v. Harding, 154

Me. 128, 145 A2d 94 (1958) (first amendment and due process

grounds); North Carolina Real Estate Licensing Board v. Aikens, 31

N.C.App. 8, 228 S.E.2d 493 (1976) (state due process grounds); bur see

Whitaker v. Arizona Real Estate Board, 26 Ariz.App. 347, 548 P.2d 841

(1976) (where rental information service also counseled clients regard-

ing property licensing s* ute constitutional as applied ).

29. These negotiations had progressed to the point where UHR was

willing to ensure that all original gathering of rental information would be

done by licensed employees. The major sticking point appears to have been

whether licensure would be required for employees calling to verify informa-

tion. .

es ee ie eee en oe Se

A-21

ceedings would be unseasonable and obstrusive. The

“delay and expense to which application of the abstention

doctrine inevitably give rise,” Bellotti v. Baird, 1976, 428

U.S. 132, 150, 96 S.Ct. 2857, 2868, 49 L.Ed.2d 844,

quoting England v. Medical Examiners, 1964, 375 U.S.

411, 418, 84S.Ct. 461, 466, 11 L.Ed.2d 440, 446, would be

even more acute if we did not abstain here.

Gibson v. Jackson, 578 F.2d at 1050-51.

Pullman mandates that a federal court faced with an initial

review of a state agency’s application of its own regulations,

where that application is challenged on constitutional grounds,

should abstain, absent compelling circumstances, in order to

allow the state agency and the state courts first review of the

interpretation of state law at issue and to avoid unnecessary

constitutional adjudication.

The facts of this case required abstention under Pullman.

On remand, the district court should dismiss this action without

prejudice.%

The judgment below is

REVERSED AND REMANDED FOR PROCEEDINGS CONSISTENT

WrrtH THis OPINION.

TATE, Circuit Judge, dissenting.

I respectfully dissent. I would affirm on the basis of the

district court opinion. United Home Rentals v. Texas Real

Estate Commission, 548 F Supp. 566 (N.D. Tex.1982).

The Texas statute, if enforced as consistently interpreted

and applied by the Texas administrative agency, in my view

infringes on the plaintiffs’ first amendment rights. The plaintiffs

30. Uswally a district court retains jurisdiction over a case when it

abstains or Pullman grounds. However, the quirks of Texas law preclude

retention oi federal jurisdiction and thus dismissal without prejudice is the

correct disposition. See generally Moore v. El Paso County, 660 F.2d 586 ( Sth

Cir.1981), cert. denied, —U.S.—, 103 S.Ct. 51, 74 L.Ed.2d 57 (1982).

A-22

are clearly aggrieved by that intrepretation and enforcement in

their own instances. Neither the Attorney General of Texas in

his brief and argument in this court, nor the plaintiffs, argue

that the statute is ambiguous, as the panel majority holds, and

in my opinion no grounds exist for Pullman abstention—neither

party raises the issue that the statute is not applied in accord-

ance with its terms, see also district court, 548 F.Supp. at 570

(“No ambiguity in statute.”). Thus interpreted and applied by

the agency authoritatively entrusted with its administration, the

statute is, it seems to me, unconstitutional on first amendment

commercial free speech grounds. See 548 F.Supp. at 571-75.

Insofar as the parties are concerned, the panel opinion

mostly deals with non-issues. The res judicata-collateral estop-

pel issue, not even raised by the State, seems to me to involve

ultra-technical concerns that, upon full reflection, would not

justify application of res judicata or collateral estoppel without

fundamental disregard of the functional purposes of those

principles and of the principles that underlie the Federal Rules

of Civil Procedure.

Application here of the Pullman principle, expressly esc-

hewed by the appellant State, serves only to delay and frag-

ment decision of the central issue squarely raised by this

litigation: Are the plaintiffs aggrieved by the requirement that

they or their employees obtain real estate licenses to engage in

commercial free speech protected against governmental restric-

tion by the first amendment of the federal constitution? Texas

argues that they are not—that it is entitled to exact licenses

from employees before permitting them to exercise the free

speech rights here at issue, under the unambiguous terms of the

statute as authoritatively construed and consistently applied by

the Texas agency entrusted with its administration. That the

licenses to the employees were granted by the state agency does

not moot the plaintiffs’ claims, nor does it cast into doubt the

still-asserted claim of Texas that licenses are unambiguously

required by the Texas statute—unconstitutionally, the plaintiffs

Pes

A-23

No grounds for Pullman abstention exist, in my opinion,

and the panel is in error in not deciding on the ARG

constitutional issue squarely posed to us. merits

A-24

APPENDIX B

In THe Untrep States District Court

For the Northern Division of Texas

Dallas Division

Untrep Home RENTALS, INC.,

MICHAEL A. LIVINGSTON, AND

W. EUGENE BUSHMAN

vs.

