Amicus Curiae Brief — Twin City Fire Insurance v. Fortunato

WUIIUN FILED

DEC 2 8 1992 No. 92-728

In The

Supreme Court of the United States

October Term, 1992

*

TWIN CITY FIRE INSURANCE CO., et al.,

Petitioners,

SAMUEL F. FORTUNATO, COMMISSIONER OF THE

NEW JERSEY DEPARTMENT OF INSURANCE,

Respondent.

¢

On Petition For A

Writ Of Certiorari To The

Supreme Court Of New Jersey

*

MOTION FOR LEAVE TO FILE BRIEF AMICI CURIAE

AND BRIEF AMICI CURIAE OF INSTITUTE FOR

JUSTICE, CITIZENS FOR A SOUND ECONOMY,

COMPETITIVE ENTERPRISE INSTITUTE,

HEARTLAND INSTITUTE, AND PIONEER

INSTITUTE IN SUPPORT OF THE

PETITION FOR CERTIORARI

«

WituiAM H. ME -tor III*

CLINT BOoLick

Dirk G. ROGGEVEEN

Scott G. BuLLOcK

Institute for Justice

1001 Pennsylvania Avenue, N.W.

Suite 200 South

Washington, D.C. 20004

(202) 457-4240

Attorneys for Amici Curiae

*Counsel of Record

COCKLE LAW BRIEF PRINTING CO,, (800) 225 6964

OR CALL COLLECT (402) 342-2831

MN) y

at See SR Oh tr ca el

MOTION FOR LEAVE TO FILE

ATTACHED BRIEF AMICI CURIAE

The Institute for Justice, Citizens for a Sound Econ-

omy, the Competitive Enterprise Institute, the Heartland

Institute, and the Pioneer Institute move for leave to file

the attached brief amici curiae in support of the petition in

this case. Petitioners consented to the filing of this brief.

Respondents refused to consent without reviewing the

contents of the brief in advance, a condition which amici

declined to accept, making this motion necessary.

Each of the amici is a nonprofit organization that

conducts some combination of research, public education,

legislative advocacy, and litigation in support of a com-

mon ideal: the protection and preservation of a free mar-

ket economy and a republican form of government. None

of the amici is affiliated, directly or indirectly, with the

insurance industry (or any other economic interest

group). The Institute for Justice is a nonprofit, public

interest legal foundation dedicated to securing full consti-

tutional protection for economic liberty, private property

rights, and freedom of speech. Citizens for a Sound Econ-

omy is a 250,000-member, nonpartisan, nonprofit citizen

advocacy group that promotes market-based solutions to

public policy problems to achieve economic freedom and

opportunity for all people. The Competitive Enterprise

Institute is a nonprofit organization dedicated to advanc-

ing public understanding of the hidden costs of govern-

ment over-regulation. The Heartland Institute serves the

nation’s 8,000 governors, state legislators, and state con-

Stitutional officers by providing them with objective

research on state and local public policy issues. The

Pioneer Institute for Public Policy Research is a Massa-

chusetts based tax-exempt organization that is supportive

of market-based alternatives to many governmental ini-

tiatives and programs in Massachusetts. |

By filing this brief, amici wish to emphasize that the

issue in this case is not merely the problem of one com-

pany, or even of one industry, but is of widespread

importance to our economic system and the structure of

legal rights. We believe that the right of exit at issue in

this case is preservative of every other right —- and espe-

cially of the rights of shareholders and customers in other

states, who have no voice or vote in New Jersey, but who

are the targets of this oppressive legislation. They have

no way to protect themselves from oppressive measures

except to leave. We wish to bring this broader perspective

to bear on this Court’s consideration of the case. Accord-

ingly, we seek leave to file this brief amici curiae..

lahebihe Cot oe

Respectfully submitted,

WILLIAM H. MELLor III*

CLINT BOoLick

Dirk G. ROGGEVEEN

Scott G. BuLLock

Institute for Justice

1001 Pennsylvania Ave., N.W.

Suite 200 South

Washington, D.C. 20004

(202) 457-4240

Attorneys for Amici Curiae

in Support of Petitioners

* Counsel of Record

Date: December 28, 1992

ee

QUESTION PRESENTED

Whether the United States Constitution protects the

right of an individual or corporation to refuse to do

business within a state.

il

TABLE OF CONTENTS

Page

GUA FUPEURIUS WURUINORUED 6c ccccssscccccenssssvesss i

INTERESTS OF AMICI CURIAE ................... 1

SIAR EMeeS OF THE CAGE... 2... ccccccsccccesess 1

ARGUMENT ........ Pe eer Eee TT PETE Te TT TT ee eee 6

I. THE RIGHT OF EXIT IS A LIBERTY PRO-

TECTED UNDER THE DUE PROCESS CLAUSE 7

A. The Right Of Exit Is Fundamental To Federal-

ism As A Structural Safeguard For Liberty... 8

B. The Right To Choose Whether To Conduct A

Particular Business In A Particular State

Is Inherent In The Very Idea Of Free

en Lea wae tae cu ree oak nes 11

C. The Right Of Exit Is Deeply Rooted In The

Customs And Traditions Of This Nation,

And Has Been Recognized By This Court.. 13

Il. THE CONSTITUTIONAL RIGHT OF EXIT IS

PLAINLY IMPLICATED BY THE ORDER

SUS KoA 46 bo secre Anna 4 6e¥ 0 wae O 18

GEE s Scan en vas dekbnsescins se edwedlawess 20

ili

TABLE OF AUTHORITIES

Page

Cases:

Aptheker v. Secretary of State, 378 U.S. 500 (1964)...... 7

Armstrong v. United States, 364 U.S. 40 (1960)........ 19

Austin v. Michigan Chamber of Commerce, 110 S. Ct.

