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Rosenblatt v. City of Santa Monica

United States Court of Appeals, Ninth Circuit

October 3, 2019

Arlene Rosenblatt, an individual, on behalf of herself and all others similarly situated, Plaintiff-Appellant,
v.
City of Santa Monica, a municipal corporation; The City Council of the City of Santa Monica, a governing body, Defendants-Appellees.

          Argued and Submitted October 12, 2018 Pasadena, California

          Appeal from the United States District Court for the Central District of California, No. 2:16-cv-04481-ODW-AGR Otis D. Wright II, District Judge, Presiding

          Robert L. Esensten (argued) and Jordan S. Esensten, Esensten Law, Los Angeles, California, for Plaintiff-Appellant.

          Yibin Shen (argued), Chief Deputy City Attorney; Heidi Von Tongeln and Michael R. Cobden, Deputy City Attorneys; Lane Dilg, City Attorney; Santa Monica City Attorney's Office, Santa Monica, California; for Defendants-Appellees.

          Before: Mary M. Schroeder and Jacqueline H. Nguyen, Circuit Judges, and Michael H. Simon, [*] District Judge.

         SUMMARY [**]

         Civil Rights

         The panel affirmed the district court's dismissal of a putative class action against the City of Santa Monica and Santa Monica City Council alleging that the City's short-term vacation rental ordinance violates the dormant Commerce Clause.

         Santa Monica's ordinance prohibits property rentals of 30 days or less with an exception for rentals where a primary resident remains in the dwelling. Plaintiff is a Santa Monica resident and homeowner who, prior to the passage of the ordinance, rented out her house on Airbnb.

         The panel first held that the ordinance is not a per se violation of the dormant Commerce Clause because it does not directly regulate interstate commerce. At most, the ordinance has an interstate effect because it makes travel lodging to Santa Monica less accessible, available and affordable. Moreover, the ordinance penalizes only conduct in Santa Monica, regardless of whether the visitors are in-state or out-of-state. The panel rejected plaintiff's argument that the ordinance violates the dormant Commerce Clause by directly regulating booking and payment transactions that may occur entirely out-of-state. The panel held that the ordinance applies evenhandedly and does not directly restrain interstate commerce although it may regulate transactions with an interstate component. The panel further held that nothing in the ordinance suggested that its advertising ban was intended to have extraterritorial application.

         The panel held that the ordinance does not discriminate against interstate commerce by favoring in-state over out-of-state interests. The panel determined that Santa Monica's ban on vacation rentals applies in the same manner to persons nationwide, including Santa Monica residents who may be interested in renting a vacation home from another resident. The panel further noted that the ordinance applies equally to renters and property owners from outside California, California residents outside of Santa Monica, and Santa Monica residents. The panel held that the complaint did not adequately allege that the ordinance increases the relative market share of local businesses or that it has a net negative effect on commerce outside of California. Finally, the panel held that the complaint failed to plausibly allege that the home-sharing exception obviously advantages Santa Monica residents at the expense of out-of-state homeowners.

         The panel held that the complaint failed to plausibly allege that the ordinance unduly burdens interstate commerce through its incidental effects. Because plaintiff failed to show a high burden on interstate commerce - and, at most, suggested some negligible burden on the local economy of Santa Monica - the complaint could not meet the standard established in Pike v. Bruce Church, Inc., 397 U.S. 137 (1970). Thus, the complaint's allegations did not adequately demonstrate how the alleged burden on interstate commerce would clearly exceed the stated benefits of the ordinance.

          OPINION

          NGUYEN, CIRCUIT JUDGE

         This case involves the perennial clash between a city's exercise of traditional police powers in regulating land use and the rights of property owners to use their property as they see fit. But this familiar problem has a not-so-familiar backdrop: online marketplaces-such as Airbnb and HomeAway-where travelers can rent privately-owned residential properties as vacation rentals.

         Santa Monica resident Arlene Rosenblatt used to rent out her house on Airbnb when she and her husband went on vacation. Santa Monica passed an ordinance prohibiting property rentals of 30 days or less ("vacation rentals") with an exception for rentals where a primary resident remained in the dwelling ("home sharing"). Rosenblatt brought a putative class action against the city of Santa Monica and Santa Monica's City Council (collectively, Santa Monica), arguing that the ordinance violated the dormant Commerce Clause. Rosenblatt contended that the ordinance directly and indirectly regulated and burdened interstate commerce.

