No Grounds to Stand On: Analyzing the Case Against Lil’ Bill

bicycle-1850008_1920

The video was all over Facebook, trailed by hundreds of angry comments from USC students. The reason? “I’ve been asked to leave the campus,” says Aaron Flournoy in the clip. “It’s like an eviction so to speak.”

The word “eviction” glares in bright gold from its subtitle on the screen, as if daring someone to object to its usage. First covered by Annenberg Media on March 31 by Cole Sullivan, the story of Lil’ Bill’s Bike Shop has frequently been spun as an economic injustice, for reasons that have little economic justification.

Lil’ Bill was being “evicted” from campus, because Solé Bicycles was becoming a vendor for USC Village. Solé and the university had agreed to sign a non-compete clause, preventing USC from allowing a competitor like Lil’ Bill to sell bikes on campus with a business move that has been virtually banned from California, except in three circumstances:  

  1. When one business acquires another
  2. When a partnership is dissolved
  3. Limited Liability Companies (LLCs)

USC isn’t acquiring Solé. The two had no preexisting partnership, and are not involved in an LLC, so none of the three circumstances apply. Has Lil’ Bill been illegally targeted?

When asked to elaborate on the specifics of the non-compete in an email exchange, David Donovan, Associate Director of USC Transportation, who has previously addressed media inquiries regarding the Village, declined to respond. Even so, studying the case history of non-competes in California may offer an answer.

An exception to California’s strict criteria for non-competes emerged in Campbell v. Board of Trustees of Leland Stanford Junior Univ., 817 F.2d 499 (9th Cir.1987), where the court ruled against Stanford’s contract preventing a professor from reproducing a psychological test he developed. Campbell states that contracts “where one is barred from pursuing only a small or limited part of the business, trade or profession” are valid, and that the burden of proving whether a contract fully bars business is up to the plaintiff.

This statement became known as the “narrow-restraint” clause, and has since been applied to several other cases. It might be Solé’s justification behind implementing a non-compete clause, which would not fully bar Lil’ Bill from his profession of fixing bicycles. In fact, in Boughton v. Socony Mobil Oil Co., the Ninth Circuit upheld the narrow-restraint clause to allow a non-compete that prevented the use of land for a competitor’s business, rather than prevent the competitor from carrying out business.

The only problem? In 2008, the California Supreme Court overturned the “narrow-restraint” clause in Edwards v. Arthur Andersen LLP, claiming that “if the legislature had intended the statute to apply only to unreasonable or over-broad restraints, it could have included language to indicate so.” While the Court in Edwards agreed with the Boughton decision, the Court argued that restricting use of land did not qualify as a non-compete. Furthermore, California lawyer David Trossen points out that the court claimed Boughton did not offer any guidance on evaluating non-compete, suggesting that using Boughton as a precedent for justifying a non-compete would be risky for Solé.

Yet Solé must have felt threatened enough by Lil’ Bill to risk a non-compete clause. After all, according to the Daily Trojan, Lil’ Bill and his family have been serving the USC community for 40 years. Surely, those 40 years gave enough of a foundation for them to gain significant market power and become a monopoly within the USC community. Perhaps Solé meant to kill Lil’ Bill’s market power.

Or perhaps the justification was even simpler. USC faces strong incentives to favor Solé’s non-compete over Lil’ Bill. The university financially benefits from Solé paying rent for a venue in the Village. Furthermore, in 2028, when USC Village will be used to host the Summer Olympics, Solé will reap additional profit from sales to competing athletes. Meanwhile, Lil’ Bill’s venue takes up a parking spot on USC’s property for free. Even if the financial loss of favoring Lil’ Bill were discounted, USC could face the legal cost of facilitating an illegal business. In a Daily Trojan interview, David Donovan said that “the city of Los Angeles has identified [Lil’ Bill’s] shop as an illegal business because it is operating out of parking lot and occupying a handicap space.”

But what do Lil’ Bill’s losses matter? They are excluded from the contract, as a negative externality–that is, a cost that signers of the contract cause, but are not held accountable for. And it is not enough to ask Lil’ Bill to give up his business and work for Solé, and call it accountability. When companies make decisions about their community, without the community’s legal ability to negotiate, the law itself ought to be reevaluated to consider the existing community businesses as stakeholders. To do otherwise, would be an economic injustice.

Quantitative easing, explained

FedRes.JPG

“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

-Federal Reserve Act Section 2A

            Maximum employment, stable prices and moderate long-term interest rates are the responsibilities of the Federal Reserve (the Fed) often known as its “dual mandate.” Achieving these goals is no minor feat. The economy is a complex and unpredictable structure, dependent not only on the performance of businesses, but also slave to human behavior. As Nassim Nicholas Taleb famously wrote, “Think of the economy as being more like a cat than a washing machine.”

So how is the Fed expected to tame this dynamic and volatile system? American monetary policy until late 2008 consisted of adjusting the monetary supply through the sale and purchasing of short term treasury bills, affecting interest rates by setting their overnight risk-free rates and attempting to control public expectations and actions through public statements.

The post-great recession global economy, however, has not been as responsive to these conventional forms of monetary policy. The Fed has maintained a historically large monetary supply, and risk free interest rates close to 0% since the great recession, yet the economy is still resisting maximum employment and healthy inflation rates.

To supplement these insufficient strategies, central banks have turned to Quantitative Easing. Quantative Easing (QE) has become somewhat of a buzzword used to describe a range of policies. It is therefore difficult to construct a concrete definition. A good starting place, however, is thinking of it as any non-traditional monetary strategy consisting of purchasing long-term assets, particularly when short-term risk-free interest rates are close to 0%.

QE1, the first round of American quantitative easing, was essentially a bailout where the Fed acquired mortgage-backed securities (MBS) and funded government sponsored enterprises (GSE). By purchasing mortgage backed securities—a risky long term asset held by many banks at the time of the great recession—they provided relief to banks who were in danger of turning illiquid. Housing oriented GSEs were financed in order to create credit for investments in real estate.

Notice that QE1 resembles fiscal policy more than monetary policy. Without passing an official stimulus through congress, the Fed managed to inject money into the economy and provide incentives for investment. Our definition of Quantitative Easing can thus be updated to reflect this function.

The second and third rounds of Quantitative Easing were extensions to QE1 with one addition. The Fed purchased longer-term treasury bills. These auxiliary rounds of QE had the effect of continuing to increase the monetary base and lowering long-term interest rates, thereby incentivizing even further investment.

Quantitative Easing is any non-traditional monetary policy, which stimulates the economy through the purchase of long-term assets, particularly when traditional monetary policy has failed. The purchase of long-term assets stimulates the economy by lowering long-term interest rates and increasing the money supply, which in turn incentivize lending and investing.

Recently, QE has been used by central banks all over the world, most notably, the Bank of England, Bank of Japan, and the Fed. However, this strategy is not without its critics. Detractors argue that QE weakens the effects of traditional monetary policy and puts central banks in danger of run-away inflation. While these dangers do exist, it is clear that traditional monetary policy is no longer sufficient to reach desired interest rates. While QE may not be the final solution, it has so far seemed effective.

Traditional monetary policy has not been enough to lift us from our global recession. It is clear that central banks need an additional tool to stimulate a healthy economy. QE will be around at least until a new alternative is found. Whether it actually stimulates the economy or simply inflates the prices of assets remains to be seen.