Bi, MPrpeerrrrerrrr er rer et oe es te 12

Brooks-Scanlon Co. v. Railroad Comm'n, 251 U.S. 396

SPRUE kis hat nccdn hyve easeeln en deean ee ake Ea ee st 16

Brock v. Roadway Express, 481 U.S. 252 (1987)........ 12

CalFarm Insurance Co. v. Deukmejian, 771 P.2d 1247

re re Oy Pere 7

Corfield v. Coryell, 6 Fed. Cas. 546 (E.D. Pa. 1823).... 11

De Vitis v. New Jersey Racing Comm’‘n, 495 A.2d 457

(N.J. Super. App. Div.), cert. denied, 508 A.2d 213

Ed. MO cue us acho desenes cape eadaneneeaneeeme aes 4

FCC v. Florida Power Corp., 480 U.S. 245 (1987)...... 17

First National Bank of Boston v. Belotti, 435 U.S. 765

5 | Ey re ere ine mr remy pe Arras ereaeks 12

Fort Smith Light & Traction Co. v. Bourland, 267 U.S.

Pe EEE sa os coahae eeu b4 ie dseerSeneeeberaeeeken 17

Fresh Pond Shopping Center v. Callahan, 464 U.S. 875

SRE aac bevee vce «i xd'eanckens aenge esa ees eae ee 17

G.M. Leasing Corp. v. United States, 429 U.S. 338

os SE ree ry erer eter rrr rere rr emer e 13

Gibbons v. United States, 660 F.2d 1227 (7th Cir.

I 6 ss cae Sas Sao Rad ib Pde AR ee ce eae 16

iv

TABLE OF AUTHORITIES - Continued

Page

Grosjean v. American Press Co., 297 U.S. 233 (1936) .11, 12

Hartford Accident & Indemnity Co. v. Ingram, 226

SEE EP COU Mies SIF s 650.05 00s RE Kad hENE CREST EOOR 6

Hebert v. Louisiana, 272 U.S. 312 (1926).............. 11

Kaiser Aetna v. United States, 444 U.S. 164 (1979)..... 12

Lewis v. Safeco Insurance Co., 414 N.Y.S. 2d 823

APPT TETTUCTECIT TT TT eT er Te Tee Core Tee 6

Maryland Casualty Co. v. Commissioner of Insurance,

Beer 94. 1OG7 (NROS., TSF7). occ cic cect cee 6

Meyer v. Nebraska, 262 U.S. 390 (1923)................ 8

Michae! H. v. Gerald D., 491 U.S. 110 (1989) ....... 8, 13

Moore ». City of East Cleveland, 431 U.S. 494 (1977) .... 13

Munn v. Illinois, 94 U.S. 113 (1876)............... 15, 17

New York Times v. Sullivan, 376 U.S. 254 (1964)...... 12

New Jersey Department of Environmental Protection

v. Atlantic States Cast Iron Pipe Co., 575 A.2d 457

See, Oe. FD. THU. TOME voi ceescccen deca scdsies 4

Northwestern Life Ins. Co. v. Riggs, 203 U.S. 243

ITT TT TTT eer ere er ee 16

Palko v. Connecticut, 302 U.S. 319 (1937)............. 11

Planned Parenthood v. Casey, 112 S. Ct. 2791 (1992)..... 7

Railroad Comm'n v. Eastern Texas R.R., 264 U.S. 64

so ere eo 6 0-6k bE SRAM C EUW A CREEDENCE 16

teenie

TABLE OF AUTHORITIES —- Continued

Page

Santa Clara County v. Southern Pacific R.R., 116 U.S.

ot. | PePereeerr rrr rrrrr Te ere eee 12

Shapiro v. Thompson, 394 U.S. 618 (1969)............. 14

Sheeran v. Nationwide Mutual Ins. Co., 404 A.2d 625

ES, We on seh 5 ces cet eenense pd cackeetatveverwars 3

Slaughter-House Cases, 83 U.S. (16 Wall.) 36 (1873)..... 8

Snyder v. Massachusetts, 291 U.S. 97 (1934)........... 13

Southern Ry. v. North Carolina, 376 U.S. 93 (1964) ....17

Sunray Mid-Continent Oil Co. v. FPC, 364 U.S. 137

ig, SEPT CRE EC UEe CET Ce TUVSE TC TTT TTT ee eee eee 17

Textile Workers v. Darlington Co., 380 U.S. 263

CREE Go SKi vad s ous Kedne ver cucethuwes veers ccawaes 13

Turner v. Safley, 482 U.S. 78 (1987) ....... 6 cee eee ees 8

Twining v. New Jersey, 211 U.S. 78 (1908)............ 11

United States v. Guest, 383 U.S. 745 (1966)........... 8

United States v. Martin Linen Supply Co., 430 U.S.

oh: errr Ter rer Te re reer TT rT eee 12

United States v. White, 322 U.S. 694 (1944)........... 12

Whitney v. California, 274 U.S. 357 (1927) ............. 7

Wolff Co. v. Industrial Court, 262 U.S. 522 (1923)..... 16

Yee v. City of Escondido, 112 S. Ct. 1522 (1992)....16, 17

Zobel v. Williams, 457 U.S. 55 (1982)........ 8, 9, 10, 14

vi

TABLE OF AUTHORITIES — Continued

Page

MISCELLANOUS:

pO ae 14

W. Blackstone, COMMENTARIES ON THE LAws OF ENG-

cane, Ge. o Gis. Come, OG. TE7E) nc ccc ccvccecce 14, 15

Z. Chafee, THREE HUMAN RIGHTS IN THE CONSTITU-

Se ee ee ore es cea aac cheat econ ben 14

T. Dye, AMERICAN FEDERALISM: COMPETITION AMONG

Se I ts ee ee aek bones bobs 10

Easterbrook, Antitrust and the Economics of Federal-

ism, 26 J. of Law & Econ. 23 (1983)............... 10

Epstein, Exit Rights Under Federalism, 55 Law &

eS en ee 9

A. Hamilton, THe Feperauist, No. 28.................. 9

F. A. Hayek, The Economic Conditions of Interstate

Federalism, in INDIVIDUALISM AND ECONOMIC ORDER

Bateheg Oa Bp ay Rate a A, Al il Se pel toe Mi A 9

F. A. Hayek, THe ConstiTuTION oF LiBerTy (1960) ...... 9

A. Hirschman, Exit, Voice, AND Loya.tty (1970)........ g

D. Kenyon & J. Kincaid, eds., Competition AMONG

STATES AND LOCAL GOVERNMENTS: EFFICIENCY AND :