         The district court dismissed the amended complaint without leave to amend, concluding that Rosenblatt failed to allege a Commerce Clause violation as a matter of law. We have jurisdiction under 28 U.S.C. § 1291. Reviewing de novo, see Chinatown Neighborhood Ass'n v. Harris, 794 F.3d 1136, 1141 (9th Cir. 2015), we affirm.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         Santa Monica has implicitly prohibited short-term property rentals in residential zones since at least 1988.[1] In 2015, Santa Monica explicitly codified this zoning prohibition on vacation rentals in an ordinance. See Santa Monica Ordinance 2484 (May 12, 2015) (codified as amended at Santa Monica Mun. Code §§ 6.20.010- 6.20.100).[2] The ordinance created an exception for home sharing to allow residents to "host visitors in their homes, for compensation . . ., while at least one of the dwelling unit's primary residents lives on-site, in the dwelling unit, throughout the visitors' stay." Santa Monica Mun. Code § 6.20.010(a).

         The ordinance defines vacation rentals to cover situations where the unit owner or lessee rents out the property for "exclusive transient use," meaning that "none of the dwelling unit's primary residents lives on-site . . . throughout any visitor's stay." Id. § 6.20.010(f). Violations of the vacation rental ordinance are punishable by a fine not exceeding $500 and up to six months in jail. Id. § 6.20.100(a).

         In enacting this ordinance, the Santa Monica City Council sought to preserve the city's "available housing stock and the character and charm which result, in part, from cultural, ethnic, and economic diversity of its resident population," and "its unique sense of community which derives, in large part, from residents' active participation in civic affairs, including local government, cultural events, and educational endeavors." Santa Monica Ordinance 2484, pmbl. The city council stressed that "vacation rentals . . . are detrimental to the community's welfare and are prohibited by local law, because occupants of such vacation rentals, when not hosted, do not have any connections to the Santa Monica community and to the residential neighborhoods in which they are visiting" and "the presence of such visitors within the City's residential neighborhoods can sometimes disrupt the quietude and residential character of the neighborhoods." Id.

         Rosenblatt is a Santa Monica resident and homeowner who, prior to the ordinance, rented out her house on Airbnb for $350 per night when she and her husband traveled. After the city of Santa Monica enacted the ordinance, Rosenblatt sued the city and its city council to enjoin the ordinance and recover damages on behalf of herself and a class of similarly situated individuals, claiming that the ordinance violates the dormant Commerce Clause.

         Rosenblatt alleges that the development of "an online marketplace to list privately-owned properties for rent on a short-term basis" allowed tourists to opt for less expensive residential rentals over "the ultra-luxurious, highly occupied, and pricey hotels in the City." According to Rosenblatt, Santa Monica's real reason for enacting the vacation rental ordinance was to prop up demand for the city's high-end hotels and thereby reverse a decline in revenue from the city's 14% transient occupancy tax, which the hotels paid but the vacation rentals did not. The district court dismissed Rosenblatt's initial complaint for failure to state a claim, and Rosenblatt filed her first amended complaint. The district court again dismissed Rosenblatt's amended dormant Commerce Clause claims under Federal Rule of Civil Procedure 12(b)(6), this time without leave to amend. Rosenblatt appeals.

         II. DISCUSSION

         A. The dormant Commerce Clause

         The Commerce Clause affirmatively grants to Congress the power to regulate interstate commerce. In order to advance national solidarity and prosperity, the Supreme Court has given meaning to the Clause's "great silences." H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 535 (1949). The Court refers to these silences-the Clause's "negative" aspect-as the dormant Commerce Clause. See Tenn. Wine & Spirits Retailers Ass'n v. Thomas, 139 S.Ct. 2449, 2459 (2019).