Texas REAL EsTaTE COMMISSION

AND THE STATE OF TEXAS

OPINION

This is a suit under 42 U.S.C. §1983' and 28 U.S.C.

$1331.2 Plaintiffs complain that Defendants have violated their

First Amendment Rights which have been made applicable to

the States by the Fourteenth Amendment.

142 U.S.C. § 1983 reads:

Every person who, under color of any statute, ordinance, regulation,

custom, or usage, of any State or Territory or the District of Columbia,

subjects, or causes to be subjected, any citizen of the United States or other

person within the jurisdiction thereof to the deprivation of any rights,

privileges, or immunities secured by the Constitution and laws, shall be liable

+ CA 3-81-0809-C

to the party injured in an action at law, suit in equity, or other proper —

proceeding for redress. For the purposes of this section, any Act of Congress

applicable exclusively to the District of Columbia shall be considered to be a

statute of the District of Columbia.

228 U.S.C. § 1331 reads:

The district courts shall have original jurisdiction of all civil actions

arising under the Constitution, laws, or treaties of the United States.

3 The First Amendment to the Constitution specifies:

Congress shall make no law respecting an establishment or religion, or

prohibiting the free exercise thereof; or abridging the freedom of speech, or of

the press; or the right of the people peaceably to assemble, and to petition the

Government for a redress of grievances.

and the Fourteenth Amendment, Section |, specifies:

All persons born or naturalized in the United States, and subject to the

jurisdiction thereof, are citizens of the United States and of the State wherein

they reside. 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.

A-25

The Parties in their Joint Motion for Pretrial Order entered

into stipulations A through L as follows:

A. Plaintiffs own and operate and/or are employed in

the rental information service industry in several locations

throughout the State of Texas. The focus of the business is

the compiling, cataloging, and sale of information about

‘ available rental property. This information is then made

available to segments of the general public who choose to

purchase a “policy” or “membership” for a specified fee

which enables the customer to examine the catalogued

information for a certain period of time, usually six

months.

B. It is the intent of Plaintiffs that employees of the

rental information service in each office perform one or

more of the following functions:

(1) gathering rental information from landlords,

classified ads, and other sources;

(2) certifying the accuracy of the information on

catalogued property, and its contained availability for

rental, on a periodic basis;

(3) handling incoming telephone calls to the

Office either in response to ads or to give information

to existing policyholders as to newly catalogued rental

properties;

(4) the explanation of services offered and the

sale of policies to customers who come into the office.

One or more functions may be performed by the same or

multiple employees within each office.

C. Plaintiff Livingston is the sole shareholder and sole

director of United Home Rentals, Inc. Plaintiff Bushman is

a real estate broker employed full time by Plaintiff United

Home Rentals, Inc., but has no ownership interest in the

company. Plaintiff Bushman currently holds a brokers

license issued by Defendant TREC and Plaintiff Liv-

aa ee tera ey ; as 5 ge & > oe, > ime mF

bei: aR hes ot crue SARE ee % ial aad a ee Bi

A-26

ingston, through the sponsorship of Plaintiff Bushman, is

the holder of a salesman’s license issued by TREC.

D. According to interpretations by Defendant TREC

and its counsel, its Rules (Appendix 2) require that any

employee that performs on any occasion any of the

functions specified aforesaid in Paragraph VB be licensed

as a salesman or broker under the provisions of the Real

Estate License Act and the rules promulgated thereunder.

E. The Commission is currently demanding that such

functions be performed only by licensed people or that

Plaintiff United Home Rentals cease doing business. De-

fendant TREC has threatened (and in fact subsequent to

the filing of suit, instituted) administrative proceedings

against Plaintiffs Livingston and Bushman to revoke their

licenses based upon their association with persons per-

forming such functions who do not have licenses issued by

Defendant TREC.

F. The minimal educational requirements for obtain-

ing a real estate salesman’s license since 1976 and as

changed by the 1981 amendment w the law are as follows:

(1) January 1, 1976—30 classroom hours (plus

30 additional hours each for second and third annual

certification );

(2) January 1, 1977—6 semester hours (90

classroom hours);

(3) January 1, 1979—12 semester hours (180

classroom hours);

(4) January 1, 1981—21 semester hours (315

classroom hours);

‘(5) April 23, 1981—12 semester hours with 6

hours in core real estate courses including 2 hours in

Principles of Real Estate (plus additional semester

hours for second, third and fourth annual certifica-

tions ).