Equity IN AMERICAN FEDERALISM (1991).............. 10

A. Lincoln, SPEECHES AND Writincs 1859-1865,

SM Oe FUMEU FOOD chess eeu cwaseeasceecsens 15

McConnell, Federalism: Evaluating the Founders’

Design, 54 U. Chi. L. Rev. 1484 (1987).............. 9

D. Mueller, Pustic CHoice II (1989).................. 10

vil

TABLE OF AUTHORITIES - Continued

Page

Rapaczynski, From Sovereignty to Process: The Juris-

prudence of Federalism After Garcia, 1985 Sup. Ct.

| PPP PT ETEVELVTT TUTTE rT eee CEE 9

A. Smith, THE WEALTH oF Nations, Bk. I (Univ. of

Rm: FN UE. TIPO) nec erccienccisnnernaness 15

Stewart, Federalism and Rights, 19 Ga. L. Rev. 917

LP eee err ert eee ee eee ee ee ee eee 9

Tiebout, A Pure Theory of Local Expenditures, 64 J.

a eR | rr rT Tree 10

UNIVERSAL DECLARATION OF HUMAN Ricuts, Art. 13..... 11

eee ee

No. 92-728

¢

In The

Supreme Court of the United States

October Term, 1992

.

TWIN CITY FIRE INSURANCE CO., et al.,

Petitioners,

SAMUEL F. FORTUNATO, COMMISSIONER OF THE

NEW JERSEY DEPARTMENT OF INSURANCE,

Respondent.

S

On Petition For A

Writ Of Certiorari To The

Supreme Court Of New Jersey

¢

BRIEF OF INSTITUTE FOR JUSTICE, CITIZENS

FOR A SOUND ECONOMY, COMPETITIVE

ENTERPRISE INSTITUTE, HEARTLAND INSTITUTE,

AND PIONEER INSTITUTE IN SUPPORT

OF THE PETITION FOR CERTIORARI

e

INTERESTS OF AMICI CURIAE

The interests of the amici are set forth in the motion

for leave to file a brief amici curiae

¢

STATEMENT OF THE CASE

This case arises out of an attempt by the State of New

Jersey to prevent certain private businesses from leaving

the state, so it can force them to bear the costs of the

legislature’s regulatory mistakes. In 1983, the legislature

1

a 2

passed the “Automobile Full Insurance Availability Act,”

the provisions and results of which are described by the

state Supreme Court at Pet. App. A8-A10. The essential

premise of the legislation was that high risk drivers

should be provided insurance at rates equivalent to lower

risk drivers, notwithstanding their higher costs. This was

accomplished through establishment of the Joint Under-

writing Association (JUA), a governmental entity that

provide.’ insurance to high risk drivers. The JUA was

adminis!-:d by the private auto insurance carriers of the

State, which were assured that they “were to be insu-

lated” from any “claims and liabilities” that might arise

from the operations of the JUA. Pet. App. A9.

Since the premiums charged to high risk drivers

would be inadequate (because they were charged no

more than lower risk drivers), the “Reform Act” subsi-

dized the JUA through revenue from traffic violations

and drunk driving convictions and from surcharges on

ordinary auto insurance policies. Pet. App. A9. Even

these sources of revenue proved insufficient, and more

and more drivers were attracted into the JUA. By 1988,

over half of all New Jersey drivers were covered by the

JUA, and the supplemental revenues lagged far behind

the cost of providing subsidized insurance. Pet. App.

A10. By 1990 the JUA had amassed a deficit of over $3.3

billion in unpaid claims and other losses.

The legislature then attempted retroactively to shift a

large portion of this multi-billion dollar deficit onto the

insurance companies. In the so-called “Reform Act” of

1990, the legislature imposed assessments totalling $160

million per year on property-casualty insurers and an

additional 5% surtax on personal auto insurance pre-

miums, anticipated to raise $300 million per year. Pet.

App. A11-A12. Significantly, the insurance carriers were

forbidden to pass on the cost of either the assessment or

the surtax to their customers; these payments were to be

3

borne by the shareholders, most of whom are out-of-

staters.

The “Reform Act” also retroactively restricted tie

right of insurance companies to withdraw from the New

Jersey market, which is the issue in this case. Under prior

law, insurance companies had a protected right to cease

to do business in the State, provided they surrendered

their license. Sheeran v. Nationwide Mutual Ins. Co., 404

A.2d 625, 630 (N.J. 1979). Section 72 of the “Reform Act,”

however, forbade surrender of a license without advance

permission from respondent.

While the proposed “Reform Act” was under consid-

eration by the legislature, officials at petitioner, Twin City

Fire Insurance Company, calculated that it would sustain

underwriting losses of more than $46 million over the

ensuing three years if the Act passed. Pet. App. A6. It

therefore decided to withdraw entirely from the business

of automobile insurance in the State, and surrendered its

license on March 7, 1990. Five days later, the “Reform

Act” was signed into law. Pursuant to the retroactive

authority of Section 72, respondent sought and obtained

an injunction requiring the company to rescind its notices

of withdrawal and to submit a “plan for orderly with-

drawal” in conformity with the new Act.