         The dormant Commerce Clause "denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce." Or. Waste Sys., Inc. v. Dep't of Envtl. Quality, 511 U.S. 93, 98 (1994). "The primary purpose of the dormant Commerce Clause is to prohibit 'statutes that discriminate against interstate commerce' by providing benefits to 'in-state economic interests' while 'burdening out-of-state competitors.'" Ass'n des Éleveurs de Canards et d'Oies du Québec v. Harris, 729 F.3d 937, 947 (9th Cir. 2013) (quoting Nat'l Ass'n of Optometrists & Opticians v. Harris, 682 F.3d 1144, 1148 (9th Cir. 2012)); see also C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 390 (1994) (explaining that the "central rationale" of the dormant Commerce Clause "is to prohibit state or municipal laws whose object is local economic protectionism, laws that would excite those jealousies and retaliatory measures the Constitution was designed to prevent").

         In reviewing challenges to local regulations under the dormant Commerce Clause, we follow a two-tiered approach:

[1] When a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, we have generally struck down the statute without further inquiry. [2] When, however, a statute has only indirect effects on interstate commerce and regulates evenhandedly, we have examined whether the State's interest is legitimate and whether the burden on interstate commerce clearly exceeds the local benefits.

Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 579 (1986) (citations omitted); see also S.D. Myers, Inc. v. City & County of San Francisco, 253 F.3d 461, 466 (9th Cir. 2001). "It is well settled that a state regulation validly based on the police power does not impermissibly burden interstate commerce where the regulation neither discriminates against interstate commerce nor operates to disrupt its required uniformity." Constr. Indus. Ass'n of Sonoma Cty. v. City of Petaluma, 522 F.2d 897, 909 (9th Cir. 1975); see also Village of Euclid v. Ambler Realty Co., 272 U.S. 365, 390 (1926) (upholding zoning regulations that excluded hotels from residential areas).

         To succeed on her facial challenge under the dormant Commerce Clause, Rosenblatt must establish "that no set of circumstances exists under which the [Ordinance] would be valid. The fact that [the Ordinance] might operate unconstitutionally under some conceivable set of circumstances is insufficient to render it wholly invalid." S.D. Myers, Inc., 253 F.3d at 467 (alterations in original) (quoting United States v. Salerno, 481 U.S. 739, 745 (1987)). Because of this high burden, "we construe the Ordinance narrowly and resolve any ambiguities in favor of the interpretation that most clearly supports constitutionality." Id. at 468.

         B. The complaint does not allege a per se violation of the dormant Commerce Clause

         1. The ordinance does not directly regulate interstate commerce

         A per se violation of the dormant Commerce Clause occurs "[w]hen a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests." Daniels Sharpsmart, Inc. v. Smith, 889 F.3d 608, 614 (9th Cir. 2018) (alteration in original) (quoting Brown-Forman Distillers Corp., 476 U.S. at 579). A local law directly regulates interstate commerce when it "directly affects transactions that take place across state lines or entirely outside of the state's borders." Id. (quoting S.D. Myers, Inc., 253 F.3d at 467).

         a. Vacation rentals

         Rosenblatt argues that the ordinance directly regulates interstate commerce because 95% of Santa Monica vacation rentals involve an out-of-state party. Although we agree that vacation rentals generally implicate interstate commerce, see Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 573 (1997), the relevant question here is whether the ordinance directly regulates the interstate or extraterritorial aspect of the vacation rental business. See Chinatown Neighborhood Ass'n, 794 F.3d at 1145 ("[E]ven when state law has significant extraterritorial effects, it passes Commerce Clause muster when, as here, those effects result from the regulation of in-state conduct.").

         Rosenblatt relies heavily on Camps, but that case addressed whether state law discriminated against interstate commerce, not whether it directly regulated it. There, a state statute provided a tax break to charitable institutions but expressly exempted institutions that were "conducted or operated principally for the benefit of persons who are not residents" of the state. 520 U.S. at 568. The Supreme Court concluded that "[t]he services that [the camp] provides to its principally out-of-state campers clearly have a substantial effect on commerce, as do state restrictions on making those services available to nonresidents." Id. at 574. However, the Court recognized that "the discriminatory burden is imposed on the out-of-state customer indirectly," not directly. Id. at 580.

