Is There an Economic Fix to Masterpiece Cakeshop?

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By Kimberly Strawbridge Robinson

Anti-discrimination laws aren’t needed to ensure that same-sex couples are served by the marketplace, Richard Epstein, a professor at New York University School of Law, New York, told Bloomberg Law.

Epstein is one of several law and economics scholars who weighed in on the side of a Colorado cake baker who refused to design a cake for a wedding for a same-sex couple in Masterpiece Cakeshop Ltd. v. Colo. Civil Rights Comm’n.

The case—which focuses on the baker’s claims that laws requiring him to make a cake for a wedding for a same-sex couple would violate his right to free expression—is scheduled for argument at the U.S. Supreme Court Dec. 5.

The law and economics scholars who side with the baker say that not only will the free market take care of most discrimination, but anti-discrimination laws are actually harmful to society as a whole.

But a group of behavioral economists disagree that the market alone can solve discrimination.

As proof, they point to the Jim Crow South, where market forces didn’t overcome private racial discrimination.

The law and economic scholars’ theory is “factually inconsistent with the historical record of race discrimination in this country,” Adam Hofmann, of Hanson Bridgett LLP, San Francisco, told Bloomberg Law. Hofmann authored the behavioral scientists’ brief.

There’s “no principled reason to distinguish between the expected economic impacts of discrimination based on sexual orientation and the impacts of racial discrimination,” the behavioral economists argue in that brief.

Economic Effects

The story started in 2012, when Jack Phillips refused for religious reasons to bake a cake to celebrate the marriage of two men, Charlie Craig and David Mullins.

The Colorado Civil Rights Commission said Phillips’s refusal violated the state’s anti-discrimination laws and required Phillips to take remedial measures and file quarterly compliance reports.

In upholding that decision, a Colorado state court briefly noted that such discrimination has “measurable adverse economic effects,” and that anti-discrimination laws ensure “that the goods and services provided by public accommodations are available to all of the state’s citizens.”

Unsatisfied Services

The state court’s “bald conclusions” are not only presented without reliable support, but are also just plain wrong, the law and economics scholars said.

Market forces—not anti-discrimination laws—will encourage all but a “tiny sliver of the market” to serve same-sex couples, they said.

Merchants who don’t serve those customers “bear the cost of lost sales, not only from those with whom the provider refuses to deal but also from the many individuals and firms who may disagree with that provider’s stance. For instance, merchants who have declined to provide services for same-sex weddings have faced social media-led boycotts and a flood of negative reviews on sites such as Yelp,” the law and economic scholars said.

That’s why no one has been able to point “to a single instance in which someone in need of wedding services goes unsatisfied,” Epstein told Bloomberg Law.

Wedding services “are as easily available in Texas, which has no” anti-discrimination law protecting gays and lesbians, “as in Colorado, which does,” the law and economics scholars said.

Market Distortions

Moreover, anti-discrimination laws actually hurt societal welfare, the law and economics scholars argued.

The enforcement of the state anti-discrimination “law against these isolated and out-numbered religious believers will diminish social welfare in two ways,” they said. “Enforcement will either” force “the exit of a class of market participants” or will “force unwilling associations.”

In the former situation, the exit of market participants “reduces social welfare by removing from the market merchants that some consumers may prefer (with or without regard to the merchant’s religious views),” the law and economics scholars said. “A smaller marketplace is necessarily less diverse and less competitive than a larger market with a diverse set of providers.”

In the latter, “market distortion results in poorly matched providers and consumers,” they said.

This matching takes place for the mutual benefit of both the merchant and the customer, Epstein told Bloomberg Law. Merchants “decide to cater to the particular tastes of their chosen customer base,” the law and economics scholars said. Additionally, consumers “are free to choose the merchants who best suit their preferences.”

Real World

But Hofmann said the law and economic scholars’ "argument attempts to pave over the personal, individual impacts of discrimination with the claim that society as a whole enjoys some kind of aggregate benefit when people are allowed to discriminate.”

Moreover, the assumptions underlying their conclusions are themselves wrong, the behavioral economists said in their brief. The law and economics scholars’ brief offers up a “faux scientific basis for permitting businesses to discriminate against customers who would otherwise be protected by state laws,” Hofmann said.

They assume that “people make decisions based strictly on rational considerations, maximizing their self-interest,” the behavioral economists said.

The law and economic scholars “contend, for example, that the ‘ordinary give and-take of the market’ and business owners’ 'self-interest’ in maximizing their profits will eventually overcome systemic prejudice in the market,” they said.

It’s a “dangerous argument because the idea of free-market efficiency as an infallible cure-all has a kind of natural, superficial appeal and currency; it has been repeated so many times it has become a kind of truism,” Hofmann said.

“But more recent work in ‘behavioral economics'—which stands at the intersection of traditional economics and other social sciences, especially psychology—reveals the ways in which rational decision-making is not the norm,” the behavioral economists said.

“Rather, decisions in the real world are often impacted by cognitive limitations, biases, and mental shortcuts,” they said.

Highly Competitive

As support, the behavioral economists look to the Jim Crow South. There, “the free market did not ‘self-correct’ or produce a welfare-maximizing outcome,” they said.

The market wasn’t “free” during that time, the law and economics scholars countered in their brief. Instead, there was “pervasive private discrimination” that distorted the market, they said. Federal anti-discrimination laws were needed to break up this monopoly, they said.

But there is no such monopoly in the baking industry, the law and economics scholars said.

“The retail bakery industry is highly fragmented and highly competitive. In 2016, there were 6,756 retail bakeries (some with multiple locations) in the U.S. with $5.16 billion in collective sales,” they said. “These retail bakeries tend to be small businesses; the average sales per retail bakery was $764,491.”

Accordingly, the market readily serves same-sex couples, the law and economics scholars argue. As proof, Epstein noted that wedding sites catering to same-sex couples are in abundance.

‘Green Book’

But “such lists are popular precisely because they help gay individuals and couples avoid humiliation or worse in the face of pervasive homophobia,” the behavioral economists countered.

The lists are “similar to the ‘Green Book’ used by African-American travelers for almost three decades beginning in 1936 to help them select hotels, restaurants, and other businesses” that were friendly to black customers “in the face of rampant racial discrimination and Jim Crow laws,” they said.

The guide became irrelevant only when Congress passed the Civil Rights Act of 1964, an anti-discrimination law similar to Colorado’s, the behavioral economists said.

Out of Hand?

In the end, though, the justices are unlikely to resolve this case via economic arguments, Eric J. Segall, of the Georgia State University College of Law, Atlanta told Bloomberg BNA. Segall is a frequent commentator on the Supreme Court, and wrote the book “Supreme Myths: Why the Supreme Court is not a Court and its Justices are not Judges.”

The law and economics scholars’ position would call into question all anti-discrimination laws, including those following the abolition of slavery, Segall said. Even the justices most skeptical of government intervention are unlikely to want to return to a pro-slavery era, he said.

Given their limited usefulness, the briefs tend to show that the whole business of filing amicus briefs in high-profile Supreme Court cases has “gotten out of hand,” Segall said.

Indeed, these amicus briefs are just two of about a hundred amicus briefs filed in the case, he said.

To contact the reporter on this story: Kimberly Strawbridge Robinson in Washington at krobinson@bloomberglaw.com

To contact the editor responsible for this story: Jessie Kokrda Kamens at jkamens@bloomberglaw.com

For More Information

The law and economics scholars' brief is available at http://src.bna.com/uvS.

The behavioral economists' brief is available at http://src.bna.com/uvT.

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