Twin City proposed a plan of withdrawal, under

which it would withdraw from the market over a one-

year period by nonrenewal of policies, would guarantee

existing liabilities, and would submit to regulatory over-

sight in the interim period. Pet. App. A68. Respondent,

however, imposed some 14 additional “conditions,”

including conditions that effectively precluded with-

drawal. The most significant of these conditions were

e The five year condition. Respondent required

Twin City to continue to provide insurance

for all of its policyholders for five years

(unless it could place the business with other

insurers, which is not a viable possibility).

ee

+

e The new business condition. During this five

year period, respondent required Twin City

to take on additional business. The losses

during this five year period are projected to

total approximately $100 million.

e The other business condition. At the end of the

five year period, Twin City must forfeit its

licenses to issue other lines of insurance in

the State of New Jersey. This business total-

led more than $37 million in 1991. Business

licenses are recognized as property under

New Jersey law.'

e The forfeiture condition. At the end of five

years, the seven other separately incorpo-

rated insurance companies owned by Twin

City’s parent corporation, ITT Hartford, must

forfeit all their insurance licenses in the State

of New Jersey. This business totalled more

than $125 million in 1991.

Pet. App. A6-A7.

Twin City challenged respondent’s order in state

court, claiming - among other legal arguments — that the

decision violated its federal constitutional rights under

the Takings Clause and the Due Process Clause by put-

ting it to the choice of either forfeiting its constitutionally

protected liberty of ceasing to do business in the State or

suffering a taking of its property without just compensa-

tion.

The state Supreme Court upheld respondent's order.

The court rejected petitioner’s substantive due process

argument, finding that the requirement to continue in

business for five years against its will “is hardly an

onerous one” (Pet. App. A17) and that the requirement to

1 New Jersey Department of Environmental Protection v. Atlan-

tic States Cast Iron Pipe Co., 575 A.2d 457, 462 (N.J. Super. App.

Div. 1990); De Vitis v. New Jersey Racing Comm‘n, 495 A.2d 457,

462 (N.J. Super. App. Div.), cert. denied, 508 A.2d 213 (N.J. 1985).

5

take on additional business “is not only rational and fair

but virtually required by the Act.” Id. at A18. The court

reasoned that to permit “an insurer who enjoyed profita-

ble operations during the pre-Reform Act period” to

“abandon entirely the remedial burdens imposed by the

Act on all private-passenger insurers” would be “inequi-

table.” Id. The court upheld the license forfeiture provi-

sions expressly on the ground that this would

“discourage[] withdrawal”:

In such a period of regulatory turmoil and

uncertainty, nothing short of severe regulatory

measures imposed on private-passenger

insurers threatening to withdraw - in other

words, strong medicine - would be effective. If

the forfeiture condition discourages withdrawal,

a substantial State interest —- retention of private-

passenger insurers — will have been advanced.

Pet. App. A20.

The court similarly rejected the Takings Clause chal-

lenge to the forfeiture condition. The court did not deny

that petitioner’s business licenses and attendant goodwill

are a property right under state law. See Pet. App. A28

(“the property affected by the regulation is the value of

the Twin City affiliates’ New Jersey insurance business”).

The court suggested, however, that takings of “commer-

cial property interests,” unlike real property, generally

require no compensation. Id. at A26. Finding that there

was no “physical invasion” of petitioner’s intangible

property, the court balanced “the private interests

affected by the regulation against the public interests that

are advanced.” Id. at A27. In that connection, the court

reiterated its point that “the forfeiture condition was a

forceful but relevant regulatory measure imposed to

advance the substantial State interest in discouraging

Twin City’s withdrawal from the private-passenger mar-

ket.” Id. at A27. Thus, the Takings Clause analysis and the

Due Process Clause analysis come down to the same

6

point: may a State impose substantial financial penalties

on an individual or corporation to prevent it from ceasing

to do business in the State?

*

ARGUMENT

This case raises a constitutional question of extraor-

dinary importance to our structure of government and

market economy: May a state force a person or corpora-

tion to continue to do business within the state against its

will? Amici submit that the right to exit or withdraw from

doing business in a state is fundamental to our system of

federalism; that it is one of the fundamental principles of

liberty and justice which inhere in the very idea of free

government; that it is deeply rooted in the customs and

traditions of the Nation; and - alarmingly — that it is now

under assault by states that hope to evade the adverse

consequences of their own regulatory blunders by entrap-

ping nationwide companies and forcing them to bear the

costs. New Jersey’s “Reform Act” is a direct assault on

the exit right, justified by no governmental interest other

than to force the company to pay ransom.

The courts of four states have confronted this ques-

tion and have rendered conflicting decisions. The

Supreme Court of New Jersey in the decision under

review, plus the Supreme Judicial Court of Massachusetts

in Maryland Casualty Co. v. Commissioner of Insurance, 363

N.E.2d 1087 (Mass. 1977), upheld state efforts to prevent

insurance companies from withdrawing from their

respective states. The courts of North Carolina and New

York invalidated such efforts. Hartford Accident & Indem-

nity Co. v. Ingram, 226 $.E.2d 498 (N.C. 1976); Lewis v.

Safeco Insurance Co., 414 N.Y.S. 2d 823 (1978). The Califor-

nia Supreme Court upheld an insurance regulation

scheme on the premise that the companies were ade-

quately protected by their right to withdraw from the

7

State. CalFarm Insurance Co. v. Deukmejian, 771 P.2d 1247,

1262 (Cal. 1989). This case provides a clear and unam-

biguous opportunity for affirmation of the right of every

person to choose whether to do business within a state.