         When this court has considered laws directly regulating interstate commerce, we have also distinguished between laws that directly regulate extraterritorial activity and laws that indirectly regulate the effects of commerce. In Chinatown Neighborhood Association, we held that a state law banning shark fin trading survived a dormant Commerce Clause challenge even though the law had direct effects on commerce outside the state. 794 F.3d at 1145. We contrasted extraterritorial effects that "result from the regulation of in-state conduct," id., with legislation that directly regulates interstate commerce by either "fix[ing] prices in other states, requir[ing] those states to adopt California standards, or attempt[ing] to regulate transactions conducted wholly out of state," id. at 1146.

         Here, Santa Monica's ordinance does not directly regulate interstate commerce by prohibiting vacation rentals for Santa Monica homes. At most, Rosenblatt alleges that the ordinance has an interstate effect because it "makes travel lodging in Santa Monica less accessible, available, and affordable." The ordinance penalizes only conduct in Santa Monica, regardless of whether the visitors are in-state or out-of-state. Accordingly, we conclude that the complaint does not sufficiently allege that the vacation-rental ban itself is a direct regulation of interstate commerce.

         b. Booking and payment transactions

         The ordinance makes it illegal to "undertake, maintain, authorize, aid, facilitate or advertise any vacation rental activity." Santa Monica Mun. Code § 6.20.030. Rosenblatt argues that the ordinance violates the dormant Commerce Clause by directly regulating booking and payment transactions that may occur entirely out-of-state. Rosenblatt's argument relies primarily on the plurality opinion in Edgar v. MITE Corp., 457 U.S. 624 (1982), and our decision in Valley Bank of Nevada v. Plus System, Inc., 914 F.2d 1186 (9th Cir. 1990).

         In MITE, the state law directly regulated interstate communications by preventing interstate tender offers unless certain requirements were met. 457 U.S. at 640. The Supreme Court held that this "direct regulation" surpassed the "incidental regulation" of interstate commerce permitted under the dormant Commerce Clause. Id. The MITE plurality did not opine, as Rosenblatt asserts, that "state and local laws purporting to regulate transactions and/or commercial offers that occur 'across state lines' constitute 'a direct restraint on interstate commerce.'" Appellant's Opening Br. at 30 (quoting MITE, 457 U.S. at 641-42). The plurality instead held that the particular state statute at issue was "a direct restraint on interstate commerce" because it regulated conduct that "would not affect a single [in-state] shareholder" and had "a sweeping extraterritorial effect." Id. at 642. A state or local law that regulates transactions with an interstate component is not in itself problematic; the law becomes problematic when it directly regulates the interstate component of the transaction.

         Valley Bank, in contrast, held that a state law regulating in-state ATM transactions did not violate the Commerce Clause even though it directly affected the workings of an interstate ATM network. 914 F.2d at 1190-93. There, we rejected the ATM network's argument that the law directly regulated interstate commerce just because uniformity among ATMs in different states was important to the network's efficient operation. Id. We stressed that "the commerce clause does not exist to protect a business's right to do business according to whatever rules it wants," which is especially true in industries where uniformity is not a necessity. Id. at 1192. We also noted that a state's law "is not 'discriminatory' under the commerce clause simply because it applies most often to out-of-staters." Id. We concluded that a law "that applies evenhandedly certainly passes muster under the commerce clause." Id. at 1193.

         As discussed above, the ordinance here applies evenhandedly. Unlike MITE, the ordinance does not directly restrain interstate commerce although it may regulate transactions with an interstate component. Because every out-of-state booking and payment that the ordinance regulates necessarily concerns property within Santa Monica, we cannot characterize these transactions as activities that are separate and entirely out-of-state. They are better categorized as part of a contractual relationship that Santa Monica properly regulates under its police power. Further, uniformity is not necessary to the vacation rental market. Even if numerous municipalities nationwide adopted ordinances like Santa Monica's, the national market for vacation rental bookings and payments would not be stifled. See Valley Bank, 914 F.2d at 1191-93; see also Exxon Corp. v. Governor of Maryland, 437 U.S. 117, 128 (1978) (stating that the Court "has only rarely held that the Commerce Clause itself pre-empts an entire field from state regulation, and then only when a lack of national uniformity would impede the flow of interstate goods").

         c. Advertising

         Rosenblatt also contends the ordinance "purports to ban wholly extraterritorial communications and advertisements made over the Internet and in other jurisdictions" by preventing the advertisement of Santa Monica vacation ...


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