A-27

G. On April 23, 1980, Defendant TREC rejected

license applications by three employees of Plaintiff United

Home Rentals, Inc. on the basis they misrepresented their

activities either past or future in their application for

licensure to Defendant TREC. Specifically, the application

requires them to affirm under oath that they have not

performed activities requiring licensure and that they will

not perform activities requiring licensure until the license is

actually issued. Defendant TREC denied the applications

on the basis that in working for Plaintiff United Home

Rentals, Inc. each employee, necessarily and admittedly,

performed one or more of the functions specified in

paragraph VB, of the Rules (Appendix 2) without the

benefit of a license from Defendant TREC. Accordingly,

Defendant TREC has denied the applications on the basis

that “the Texas Real Estate Commission is not satisfied

that (employee) would conduct his real estate business

with honesty, trustworthiness and integrity as required by

... (the act)”.

H. Defendant TREC has informed Plaintiffs that the

act provides for and in fact has commenced administrative

actions to revoke the licenses of Plaintiffs Bushman and

Livingston (such commencement occuring April 24, 1980)

on the basis that they have “associated with unlicensed

persons”.

I. Defendant TREC has informed Plaintiffs that the

act provides for criminal prosecution of employees of

Plaintiff United Home Rentals, Inc. not holding real estate

licenses and performing any of the functions specified in

paragraph VB of the Rules.

J. Defendant TREC has advised Plaintiff's counsel

that it intends to immediately and vigorously prosecute

enforcement proceedings pursuant to its authority as to

Michael Livingston, Wesley Eugene Bushman, and United

Home Rentals, Inc.’s employees, James Godfrey, Gerald

Sheridan, and Kenneth Crain.

A-28

K. Companies in the rental information industries

have been the subject of consumer complaints such as:

(a) not having the permission of the landlord to

catalog property,

(b) cataloging property no longer available for

rent;

or that was no longer available;

(d) guaranteeing the results of a service and

then not honoring such guarantees;

(e) promising the availability of property meet-

ing the needs of a particular customer and then not

having any such property.

L. Plaintiff United Home Rentals, Inc. has been the

subject of such consumer complaints but has been respon-

sive to resolving such consumer complaints. In 1976,

Plaintiff United consented to an injunction against certain

of such acts without admitting it had performed them.

Mark McQuality and Joseph Chumlea, former Assistant

Attorney Generals to the State of Texas—Consumer Divi-

sion would testify that from October, 1976, to June, 1980,

they processed approximately 37 complaints involving

United Home Rentals, Inc. in the Dallas-Fort Worth area,

and that said attorneys cannot recall any of those com-

plaints that were not resolved to the satisfaction of the

consumer. Said attorneys’ personal knowledge is limited to

the period commencing October, 1977. In April, 1980,

Joseph Chumlea suggested that Plaintiff United put a

catalog reference in its advertising referring to the specific

piece of rental property being advertised so that consumers

could verify that a property advertised was in fact listed by

United. United Home Rentals immediately and volun-

tarily complied with that suggestion.

A-29

. After trial, in response to a query by the Court concerning

case or controversy under Article III, Section 2 of the Con-

stitution’ and abstention in the light of Gibson v. Berryhill, 411

U.S. 564, 574, the Parties entered into further stipulations.

Stipulations numbered two through seven of this series are

pertinent and recite:

2. State action has occurred.

Defendant TREC has rejected license appli-

cations by three employees of Plaintiff United Home

Rentals, Inc., and has commenced administrative ac-

tion to revoke the licenses of Plaintiffs Bushman and

Livingston. While these actions by TREC can be

appealed, they are final if no affirmative action is

taken by the affected parties.

3. Statute violated.

Plaintiff United Home Rentals, Inc., Michael A.

Livingston, and W. Eugene Bushman, have per-

formed acts requiring licensure under the Texas Real

4 Art. III, Sec. 2, reads:

The judicial Power shall extend to all Cases, in Law and Equity, arising

under this Constitution, the Laws of the United States, and Treaties made, or

which shall be made, under their Authority;—to all Cases affecting Ambassa-

dors, other public Ministers and Consuls;—to all Cases of admiralty and

maritime Jurisdiction;—to Controversies to which the United States shall be a

Party;—to Controversies between two or more States;—between a State and

Citizens of another State;—between Citizens of different States;—between

Citizens of the same State claiming Lands under Grants of different States,

and between a State, or the Citizens thereof, and foreign States, Citizens or

Subjects.