We are not asking this Court to become the arbiter of

the fairness or wisdom of economic legislation. This case

is not about economic fine-tuning: the right of exit in our

federalist system, like the separation of powers, is best

understood as a structural protection for liberty. The right

of exit is vital not just in itself, but as a check and

safeguard for every other right. If persons are free to

move from state to state, or to withdraw from particular

activities altogether in response to oppressive state legis-

lation, intrusive judicial review of such legislation will be

unnecessary; the right of exit will protect against oppres-

sion. See Aptheker v. Secretary of State, 378 U.S. 500, 520

(1964) (Douglas, J., concurring). But if there is no right of

exit - no right to withdraw one’s services in response to

oppressive state legislation — then the practical ability of

states to oppress their people will be vastly advanced,

and the demands for detailed judicial review correspon-

dingly increased. Berlin Walls are built for a purpose.

I. THE RIGHT OF EXIT IS A LIBERTY PROTECTED

UNDER THE DUE PROCESS CLAUSE

The right to choose whether to do business within a

particular state is not mentioned in so many words in the

text of the Constitution. But this Court has long recog-

nized that — in Justice Brandeis’s words —- “all fundamen-

tal rights comprised within the term liberty are protected

by the Federal Constitution from invasion by the States.”

Whitney v. California, 274 U.S. 357, 373 (1927) (concurring

opinion). Enumerated rights are not the only rights given

constitutional protection; other rights traditionally recog-

nized by our society are entitled to protection as well.

Planned Parenthood v. Casey, 112 S. Ct. 2791, 2804-06 (1992)

8

(plurality opinion); Michael H. v. Gerald D., 491 U.S. 110,

121-24 (1989); Turner v. Safley, 482 U.S. 78, 94-99 (1987);

Meyer v. Nebraska, 262 U.S. 390, 399-403 (1923). In particu-

lar, this Court has extended constitutional protection to

rights inherent in our structure of government, to rights

that are essential to a free society, and to rights deeply

rooted in our legal tradition. The right of each person

(including corporations) to choose whether to conduct a

particular business within a particular state satisfies each

of these criteria.

A. The Right of Exit Is Fundamental To Federal-

ism As A Structural Safeguard For Liberty

The right of all persons, including corporations,’ to

move from state to state and determine for themselves

whether to do business therein inheres in the federal

structure of our Constitution. Zobel v. Williams, 457 U.S.

55, 67 (1982) (plurality opinion) (deriving the “principle

of free interstate migration” from the logic of a “docu-

ment that transformed a loose confederation of states into

one nation”); United States v. Guest, 383 U.S. 745, 757-58

(1966); see also Slaughter-House Cases, 83 U.S. (16 Wall.)

36, 79 (1873) (listing interstate mobility as among the

“implied guarantees of [the] Constitution” that “owe

their existence to the Federal government, its National

character, its Constitution, or its laws”). The right of exit

imposes a natural, structural limitation on the ability of

states to oppress those within their jurisdiction. If a per-

son is free to exit, the state can impose burdens on that

person only up to the point that the burdens equal the

marginal benefit to the person of remaining in the state.

Beyond that point, he will leave. If the State can prohibit

2 There can be no doubt at this late date that corporations

are “persons” within the meaning of the Due Process Clause.

See page 12, infra.

9

exit, however, he is vulnerable to whatever burdens or

oppression the State may heap upon him. The right of

exit - the right to vote with one’s feet - is thus an

essential backstop to the democratic process as a safe-

guard against oppression. See Albert O. Hirschman, Exit,

Voice, AND Loyatty (1970); Richard B. Stewart, Federalism

and Rights, 19 Ga. L. Rev. 917, 923-27 (1985); Richard A.

Epstein, Exit Rights Under Federalism, 55 Law & Contemp.

P. 147 (1992).3

As this Court has noted, “the principal benefit of the

federalist system is a check on abuses of government

power.” Gregory v. Ashcroft, 111 S. Ct. 2395 (1991). From

the time of the Founding, it has been thought that “the

new federalist system would suppress completely ‘the

attempts of the government to establish a tyranny.’ ” Id.

at 2400, quoting THe Feperauist, No. 28, at 180-81 (A.

Hamilton). See Michael W. McConnell, Federalism: Eval-

uating the Founders’ Design, 54 U. Chi. L. Rev. 1484,

1503-04 (1987); Andrez Rapaczynski, From Sovereignty to

Process: The Jurisprudence of Federalism After Garcia, 1985

Sup. Ct. Rev. 341, 380-91. But, as noted in Gregory, this

depends on the existence of a “mobile citizenry.” Gregory,

111 S. Ct. at 2399; see also Zobel, 457 U.S. at 68 (Brennan,

J. concurring). If citizens cannot exit in response to

oppressive measures, federalism serves no rights-protec-

tive purpose. Decentralization without mobility leads

only to balkanization and petty fiefdoms. See F. A.

Hayek, The Economic Conditions of Interstate Federalism, in

INDIVIDUALISM AND Economic Orper (1948); F. A. Hayek,

THe ConstITUTION oF LiBeRTy 184-85 (1960).

3 Of course, exit rights are an incomplete protection against

oppressive state measures in that the cost of exit (whether

because of fixed investments, sentimental attachments, or lack

of financial resources or opportunities) may be so high that exit

is not a realistic option, and additional protections for liberty

are necessary. See Epstein, supra, at 150-54.

