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Federal court blocks law requiring licensure for online auctioneers as improper restriction on commerce

A federal judge in Tennessee, in a July 23 ruling, issued a preliminary injunction blocking new legislation which would extend licensure requirements to auctioneers making a sufficient amount of money through open-ended internet auctions.

(McLemore v. Gumucio).

The court held that the state’s attempt to regulate such remotely-controlled activity was an improper restriction on interstate commerce.

While professional auctioneers in Tennessee require licenses, state law creates an exemption for eBay-type sites that do “not constitute a simulcast of a live auction.”

In 2019, the state legislature passed a bill that would exclude from the exemption Internet auctions where additional bidding activity extends the time of the auction, thus making the event more like a traditional auction, although certain auctions, such as those conducted by governmental or charitable entities, or auctions conducted by individuals that receive less than $25,000 per year from online auctions, were still exempted from licensure requirements.

In response, the plaintiffs in this case—two auction companies which conduct online extended-time auctions that generate more than the $25,000 yearly limit and employ non-licensed people to conduct these auctions, plus an advocacy organization created in response to the proposed bill by the owner of one of two plaintiff companies—brought suit against the state to challenge the amendment.

Among other things, they claimed that the proposed amendment would improperly burden interstate commerce.

Judge Eli Richardson of the United States District Court for the Middle District of Tennessee agreed with the plaintiffs, issuing a ruling granting a preliminary injunction against enforcement of the new rules.

In claiming that the new law improperly regulates interstate commerce in violation of the U.S. Constitution, the plaintiffs argued that, because the law would apply to any online auction in which a resident of Tennessee could participate, the new amendment would attempt to improperly regulate commercial activity outside of the state. Judge Richardson agreed.

The judge rejected the state’s argument that the new law applied only to auctioneers physically present in Tennessee, noting that the statute’s language contained no geographical limitation on its enforcement, and thus the new law would impose restrictions on any auction in which a person in Tennessee may bid.

Because internet auctions have, essentially, unlimited geographic reach, the law would thus apply to any online auction originating from anywhere in the world, amounting to an improper restriction on commercial activity between people located in different states.

“Wittingly or unwittingly, Tennessee has projected its legislation into other states and directly regulated Commerce therein,” wrote Judge Richardson. “Perhaps the State could change the result via statutory amendments inserting express, specific geographical limitations, but it cannot change the results by insisting that the statute obviously contains geographic limitations that in fact manifestly are not there.”

In addition, Judge Richardson held that the burdens such a law would place on out-of-state auctioneers far outweighed any benefits that would accrue from its enforcement, as every person conducting an online auction who met the $25,000 yearly threshold would have to acquire Tennessee licensure and maintain an escrow account in the state.

Referencing the results of a task force set up by the state legislature to investigate the need for such a law, Judge Richardson noted that consumers filed only three complaints in the three years studied by the task force regarding extended-time online auctions.

The judge also noted the many exemptions to the new law, which he said undercut the state’s argument that the new restriction was needed to protect the public.

“As a whole,” he wrote, “these facts suggest that the State’s purported concerns in fact are illusory, thus severely undercutting the State’s position.”

“. . . There is considerable support for Plaintiffs’ contention that the actual purpose of the regulation is likely not consumer protection, and thus the Court does not find that the State has a strong local interest in implementing the statute.”

After concluding that damages to the plaintiff auction companies from implementation of the statute would be irreparable, the court issued the injunction sought by the plaintiffs.