In all Cases affecting Ambassadors, other public Ministers and Consuls,

and those in which a State shall be a Party, the Supreme Court shall have

original Jurisdiction. In all other Cases before mentioned, the Supreme Court

Shall have appellate Jurisdiction, both as to Law and Fact, with such

Exceptions, and under such Regulations as the Congress shall make.

The trial of all Crimes, except in Cases of Impeachment, shall be by Jury;

and such Trial shall be held in the State where the said Crimes shall have

been committed; but when not committed within any State, the Trial shall be

at such Place or Places as the Congress may by Law have directed.

A-30

Estate License Act and the rules and regulations

promulgated thereunder. The acts performed to

provide an advance fee rentals information service

such as that provided by Plaintiffs are brokering

activities as defined By the Act and require a real

estate license under the Texas Real Estate License Act.

United Home Rentals employees have performed

such actions without licensure in violation of said Act.

4. No ambiguity in statute.

Provisions of the Texas Real Estate License Act,

art. 6573 (a), V.A.C.S., and the rules and regulations

promulgated thereunder are not ambiguous and clear-

ly cover the actions of Plaintiffs and their employees.

The statute is not fairly susceptible to a reading that

would avoid the need to decide the Constitutional

issue.

5. Only issue is Federal Constitutional issue.

The only disputed fact issues before the Court

are: (1) Whether the definition of real estate broker

and licensure requirements of the Texas Real Estate

License Act are so broad as to violate Plaintiffs’

Constitutional protection of free commercial speech

and press when applied to Plaintiffs’ activities as

advance fee rentals agent; (2) whether said require-

ments bear a rational relationship to the governmental

purpose for such licensure when applied to Plaintiffs’

activities; (3) whether the rules and regulations

regarding said requirements for activities performed

by Plaintiffs are so overly broad as to violate the

constitutional protection of free commercial speech

and press when applied io Plaintiffs’ activities as

advance fee rental agents; and (4) whether the statute

and regulations in fact impact Constitutionally pro-

tected rights of speech. and/or press or just impact

regulatable activities.

A-31

6. Waiver.

Defendants TREC and The State of Texas waive

their right to assert or demand abstention by the Court

in this cause.

7. Prescribed state administrative procedures have

been complied with in such a way that no other adminis-

trative remedies are applicable to this cause.

To the extent any available administrative re-

medies can be pursued by Plaintiffs, Defendants waive

any further application of the doctrine of exhaustion

of administrative remedies.

It does appear that the Parties have presented a live

controversy to this Court and have settled any questions of

abstention.

The paramount question in this case is whether the State of

Texas can subject Plaintiffs to licensure under the Texas Real

Estate License Act, Art. 6573(a), Vernon’s Ann.Civ.St. Plain-

tiffs say no because to do so would trample their rights of free

commercial speech and press.

As this is a commercial speech case, it is governed by the

Supreme Court’s decision in Central Hudson Gas v. Public

Service Commission, 447 U.S. 557 (1980).

The Court set out 2 four part test in that case. Those

components are:

(1) Is the speech protected by the First Amendment?

(2) Is the governmental interest asserted substantial?

(3) Does the regulation directly advance the govern-

mental interest asserted? and

(4) Is the regulation more extensive than is necessary

to serve that interest?

A-32

To answer the first question, it must first be decided just

who is speaking? In this instance, it is the apartment, duplex

and home renters who are seeking to disseminate information

about rental properties. Most assuredly, this is the sort of

information that is protected by the First Amendment.

In being a means of disseminating this information Plain-

tiff United Homes Rental is fulfilling the same function as a

newspaper which carries classified advertising.

Just as newspapers seek listings in their classified sections

for rental properties, so do Plaintiffs seek listings for rental

properties. Newspapers, after they receive a listing, then seek

to disseminate this information to a group limited only by the

individual’s willingness to purchase a subscription or an indi-

vidual edition of that paper. Plaintiffs, functionally, do the

same. They seek to disseminate the same information to a

group limited only by the individual’s willingness to purchase a

“policy” or “membership” for a stated time period. That

Plaintiffs choose to receive compensation for their services from

only those seeking housing and not those offering housing is a

distinction without a difference.

The Supreme Court in the case of Lovell v. Griffin, 303

U.S. 444 (1937) said at page 452: “The press in its historic

connotation comprehends every sort of publication which af-

fords a vehicle of information and opinion.” The Court also

said in Ex parte Jackson, 96 U.S. 727, at 733: “Liberty of

circulating is as essential to that freedom as liberty of publis-

hing; indeed, without the circulation, the publication would be

of little value.”