10

Moreover, the protection accorded by the right of exit

benefits not just the person who exits, but others who

remain — who are protected by the threat of exit. A gov-

ernment must be restrained in its treatment of those

within the jurisdiction if it knows that oppressive mea-

sures will cause withdrawal of individuals and busi-

nesses from the State. This acts as a powerful disincentive

to oppressive or exploitative policies. In fact, the eco-

nomic model of federalism shows that the existence of a

large number of jurisdictions, coupled with a mobile citi-

zenry, not only reduces the danger of government abuse

but affirmatively creates competition among the states for

more efficient and popular government. The classic expo-

sition of this, presented in the context of achieving effi-

cient levels of taxation and public spending, is Charles

Tiebout’s much-cited article, A Pure Theory of Local Expen-

ditures, 64 J. Pol. Econ. 416 (1956). More recent explora-

tions of this theme can be found in such works as Dennis

Mueller, Pusiic Cuoice II 154-63 (1989); Daphne A. Ken-

yon & John Kincaid, eds., COMPETITION AMONG STATES AND

LocaL GOVERNMENTS: EFFICIENCY AND Equity IN AMERICAN

FEDERALISM (1991); Thomas R. Dye, AMERICAN FEDERALISM:

ComPeETITION AMONG GOVERNMENTS (1990); Frank East-

erbrook, Antitrust and the Economics of Federalism, 26 J. of

Law & Econ. 23, 33-35 (1983). The genius of federalism is

that states and localities are forced to compete among

themselves by offering superior mixes of taxes and ser-

vices, and by avoiding abusive and unpopular measures.

Justice Brennan has described this competition as a

“healthy rivalry” that “inheres in the very idea of main-

taining the States as independent sovereigns within a

larger framework.” Zobel, 457 U.S. at 68 (concurring opin-

ion). But if citizens are not free to come and go, the

competitive mechanism does not work. Tiebout, supra, at

420-22; Mueller, supra, at 155. A state with the ability to

prohibit exit is like the holder of a monopoly over an

11

essential good: it can exploit its customers and has no

incentive to improve price, quality, or service.

The right of each person (including corporations) to

exit from a state in response to governmental abuse, or

for any other reason, is thus an essential aspect of our

federalist constitutional structure, and warrants strong

constitutional protection.

B. The Right To Choose Whether To Conduct A

Particular Business In A Particular State Is

Inherent In The Very Idea Of Free Government

The constitutional right at stake in this case is an

amalgam of two rights, each recognized as essential to

free governments and free economies. First is the right to

decide what business to engage in, or whether to engage

in business at all. To force a person to continue to ply a

trade against his will is a monstrous invasion of personal

liberty, akin to involuntary servitude, and justly con-

demned by free governments everywhere. Second is the

right to exit from a particular jurisdiction and go else-

where. This right has often been denied by oppressive

regimes, but never by a free government. It is no exag-

geration to say that it is impossible to conceive of a free

government or a free economy that does not recognize

and honor these rights. Palko v. Connecticut, 302 U.S. 319,

325 (1937). The right to exit is a clear example of “one of

those ‘fundamental principles of liberty and justice which

lie at the base of all our civil and political institutions,’

and, as such, is embodied in the concept ‘due process of

law.’ ” Grosjean v. American Press Co., 297 U.S. 233, 245

(1936), quoting Hebert v. Louisiana, 272 U.S. 312, 316

(1926), and Twining v. New Jersey, 211 U.S. 78, 99 (1908);

Corfield v. Coryell, 6 Fed. Cas. 546 (E.D. Pa. 1823) (includ-

ing within definition of “fundamental” rights those

“which belong, of right, to the citizens of all free govern-

ments”). See Universal Declaration of Human Rights, Art.

13.

12

The only reason these principles may not seem obvi-

ously applicable here is that petitioners are corporations

rather than individuals. If an individual insurance agent

(or butcher, or baker, or candlestick-maker) were told he

had to continue to do business in New Jersey, such an

order would be universally recognized as a violation of

fundamental freedoms. Corporations do not naturally

excite such sympathy. But this Court has held for over

100 years that corporations are “persons” within the

meaning of the Fourteenth Amendment, entitled to the

protections accorded the individual. First National Bank of

Boston v. Belotti, 435 U.S. 765, 780 n.15 (1978); Grosjean,

supra, 297 U.S. at 244; Santa Clara County v. Southern

Pacific R.R., 116 U.S. 394 (1886). Since no one would

question the existence and importance of this right in the

case of a natural person, it follows that it is protected in

the case of a corporation.

To be sure, the issue might be different if the interests

of the state were directly related to the corporate form of

the entity that is the target of the state’s order. See Austin

v. Michigan Chamber of Commerce, 110 S. Ct. 1391, 1397-98

(1990). But petitioners’ corporate form has no relevance

to the regulatory measures here. Similarly, the issue

might be different if the constitutional right in question

were “purely personal” (First National Bank of Boston,

supra, 435 U.S. at 778-79 n.14), such as the privilege

against self-incrimination (United States v. White, 322 U.S.

694, 698-701 (1944)). But there is nothing “personal”

about the freedom to do business (or not to do business)

in a particular state; indeed, the arguments for mobility

apply with full force to corporations. If corporations are

entitled to freedom of speech (First National Bank of Bos-

ton, supra; New York Times v. Sullivan, 376 U.S. 254 (1964)),

property (Kaiser Aetna v. United States, 444 U.S. 164

(1979)), protection against double jeopardy (United States

v. Martin Linen Supply Co., 430 U.S. 564 (1977)), pro-

cedural due process (Brock v. Roadway Express, 481 U.S.

13

252 (1987)), and protection against unreasonable searches

and seizures (G.M. Leasing Corp. v. United States, 429 US.

338, 353 (1977)), there is no reason in logic or history that

they should not be entitled to the freedom to choose

whether to engage in a particular business in a particular

state.

C. The Right Of Exit Is Deeply Rooted In The

Customs And Traditions Of This Nation, And

Has Been Recognized By This Court

The most widely accepted test for determining

whether an asserted liberty, not otherwise enumerated in

the text, is entitled to constitutional protection is whether

it is “an interest traditionally protected by our society.”

Michael H. v. Gerald D., 491 U.S. 110, 122 (1989); Moore v.

City of East Cleveland, 431 U.S. 494, 503 (1977); Snyder v.

Massachusetts, 291 U.S. 97, 105 (1934). Whether other free-

doms, less firmly rooted in the tradition, may also be

entitled to protection is a matter of dispute (see Michael

H., 491 U.S. at 137-41 (Brennan, J., dissenting)), but no

member of this Court in recent times has disputed that at

least the rights firmly rooted in this nation’s legal tradi-

tion are protected under the Due Process Clause.

