Jersey City Restriction on Chain Stores and Restaurants Could be Unconstitutional

Jersey City, New Jersey’s second largest city, recently passed an ordinance that restricts “formula businesses” in certain neighborhoods. The ordinance defines a “formula business” as one which is “contractually obligated” to maintain certain “standardized characteristics” such as merchandise, menu items, design, signage, and trademarks. In other words, Jersey City is seeking to limit chain restaurants and stores from opening in certain city neighborhoods.

Steve Fulop, Jersey City’s Mayor and proponent of the ordinance, was quoted in news reports about the ordinance as saying “[w]e don’t want every retail space to become a Gap, TGI Fridays or a Starbucks”, and “[l]ook at New York, it’s just Starbucks after Duane Reade after Chipotle after (TGI Fridays).” Without the ordinance, according to the Mayor, Jersey City would be “an environment that doesn’t necessarily foster the creative class and foster an interesting place for people to want to live in.” A challenge to this ordinance would not be surprising – it is the first of its kind in New Jersey, according to the New Jersey Chamber of Commerce, which opposed the ordinance.

The caselaw in this area is limited, but at least one federal appellate court has held a similar ordinance unconstitutional. In 2002, Islamorada, a village in the Florida Keys, enacted an ordinance that restricted “formula restaurants” and “formula retail” establishments, much like the Jersey City ordinance does. An Islamorada business owner entered into a contract to sell his property to a developer that planned to build a Walgreens drug store. The town planning board rejected the developer’s application for land use permits, a decision affirmed by the Village Council.

The seller of the property sued the town. The constitutional question was whether the ordinance favored local business at the expense of national chain stores, in violation of the Dormant Commerce Clause. The federal district court in Miami found that the ordinance had the “practical effect” of discriminating “between local and national business,” even though the ordinance was, on its face, neutral. Island Silver & Spice, Inc. v. Islamorada, 475 F. Supp. 2d 1281, 1291 (S.D. Fla. 2007). The court held that while “preserving a small town community is a legitimate purpose,” the Village had not “demonstrated that it has any small town character to preserve.” Instead, the court continued, “the ordinance appears tailored to serve local business interests by preventing competition from national chains.” And it noted specifically that “[a] member of the Village Council admitted that the ordinance was inspired by the Council’s desire for ‘none of them darn chain stores’ to come to town.” The ordinance was declared unconstitutional, and that decision was affirmed by the Eleventh Circuit. Island Silver & Spice, Inc. v. Islamorada, 542 F.3d 844 (11th Cir. 2008).

If a federal court in New Jersey were inclined to follow the precedent from Florida, Jersey City’s ordinance could likewise be held unconstitutional. Like the Village Council members in Islamorada, Jersey City’s Mayor was candid in his public statements that one goal of the ordinance was to limit chain stores from coming to his city. While preserving a certain “feel” or “character” of a municipality may be a valid public purpose, economic protectionism for local businesses is not. The constitutionality of Jersey City’s ordinance might therefore turn on whether (a) the City Council developed an adequate record as to the non-discriminatory goal it sought to achieve (notwithstanding the Mayor’s public statements), and (b) adequate, non-discriminatory alternatives were considered and deemed unavailable.

As the Jersey City ordinance is the first of its kind in the state, and given Jersey City’s prominent role in the state’s economy, a constitutional challenge from a prospective formula establishment operator could be on the horizon.

Kevin W. Weber is an Associate in the Gibbons Business & Commercial Litigation Department. This blog also appeared on the Gibbons Business Litigation Alert on September 24, 2015.
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