The best statement by The State of Texas as to the interest

asserted may be found at page one of its trial brief. There, it

has stated: “... the challenged statute does not restrict speech

in any way. Rather, it restricts the profession of real estate

brokering to licensed individuals.”

The legal counsel for the Texas Real Estate Commission

stated at trial that the purpose of licensure of these individuals

A-33

is consumer protection.5 The consumer is protected in that an

applicant for a license under the Texas Real Estate License Act

(“the Act”) must, as required by Sec. 6(b) of that act, show

“his honesty, trustworthiness, integrity, and competency.” Su-

rely, The State of Texas does have a substantial interest in

thusly protecting its citizens in such a vital commerce as the

market for housing, one of the fundamental needs of its citizens.

The Texas Real Estate License Act does directly advance

the interest asserted. Section 6 in paragraphs (b) & (c)

specifies that the competency of an applicant “shall be judged

soley on the basis of the examination referred to in Section 7 of

this Act.” Section 7(a) sets out nine “core real estate courses”

that an applicant must have studied before he or she may take

an examination for a real estate license. Those courses are

listed and described as:

(1) Principles of Real Estate (or equivalent) shall

include but not be limited to an overview of licensing as a

real estate borker and salesman, ethics of practice, titles to

and conveyancing of real estate, legal descriptions, law of

agency, deeds, encumbrances and liens, distinctions be-

tween personal and real property, contracts, appraisal,

finance and regulations, closing procedures, and real estate

mathematics.

(2) Real Estate Appraisal (or equivalent) shall in-

clude but not be limited to the central purposes and

functions of an appraisal, social and economic determinant

of value, appraisal case studies, cost, market data and

income approaches to value estimates, final correlations,

and reporting.

(3) Real Estate Law (or equivalent) shall include

but not be limited to legal concepts of real estate, land

description, real property rights and estates in land, con-

5 Transcript of the Preliminary Injunction hearing, p.62.

A-34

tracts, conveyances, encumbrances, foreclosures, recording

procedures, and evidence of titles.

(4) Real Estate Finance (or equivalent) shall include

but not be limited to monetary systems, primary and

secondary money markets, sources of mortgage loans,

federal government programs, loan applications, processes

and procedures, closing costs, alternative financial in-

struments, equal credit opportunity acts, community

reinvestment act, and state housing agency.

(5) Real Estate Marketing (or equivalent) shall

include but not be limited to real estate professionalism

and ethics, characteristics of successful salesmen, time

management, psychology of marketing, listing procedures,

advertising, negotiating and closing, financing, and the

Deceptive Trade Practices-Consumer Protection Act, as

amended, Section 17.01 et seq., Business & Commerce

Code.

(6) Real Estate Mathematics (or equivalent) shall

include but not be limited to basic arithmetic skills and

review of mathematical logic, percentages, interest, time-

valued money, depreciation, amortization, proration, and

estimation of closing statements.

(7) Real Estate Brokerage (or equivalent) shall

include but not be limited to law of agency, planning and

organization, operational policies and procedures, recruit-

ing, selection and training of personnel, records and con-

trol, and real estate firm analysis and expansion criteria.

(8) Property Management (or equivalent) shall in-

clude but not be limited to role of property manager,

A-35

(9) Real Estate Investments (or equivalent) shall

include but not be limited to real estate investment charac-

teristics, techniques of investment analysis, time-valued

money, discounted and nondiscounted investment criteria,

leverage, tax shelters depreciation, and applications to

property tax.

Section 7 in paragraph (k) also requires all applicants to have

taken further coursework as follows:

(k) All applicants for licensure must complete at least

three classroom hours of coursework on federal, state, and

local laws governing housing discrimination, housing credit

discrimination, and community reinvestment or as least

three semester hours of coursework on constitutional law.

The mere reading of these coursework requirements brings

home the desirability of ensuring the competence of the real

estate profession. It is more than reasonable for The State of

Texas to require real estate professionals to be licensed so that

the public can be assured that the members of that profession

are well versed in these complicated subject areas. Thus, on its

face, the Act directly advances the governmental interest that

has been asserted as its reason for existence.

The fourth part of the test required by the Supreme Court

in Central Hudson Gas, supra, is whether or not the regulation

is more extensive than necessary to serve the State’s interest? In

statute on its face but are challenging the gloss put on it by the

Texas Real Estate Commission.

