The degree to which private businesses have an expectation to privacy of business records is up for review by the United States Supreme Court, an issue that may or may not have implications for the scrap recycling industry.
On October 20, 2014, the U.S. Supreme Court granted a petition for a writ of certiorari (“cert”) filed by hotel owners in the city of Los Angeles who were subjected to mandatory recordkeeping and warrantless inspections of their business records. The Court agreed to decide whether the city’s ordinance authorizing warrantless searches of hotel and motel guest registries without the need to get a search warrant violates the Fourth Amendment of the U.S. Constitution.
In the case, City of Los Angeles v. Patel (738 F.3d 1058), the Supreme Court will look at two questions: 1) whether facial challenges – that a law is unconstitutional in every application – to laws are permitted under the Fourth Amendment, and if so, 2) whether the Amendment requires those laws to provide for judicial review before police can inspect the business records. Initially, the federal district court ruled in favor of the city ordinance. However, on December 24, 2013, an en banc panel (meaning all of the judges) of the U.S. Court of Appeals (9th Circuit) ruled that the ordinance was unconstitutional.
While initially this case may seem to have a strikingly similar fact scenario to the innumerable local recordkeeping ordinances that govern scrap recyclers, the questions before the Court pertain to protections under the Fourth Amendment that have been tweaked and narrowed as a result of decades of case law and Court rulings. There are several considerations that make this case far less than a “slam dunk” with regard to the scrap recycling scenario. First, there is existing U.S. Supreme Court precedent which specifically determined that the automotive dismantling/salvage industry has a significantly reduced expectation of privacy in terms of Fourth Amendment searches (U.S. v. Burger, 482 U.S. 691) – and this could be argued as applicable to the scrap recycling industry, though ReMA refutes this generalization. Secondly, the Ninth Circuit is generally considered a liberal court and the decision handed down in this case will likely face more stringent scrutiny from the U.S. Supreme Court Justices. And finally, although the vote in the 9th Circuit Patel decision was 7-4, the dissent raises some very strong arguments with regard to the scrutiny applied by the majority.
Ninth Circuit Decision
As background, the City of Los Angeles (LA) enacted an ordinance requiring motel and hotel operators to collect and record certain information from guests at the time of check-in and to maintain that data for a certain period of time. The ordinance also states that the records be made available for inspection by a police officer during normal business hours (to the extent possible). The city says that “these laws expressly help police investigate crimes such as prostitution and gambling, capture dangerous fugitives and even authorize federal law enforcement to examine these registers, an authorization which can be vital in the immediate aftermath of a homeland terrorist attack.”
Similar to scrap recyclers, the Plaintiffs (Patel) are not objecting to the requirement to collect, record and maintain the data. However, they are objecting to the warrantless searches that would ensue by virtue of their having to make those records available to the police. The Plaintiffs are arguing that the LA ordinance is “facially” unconstitutional. It is of note that the reason this case is in federal court is the fact that the lawsuit was brought under 42 U.S.C. § 1983, “Civil Action for Deprivation of Rights,” as opposed to an action brought in state court challenging the ordinance itself.
The 9th Circuit determined first that the hotel records were the property of the hotel and not its guests and furthermore, that the hotel guests had no privacy interest in the records because they had voluntarily disclosed the information to the hotel. However, the 9th Circuit clearly disregarded the fact that the hotel collected the information because they were compelled to do so by the ordinance and that the guests were also compelled by the ordinance to provide their potentially private information if they wanted to stay at the hotel. Nonetheless, once the 9th Circuit established the records were the hotel’s property, it was an easy stretch for them to say that a police officer’s non-consensual inspection of the hotel’s records amounts to a warrantless search, even if nothing of “value” was disclosed. The 9th Circuit cited the U.S. Supreme Court in a 1987 decision in which it said, “[a] search is a search, even if it happens to disclose nothing but the bottom of a turntable.” The 9th Circuit went on to note that even an “…administrative record-inspection need not require issuance of a search warrant, but it must at a minimum afford an opportunity for pre-compliance judicial review...,” something which the LA ordinance did not provide.
In their dissent, however, the 9th Circuit minority argues that the facial nature of the Plaintiff’s challenge means there is a very high bar to overcome for such a challenge to succeed and that the Plaintiff’s failed to establish that an inspection pursuant to the LA ordinance would be unreasonable. They pointed out that the U.S. Supreme Court, in a 2011 case, said “warrantless searches are allowed when the circumstances make it reasonable…to dispense with the warrant requirement.” They end by stating, it is not enough to say a “search is a search” because the U.S. Supreme Court has said, “that is just the beginning point, not the end of the analysis.”