The right to refuse to do business within a state

against one’s will is one of the clearest possible examples

of such a right. Not only do the rights to decide for

oneself what business or occupation to pursue and where

to pursue it have deep roots in the historical experience

of this nation; this right has been explicitly recognized by

this Court. If the right has not more frequently been the

subject of constitutional litigation, this is because the

right is so fundamental, so deeply rooted, that few states

have ever been so bold as to deny it. As this Court stated

in Textile Workers v. Darlington Co., 380 U.S. 263, 270

(1965), the “proposition that a single businessman cannot

14

choose to go out of business if he wants to would repre-

sent ... a startling innovation.”

William Blackstone’s COMMENTARIES ON THE LAWS OF

ENGLAND, the most cited and revered legal work among

the American founders, stated that the right “of changing

situation, or moving one’s person to whatsoever place

one’s Own inclination may direct” is a “right strictly

natural” that “the laws of England have never abridged

. .. without sufficient cause.” Id., Bk. 1, ch. 1, at *134 (G.

Chase, ed. 1878). To the Americans, the right was more

than theory: it was experience. The freedom to leave a

state in response to unwelcome or oppressive govern-

mental acts was literally the first freedom exercised by

our forebears as they fled religious persecution in Eng-

land and came to these shores.

The importance of this freedom to the American con-

stitutional tradition can be seen in its express inclusion in

two of our earliest charters of freedoms — the Rhode

Island Charter and the Massachusetts Body of Liberties.

See Zechariah Chafee, THREE HUMAN RIGHTs IN THE CONSTI-

TUTION OF 1787, at 177-78 (1956); see also Zobel, 457 U.S. at

79 n.9 (O’Connor, J., concurring). The Articles of Confed-

eration carried forth this tradition, recognizing a right of

“free ingress and regress to and from any other State.”

Art. of Confed., Art. IV. Significantly, the language of

Article IV of the Articles shows that this principle had

particular reference to “trade and commerce.” Id. The

principle of “free ingress and regress” remains a cher-

ished part of our constitutional liberty today. Shapiro v.

Thompson, 394 U.S. 618, 630-31 (1969); Zobel, supra. As the

nations of Western Europe move toward open borders for

economic activity, it would be ironic if the states of the

United States were permitted to undo our centuries-old

tradition of open internal borders and internal move-

ment.

The second aspect of the liberty at issue in this case -

the right to choose whether to engage in a particular

15

occupation or business - likewise has ancient roots in the

common law. Blackstone, supra, Bk. I, ch. 4, at *427 (“[a]t

common law, every man might use what trade he

pleased”); Adam Smith, THe WEALTH oF Nations, Bk. I, ch.

10, pt. 2, at 136 (Univ. of Chicago Press ed. 1976) (to

“hinder” a man “from employing [his] strength and dex-

terity in what manner he thinks proper, without injury to

his neighbor, is a plain violation of [his] most sacred

property”). But it attained particular salience within our

tradition through the experience of slavery and the “free

labor” tradition that opposed and eventually unseated it.

The concept of “liberty” in the Fourteenth Amendment,

born of the opposition to slavery, is infused with the

understanding that enforced service is antithetical to the

American ideal. Thus, Abraham Lincoln stressed that

each man has “a freedom to choose the mode of his work

and the manner of his employer.” Abraham Lincoln,

SPEECHES AND Writincs 1859-1865, at 84 (Library of Amer-

ica 1989) (speech at Cincinnati, Ohio, Sept. 17, 1859). Of

course, this (as with many aspects of liberty) has its

greatest intuitive force in the case of natural persons. But

as discussed above, the liberties of natural persons, with

the exception of those that are “purely personal,” have

been extended to corporations as well.

This Court, too, has long recognized the right to

withdraw from business as the ultimate protection

against abuse of governmental power. The state has the

authority to regulate, but it does not have the power to

force any person to continue to conduct business when he

believes the regulation has become intolerable. In Munn

v. Illinois, 94 U.S. 113 (1876), this Court's first occasion to

consider the effect of the newly ratified Fourteenth

Amendment on the power of the states to regulate the

rates and terms of business, the Court acknowledged a

broad power to regulate businesses clothed with a public

interest, but at the same time recognized the right of the

regulated party to withdraw:

16

When, therefore, one devotes his property to a

use in which the public has an interest, he, in

effect, grants to the public an interest in that

use, and must submit to be controlled by the

public for the common good, to the extent of the

interest he has thus created. He may withdraw his

grant by discontinuing the use; but, so long as he

maintains the use, he must submit to the con-

trol.

Id. at 126 (emphasis added). The Court applied this prin-

ciple to the business of insurance in Northwestern Life Ins.

Co. v. Riggs, 203 U.S. 243 (1906). In an opinion by the first

Justice Harlan, the Court held that the state has broad

power to regulate the insurance industry, but insisted: “If

a life insurance corporation does not approve such a

restriction upon the conduct of its affairs it is its privilege

to cease doing business.” Id. at 254-55.4

The Court recently reaffirmed this principle in Yee v.

City of Escondido, 112 S. Ct. 1522 (1992). Yee involved the

constitutionality of a rent control ordinance on mobile

home sites, coupled with a law granting tenants the right

to remain indefinitely and to assign their tenancy to

others. The Court upheld the ordinance, but expressly

noted that “[a]t least on the face of the regulatory scheme,

* Other cases reiterating the right to exit include

Brooks-Scanlon Co. v. Railroad Comm’‘n , 251 U.S. 396 (1920); Rail-

road Comm'n v. Eastern Texas R.R., 264 U.S. 64 (1924); and Wolff

Co. v. Industrial Court, 262 U.S. 522, 540-41 (1923). It would be a

mistake to suppose that these decisions were nothing more than

aspects of the discredited substantive due process theories of

the Lochner era. Some of the opinions were written by the dis-

senters in Lochner (Justice Holmes wrote Brooks-Scanlon and the

first Justice Harlan wrote Northwestern Life.). Indeed, the exit

right was typically invoked as part of the justification for

upholding economic regulation. For discussion of the current

vitality of the doctrine in the railroad context, see Gibbons v.