As part of Plaintiff's Exhibit No. 11, a letter dated October

18, 1978, written by the Legal Counsel to the Texas Real Estate

Commission sets out the following rules of the Commission as

governing the requirements for licensure of persons in Plain-

tiffs’ field of endeavor:

A-36

Rule 402.03.02

.003.4 Real estate broker licensure is required for

the operation of a rental agency. This section does not

prohibit employment of an answering service which is

identified to callers as such and which provides infor-

mation concerning the size, price and terms of proper-

ty advertised.

.005.1 Locating and bringing together a buyer

and seller through correspondence or telephone con-

stitutes negotiation if done from within the borders of

Texas.

.005.5 Real estate licensure is required of rental

agents doing all solicitation by telephone unless such

agents are employees of the owner of the property

concerned.

.005.6 A clerical employee of a real estate broker

is not required to be licensed if such employee engages

in no solicitation work and does not hold himself or

herself out as authorized to act as a real estate agent.

.005.7 Answering of the telephone and acts of a

secretarial nature done in a broker’s office do not

require real estate licensure.

.010.1 (a) Real estate licensure is required for

the operation of an apaftment selector/locator service

or home-finding service in Texas.

.010.2 (b) The compilation and sale of listings of

rental vacancies available in an area is activity requi-

ring real estate licensure. This is true even if the

property is not shown, sold, leased or managed.

011.1 This section prohibits a person not licens-

ed as a Texas real estate broker or salesman from

receiving a referral fee from another concerning the

sale, exchange, purchase, rental or lease of real estate.

A-37

011.2 Real estate licensure is required for one to

procure or assist in the procuring of prospective

tenants of real property for compensation in any form,

including but not limited to rent bonuses, discounts,

- gifts or other things of value.

011.3 The referral of a prospective purchaser,

for compensation, is an act requiring real estate

licensure.

013.1 Real estate licensure is required of those

who advertise for others regarding real property,

accept calls received in response to such advertise-

ments, and refer the callers to the owner of the

property.

On the face, it would appear that these rules are resonable

and would legitimately cover the activities of the Plaintiffs.

They plausibly encompass activities which fall within the sweep

of Section 2(2) of the Act defining just who is a real estate

broker. That Subsection reads:

“Real estate broker” means a person who, for another

person and for a fee, commission, or other valuable

consideration, or with the intention or in the expectation or

on the promise of receiving or collecting a fee, commission,

or other valuable consideration from another person:

(A) sells, exchanges, purchases, rents, or leases

real estate;

(B) offers to sell, exchange, purchase, rent, or

lease real estate;

ing, sale, exchange, purchase, rental, or leasing of real

estate;

(D) lists or offers or attempts or agrees to list e

‘i

A-38

(E) appraises or offers or attempts or agrees to

appraise real estate;

(F) auctions, or offers or attempts or agrees to

auction, real estate;

(G) buys or sells or offers to buy or sell, or

otherwise deals in options on real estate;

(H) aids, attempts, or offers to aid in locating or

obtaining for purchase, rent, or lease any real estate;

(1) procures or assists in the procuring of pros-

pects for the purpose of effecting the sale, exchange,

lease or rental of real estate; or

(J) procures or assists in the procuring of proper-

ties for the purpose of effecting the sale, exchange,

lease, or rental of real estate.

So on its face, the Act and the Texas Real Estate Commis-

sion Rules promulgated under it, appear to meet Constitutional

muster. But let us look at prongs two, three and four of the

Central Hudson Gas, supra, test in the context of the situation

presently before this Court.

First of all, it is useful to distinguish between the business

of Plaintiffs and that of apartment locator services. The latter

sell their services to landlords and are compensated for each

tenant procured by the apartment locator services. These

also take prospective tenants around to various rental properties

and show the properties to them. Licensure would appear to be

appropriate as these services are really acting as agents for the

landlord in procuring tenants. F

But Plaintiffs’ business is different. They do not receive

compensation on the closing of a real estate sale or upon the

signing of a lease agreement. They receive their compensation

at the beginning, in advance of the furnishing of any informa-

tion to a prospective tenant. Plaintiffs also either allow their

ae iy = ‘ ee. vo ‘i £4 au" Aes ee o e. ‘iin . is

pips OR RM alee on gm Be Ses 7 etn, SAR ae ea ails , as

A-39

customers to read the informatior. about listings off of cards

maintained in their offices or read the information to their

customers over the phone, for a slight additional fee. Plaintiffs

do not counsel their customerr as to suitable properties nor do

they show rental properties t their customers. One might say

that locator services are selling to landlords the service of

procuring tenants and Plaintiffs are selling prospective tenants

the service of providing information about dwellings open for

rent.