The U.S. Supreme Court agreed to hear this case because there is a split of opinion between the Ninth Circuit and the Sixth Circuit Court of Appeals regarding whether facial challenges are permitted under the Fourth Amendment. Moreover, there is a split between the Ninth Circuit and the Massachusetts Supreme Judicial Court over whether hotels enjoy expectations of privacy in guest registries under ordinances like the one in Los Angeles. The LA city attorney claims there is not only a multi-tier split decision by “severely divided courts,” but also “there is a compelling national interest to decide these issues.”
Closely or Pervasively Regulated Industries
The Supreme Court has upheld warrantless administrative searches – similar to what is being challenged in the Patel case – of closely or “pervasively” regulated businesses, including automotive “junkyards” as termed by the Court. The Supreme Court’s justification for this exception to the warrant requirement is that individuals doing business in a closely regulated industry have a reduced expectation of privacy. One of the questions before the Supreme Court in the Patel case is whether hotel owners have an expectation of privacy of their guest records. Unless the Supreme Court determines that hotels and motels should also be considered closely or “pervasively” regulated, there is strong Court precedent that the ordinance would need to provide for pre-compliance judicial review before police can inspect their records. Whether an industry is closely regulated depends upon the “pervasiveness and regularity of the … regulation” and the effect of such regulation on the privacy expectations of persons doing business in the industry. (U.S. v. Burger, 482 U.S. at 704-07). Whether the scrap recycling industry is lumped into the “junkyard” precedent is likely the predominant factor that would determine applicability of the Patel case to scrap recycling yards, but even still there are more questions than answers to be worked out.
There is legitimate debate as to whether the scrap recycling industry falls under the “junkyard” precedent set by the Burger case but there appears to be a daunting task ahead if the industry should seek to distinguish itself from automotive dismantling/salvage yards. The Burger court decision in 1987 has since been embedded into existing case law because it is cited frequently for its three-prong standard it set forth for determining constitutionality of a warrantless search for those in a closely or pervasively regulated industry. At the time of the Burger decision, a permissible warrantless search was the exception, not the rule. Only two industries had been determined to fall under this exception (mining and liquor). The Burger decision opened a Pandora’s box – just as the dissent predicted – and made it possible for nearly any industry to be deemed closely regulated. Even if the scrap recycling industry could distinguish itself from the automotive junkyards in the Burger case, the degree of regulation it has come under in the past few decades leaves it ripe for another court to determine that it too is closely regulated and therefore has a reduced expectation of privacy.
Applicability to Electronic Reporting
There is another question the Patel case raises, which is not currently being considered by the U.S. Supreme Court that poses some very interesting legal questions warranting further review. Some have asked whether the government can mandate that control over business records be relinquished so that law enforcement can inspect the records at their discretion. This question does not appear to have been directly addressed by any court and opens a door for further judicial review. If business records are deemed the property of the business owner (which is current law), the next logical question is whether the government can force the business to relinquish that property without cause. Further, if the Fourth Amendment protections against unbridled discretion of officers in the field is to be taken seriously, there is the outstanding question as to whether these protections are being sidelined by laws that mandate records be automatically reported to eliminate the need for site inspections altogether.
As the 9th Circuit noted in the Patel decision, the Fourth Amendment safeguard against the arbitrary or abusive inspection demands is essential and must be protected. The government may ordinarily compel the inspection of business records only through an inspection demand “sufficiently limited in scope, relevant in purpose, and specific in directive so that compliance will not be unreasonably burdensome.” (quoting Camara v. Mun Court, 387 U.S. 523). Even in closely or pervasively regulated industries, the Burger case dictates that any statute permitting warrantless inspection must include the “time, place, and scope” of the inspection so that it is “limited to impose appropriate restraints upon the inspecting officer’s’ discretion. (482 U.S. at 703). Furthermore, it is well established Court precedent that the Fourth Amendment protects against the “unbridled discretion” of officers in the field, who are free to choose whom to inspect, when to inspect, and the frequency with which those inspection occur. (Marshall v. Barlow’s, Inc., 436 U.S. 307). Some have inquired as to whether the electronic reporting mandates on the scrap recycling industry are in themselves unconstitutional because there are very few safeguards in place to limit who, when, or why a scrap dealer’s private property is being searched.
Electronic reporting mandates take questions on the arbitrary and abusive record inspection demands to a whole new level. Is the unbridled demand for inspection of all records by virtue of a compulsion to report regardless of cause unconstitutional? The LA ordinance at issue in the Patel case does not mandate electronic reporting of records so this question will not be answered no matter what the Court’s decision is on whether hotels have an expectation of privacy for their records. However, one can only surmise whether this is the next logical argument for the Court to decide.