United States, 660 F.2d 1227, 1233-34 (7th Cir. 1981).

17

neither the City nor the State compels petitioners, once

they have rented their property to tenants, to continue

doing so.” Id. at 1528. This was based on the fact that the

landlord was permitted to evict his tenants if he wished

to change the use of his property. Thus, the fundamental

right to exit the business altogether was preserved. The

Court stated that “[a] different case would be presented

were the statute, on its face or as applied, to compel a

landowner over objection to rent his property or to

refrain in perpetuity from terminating a tenancy.” Id. at

1529. It is important to stress that in both Munn and Yee,

as well as the intervening cases, the business owner’s

constitutional rights were not limited to the right to

obtain just and reasonable rates. In addition, the owners

enjoyed the privilege of abandoning the business, if they

so chose. See also FCC v. Florida Power Corp., 480 U.S. 245,

251-52 n.6 (1987); Fresh Pond Shopping Center v. Callahan,

464 U.S. 875 (1983) (Rehnquist, J., dissenting).

A limited exception to this principle has been recog-

nized in the case of public utilities providing a service to

the public under a certificate of public convenience and

necessity. In such circumstances, the government has a

recognized authority to forbx ~dandonment of the ser-

vice to the public, at least wheve the enterprise as a whole

is guaranteed a fair rate of return. Fort Smith Light &

Traction Co. v. Bourland. 257 U.S. 330 (1925); Sunray Mid-

Continent Oil Co. v. FPPC, 364 U.S. 137 (1960); Southern Ry.

v. North Carolina, 376 U.S. 93 (1964). But in these cases, the

obligation to continue in service was “voluntarily

assumed” (Bourland, 267 U.S. at 332) in exchange for

particular privileges, usually including protection from

competition. The public confers monopoly privileges on a

firm in order to secure universal and reliable service at

average cost, and is entitled to the benefit of its bargain.

New Jersey has conferred no monopoly privileges on

petitioner, and petitioner did not “voluntarily assume”

any obligation to remain.

18

Il. THE CONSTITUTIONAL RIGHT OF EXIT IS

PLAINLY IMPLICATED BY THE ORDER UNDER

REVIEW

There can be no question that the constitutional right

to exit is burdened by the order under review in this case.

The five year condition explicitly precludes exit for a

lengthy period of time (estimated to cause losses of $100

million), and the forfeiture conditions effectively make

the restriction on exit perpetual. In effect, the State pro-

poses to punish Twin City and its affiliated companies by

a loss of over $160 million in annual revenues if the

company withdraws from the automobile insurance mar-

ket. The New Jersey Supreme Court admitted that the

“economic impact is potentially quite severe” (Pet. App.

A30), but averred that “strong medicine” was necessary

in order to “discourage withdrawal.” Id. at A20. If a state

may impose so substantial a penalty for no purpose other

than to discourage the exercise of the right, the constitu-

tional right of exit is meaningless.

The only interest the State has in preventing exit is to

coerce the shareholders of automobile insurance com-

panies into shouldering financial obligations that were

caused by the regulatory ineptitude of the state legisla-

ture.> These costs, like any other costs of maintaining

> There is no plausible argument in this case that the exit

restraint is needed either to ensure that the companies will

continue to fulfill their contractual obligations incurred in past

years or to prevent disruption in insurance markets. Petitioners’

“plan for orderly withdrawal” provided for the payment of

claims on past policies, and respondent has not questioned the

adequacy of the plan in that respect. As to preventing disrup-

tion, the four conditions under challenge actually exacerbate

any dislocation that might be caused by petitioners’ withdrawal

from the market. The new business condition means that more

New Jersey drivers will be forced to seek alternative insurers at

|

19

state government, “in all fairness and justice, should be

borne by the public as a whole” (Armstrong v. United

States, 364 U.S. 40, 49 (1960)) - not by selected targets of

convenience. It is not irrelevant to the political logic of

the state’s scheme that the burdens must be passed on to

shareholders and customers in other states, and may not

be reflected in the rates charged to New Jersey poli-

cyholders. The right of exit is especially important to

those who are not represented in the legislature. There is

scant constitutional limit on the level of taxation the state

may impose on this business, but it is unconstitutional for

the state to take away the one remaining right of self-

preservation: the right to get out and go elsewhere, with-

out punishment or penalty.

If states are free to impose oppressive levels of taxa-

tion and regulatory burdens on persons and corporations,

and then to impose “severe” penalties on them for

departing, there is nothing left of one of the most founda-

tional of our constitutional rights. If the decision below is

allowed to stand, state legislatures and state courts will

surely seize the opportunity to exploit nationwide busi-

nesses by blocking exit, and one of the key structural

features of our constitutional order will be imperiled.

Review by this Court is necessary to define and enforce

the constitutional right of every person to refuse to do

business in a state against his will.

4

the end of the five year period; and the other business and

forfeiture conditions needlessly disrupt other lines of insurance

for no reason other than to punish the exercise of the right to

exit.

20

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted,

WiLuiAM H. ME ttor III*

CLINT BOoLick

Dirk G. ROGGEVEEN

Scott G. BuLLock

Institute for Justice

1001 Pennsylvania Ave., N.W.

Suite 200 South

Washington, D.C. 20004

(202) 457-4240

Attorneys for Amici Curiae

in Support of Petitioners

* Counsel of Record

Date: December 28, 1992