Clearly, there is a meaningful distinction between these

two businesses. The services performed by apartment locator

services are much greater and of a different quality from those

performed by Plaintiffs.

It can readily be seen that apartment locator service

employees should be licensed to ensure that they are versed

with the coursework required in order to obtain a license under

the Act. Their livelihood depends on their ability to determine

the needs of prospective tenants and to persuade the prospec-

tive tenants to lease dwellings shown by them. Another reading

of the coursework requirements of the Act, supra, in and of

itself, shows the desirability of a locator service having knowl-

edge of at least some of this coursework. Surely, such an

employee would need knowledge of lease contracts and their

legal effects, real estate marketing and property management in

order to do their job.

This is in great contrast to Plaintiffs’ business. The

stipulations entered into by the Parties, the text of the Act and

the testimony at the Preliminary Injunction hearing show only

that it might be helpful for an employee in the rental service

information industry to be familiar with some of the terminol-

ogy of the real estate business. It is, no doubt, helpful for any

person who deals with information related to any field of

endeavor to be conversant with the terminology used in that

field. This reed is too slender to carry the weight of the

licensing requirements of the Act.

A-40

Both Fiaintiffs and Defendants appear to agree that the ills

of the rental information service industry are covered by the

Texas Deceptive Trade Practices-Consumer Protection Act,

V.T.C.A. Bus. & C. §17.41 et seq. Both Parties also agree that

Plaintiffs did have some problems with consumer complaints

when they started in business (see stipulation L, supra) but that

there have been no unresolved problems since 1976.

It is true that the coursework requirements of the Act do

require a familiarity with the D.T.P.-C.P.A. But this is an act of

general applicability. Any person who is dealing with the

public in the State of Texas should be familiar with the

consumer protection statutes, state and federal, that are appli-

cable.

The Legal Counsel to Defendants did testify that numer-

ous complaints had been made to the Attorney General of the

State of Texas and to Defendants about firms in the rental

information service industry. He also stressed that it is the

position of the Defendants that it is better to regulate this

industry in advance than to merely provide a remedy after

malfeasance, misfeasance or nonfeasance.

The Court will agree that usually this is a decision that a

state can make without running afoul of the Constitution. But

we are dealing with the First Amendment made applicable to

the States by the Fourteenth Amendment.

The whole question before this Court may be boiled down

to asking whether Plaintiffs are in the real estate business or in

the information business? It seems clear that Plaintiffs offer only

an exchange of information for a set fee. They or their

employees do not counsel either landlords or tenants. They do

not show properties. They get inviolved in neither lease

that newspapers do, an exchange of information. They just do

not appear to be in the real estate business any more than a

newspaper that solicits classified advertisements lising homes

for lease or sale is in the real estate business. Accord: Real

A-4l

Estate Commission of Maryland v. Phares, 268 Md. 334, 302

A.2d 1 (1973), North Carolina Real Estate Licensing Board v.

Aikens, 31 N.C. App. 8 (1976).

If Plaintiffs were carrying on such acitivities as counseling

prospective tenants, the substantial interest of the State of Texas

in regulating the real estate business in Texas would come into

play. This is also to say that the Texas Real Estate Commis-

sion’s attempt to regulate Plaintiffs’ business does not directly

advance that substantial interest and the regulation is much

more extensive than necessary.

That other persons or entities might run afoul of the Act by

providing more than pure information is without moment.

That Plaintiffs may have run afoul of the Texas Deceptive

Trade Practices-Consumer Protection Act some years ago and

other entities in the rental information industry may be present-

ly afoul of that law is insufficient reason to bring Plaintiffs under

the strictures of the Texas Real Estate License Act. Just as the

coursework requirements of the Act have minimal relevance to

Plaintiffs’ business, the moral character of them and their

employees is no more relevant that it is for anyone who deals

with the public in any way. Plaintiffs and their employees are

not fiduciaries to either prospective tenants or landlords; they

never hold funds in escrow; they do not negotiate contracts

involving the lease or sale of real estate nor do they ever have

an interest in such contracts. They just do not hold positions of

trust and confidence so that licensure would directly advance

the substantial interest of the State of Texas in protecting its

citizens from any unscrupulous dealings in real estate.

Judgment will be granted to Plaintiffs.

W. M. TaYLor

UNTTED STATES

District JuDGE

A-42

APPENDIX C

Unrtep Home RENTALS, INC.,

MICHAEL A. LIVINGSTON and

W. EUGENE BUSHMAN,

Plaintiffs-Appellees

versus

Texas REAL EsTaTE COMMISSION

and THE STATE OF TEXAS

Defendants-Appellants.

