If you ever needed proof that corporate cronyism is a timeless practice, here’s a story for you. In the early 1870s, North Carolina law capped the interest rate on bank loans at 8% per year. A newly formed bank tried to get around that cap through an amendment slipped into a bill at the General Assembly. The amendment authorized the bank to “lend money upon such terms and rates of interest as may be agreed upon.” The bank then offered loans with interest rates higher than everyone else.
A lawsuit followed and the North Carolina Supreme Court, in an 1874 case called Simonton v. Lanier, ruled that giving the bank this kind of special treatment was unconstitutional. The Supreme Court relied on several clauses in the North Carolina Constitution that protect free enterprise. This collection of rights, which has grown over time, is not found in any other constitution in the nation.
These clauses trace the struggles our citizenry faced with cronyism, political patronage, and restraints on economic liberty. The framers of our original 1776 constitution, for example, suffered under the crushing effects of the English mercantile system, where the Crown awarded favored businesses with the exclusive right to sell certain goods. In response, our state’s first constitution barred the government from offering businesses any exclusive rights or privileges except “in consideration of public services.” Another provision declared that state-sponsored monopolies “are contrary to the genius of a free state, and ought not to be allowed.”
Later, during Reconstruction, the framers added another provision guaranteeing people the right to “enjoyment of the fruits of their own labor.” At the time, the framers feared that, despite new civil liberties guaranteed by the state and federal constitutions, freed slaves still might suffer from economic oppression. The “fruits of their labor” language was aimed at preventing established businesses from using political influence to keep out new competition in the marketplace.
Finally, in the 1930s, in the face of the New Deal and the rise of the administrative state, the framers added a provision guaranteeing “just and equitable” taxes. Recognizing that new forms of taxation surely would result from soaring state spending, this provision sought to prohibit mischievous tax schemes that had purposes other than raising revenue.
Early court cases involving these constitutional guarantees aggressively struck down state restraints on economic liberty—for example, special privileges for government workers, burdensome occupational licensing, and laws that protected established businesses from new competition. But then things changed and courts began gutting these unique constitutional protections. Today, they are all largely toothless.
So, what happened? For the past several years, I’ve traced the history of these clauses for a forthcoming academic paper in the Elon University Law Review. In the paper, I offer an answer: hard cases and faint-hearted judges.
One by one, each protection met a contentious case where a successful lawsuit would have angered powerful interest groups. For the “fruits of their labor” clause, for example, it was a suit that would have permitted ordinary people to sell homes without being a licensed realtor. For the monopolies clause, it was a challenge to the state-sponsored monopolies for local car dealers. Confronted with the fallout of an impactful ruling, judges ignored the earlier case law and considered only whether the challenged regulations were rational.
The problem with this approach is that the U.S. Constitution already offers the same weak protection against irrational economic regulation. So by adopting this familiar “rationality” test, judges took unique parts of our state constitution and transformed them into feeble redundancies.
The good news is there’s still hope. My paper offers a lengthy set of solutions for academics and legal commentators: educate the public about our state constitution; produce more scholarly works on the subject to aid busy lawyers; and encourage judges to develop independent doctrine for their unique state constitutional language.
But there is also the challenge of ensuring judges defend these constitutional rights, especially in difficult, controversial cases. There are many constituencies known for supporting candidates for judicial office—the plaintiffs’ bar, advocates for big government, proponents of “law and order,” and countless other special interest groups. In our polarized process for electing judges, potential candidates with a passion for economic liberty often are pushed aside in favor of those with backing from these established factions.
It’s not too late to save our state’s unique free enterprise protections from a future as meaningless surplusage. But the clock is ticking. We need to inspire judges to understand the courts’ role in defending economic liberty and encourage the public to care about those who do
Richard Dietz is a judge on the North Carolina Court of Appeals.