California Appeals Court Upholds Formula Business Law

Date: 1 Nov 2003 | posted in: Retail | 0 Facebooktwitterredditmail

A California Appeals Court has upheld a local ordinance restricting the proliferation of formula retail businesses in Coronado, a city of 24,000 people near San Diego. The court ruled that the ordinance does not violate the US Constitution’s commerce and equal protection clauses, and is a valid use of municipal authority under California state law.

The ordinance, enacted in December 2000, requires anyone seeking to open a formula retail business to obtain a special permit. Approval hinges on demonstrating that the store will be compatible with surrounding uses, will be designed and operated in a manner that preserves the community’s character and ambiance, and will contribute to an “appropriate balance of local, regional, or national-based businesses.” The ordinance further requires that formula retail stores be limited to no more than 50 linear feet of street frontage and no more than two stories.

The law defines formula retail businesses as those “required by contractual or other arrangement to maintain any of the following: standardized (‘formula’) array of services and/or merchandise, trademark, logo, service mark, symbol, decor, architecture, layout, uniform, or similar standardized feature.”

A group of property owners challenged the law several months after it was enacted. The ordinance was upheld at the superior court level and then again on appeal.

Most of the appeals court ruling deals with the property owners’ primary contention, which is that the ordinance discriminates against out-of-state companies. The court found that the law does not in fact “impose different regulations on interstate as opposed to intrastate businesses, nor does it distinguish between those businesses that are locally owned and those that are owned by out-of-state interests.” The court notes the law focuses on whether the store is contractually required to have standardized features, regardless of whether it is part of a national chain or owned by a California resident.

The court further ruled that the law does not have a discriminatory purpose. The ordinance’s lengthy preamble states that the city seeks to maintain a vibrant and diverse commercial district, and that the unregulated proliferation of formula businesses would frustrate this goal and lessen the commercial district’s appeal. The court concludes that this is a legitimate purpose, noting that “the objective of promoting a diversity of retail activity to prevent the city’s business district from being taken over exclusively by generic chain stores is not a discriminatory purpose under the commerce clause.”

The court also dismissed the equal protection and state law challenges, stating that the ordinance is rationally related to a legitimate public purpose.

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Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance and directs its Independent Business Initiative, which produces research and designs policy to counter concentrated corporate power and strengthen local economies.