Appeal from the United States District Court for the

Northern District of Texas

Before GEE, GARZA and TATE, Circuit Judges.

JUDGMENT

This cause came on to be heard on the record on appeal

and was argued by counsel;

On CONSIDERATION WHEREOF, It is now here ordered and

adjudged by this Court that the judgment of the said District

Court in this cause be, and the same is hereby, reversed end’

that this cause be and the same is hereby remanded to the said

District Court for proceedings consistent with this opinion;

It 1s FurTHER Orperep that plaintiffs-appellees pay to

defendants-appellants, the costs on appeal to be taxed by the

Clerk of this Court.

Octoser 3, 1983

A-43

APPENDIX D

Unrrep Home RENTALS, INC.,

MICHAEL A. LIVINGSTON and

W. EUGENE BUSHMAN,

Plaintiffs-Appellees,

versus :

Texas REAL Estate COMMISSION

and THE STATE OF TEXAS,

Defendants-Appellants.

Appeal from the United States District Court for the

Northern District of Texas

ON SUGGESTION FOR REHEARING EN BANC

(Opinion 10/3/83, 5 Cir., 198 , F.2d )

(October 31, 1983)

Before GEE, GARZA and TATE, Circuit Judges.

PER CURIAM:

(Y) Treating the suggestion for rehearing en banc as a

petition for panel rehearing, it is ordered that the petition for

panel rehearing is DENIED. No member of the panel nor

Judge in regular active service of this Court having requested

that the Court be polled on rehearing en banc (Federal Rules

of Appellate Procedure and Local Rule 35), the suggestion for

Rehearing En Banc is DENIED.

( ) Treating the suggestion for rehearing en banc as a

petition for panel rehearing, the petition for panel rehearing is

DENIED. The judges in regular active service of this Court

having been polled at the request of one of said judges and a

majority of said judges not having voted in favor of it ( Federal

A-44

Rules of Appellate Procedure and Local Rule 35), the sugges-

tion for Rehearing En Banc is DENIED.

ENTERED POR THE COURT:

THOMAS GILBERT, Jr.

Unrrep States Cirncurr JuDGE

Tate, Circuit Judge, dissenting.

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APPENDIX E

TEXAS’ REAL ESTATE LICENSE ACT, TEX. REV.

CIV. STAT. ANN. art. 6573a, §2(2) (Vernon Supp. 1982),

provides in revelant part:

“Real estate broker” means a person who, for another

person and for a fee, commission, or other valuable

consideration, or with the intention or in the expectation or

on the promise of receiving or collecting a fee, commission,

or other valuable consideration from another person:

(D) lists or offers or attempts or agrees to list

real estate for sale, rental, lease, exchange, or trade;

[or]

(H) aids, attempts, or offers to aid in locating or

obtaining for purchase, rent, or lease any real estate;

Texas Real Estate Commission Rule 402.03.02:

.003.4 Real estate broker licensure is required for the

operation of a rental agency. This section does not

prohibit employment of an answering service which is

identified to callers as such and which provides informa- -

tion concerning the size, price and terms of property

advertised.

005.1 Locating and bringing together a buyer and

seller through correspondence or telephone constitutes

negotiation if done from within the borders of Texas.

005.5 Real estate licensure is required of rental

agents doing all solicitation by telephone unless such |

agents are employees of the owner of the property con- nd

cerned -

005.6 A clerical employee of a real estate broker is

Rot required to be licensed if such employee engages in no

A-46

solicitation work and does not hold himself or herself out

as authorized to act as a real estate agent.

.005.7 Answering of the telephone and acts of a

secretarial nature done in a broker’s office do not require

real estate licensure.

010.1 (a) Real estate licensure is required for the

operation of an apartment selector/locator service or

home-finding service in Texas.

010.2 (b) the compilation and sale of listings of

rental vacancies available in an area is activity requiring

real estate licensure. This is true even if the property is not

shown, sold, leased or managed.

011.1 This section prohibits a person not listed as a

Texas real estate broker or salesman from receiving a

referral fee from another concerning the sale, exchange,

purchase, rental or lease of real estate.

011.2 Real estate licensure is required for one to

procure or assist in the procuring of prospective tenants of

real property for compensation in any form, including but

not limited to rent, bonuses, discounts, gifts or other things

of value.

011.3. The referral of a prospective purchaser, for

compensation, is an act requiring real estate licensure.

.013.1 Real estate licensure is required of those who

advertise for others regarding real property, accept calls

received in response to such advertisements, and refer the

callers to the owner of the property.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.