Real-Time Dragnet: Cracking down on Internet innovation

“To serve and protect” is a longstanding slogan of police departments everywhere. It’s also an accurate description of a political dragnet against e-commerce, a scenario playing out right now in the New York City real-estate market. 

State governments often pass legislation to serve and protect narrow constituencies, making it harder for new companies with innovative business models to compete with entrenched businesses. One innovative company feeling this effect is provides New York City property seekers with private accounts for managing their apartment searches and connecting them to landlords, owners, brokers, and advisers. Founded by LaLa Wang, a gutsy female entrepreneur, allows renters and buyers to find matched listings accessible via the web and e-mail and hosts message centers that offer a place to exchange questions and opinions.

The company performs many of the same services as “traditional” real-estate brokerage companies — consultation and negotiation assistance-but it does not show properties. The website is especially welcome in New York City, the only major U.S. market without a Multiple Listing Service (MLS), a cooperative database where brokers list properties for sale and split commissions with buyer agents.

However, New York State requires all companies that furnish information about location and availability of rental property to obtain an “apartment information vendor” license. The licensing law is a 1975 statute originally enacted to prevent consumer fraud. Laudable intentions aside, the law’s requirements — hard-copy contracts and escrow agreements, submissions of available listings from landlords in writing before distribution, mandatory refunds on request, and a ban on advertising of specific properties — are incompatible with the 24/7 convenience, consumer control, and lower costs of online, subscription-based information services. The law’s clash with e-commerce has been the bane of existence for Ms. Wang and

In its efforts to force a square peg into a round hole, the New York Department of State revoked LaLa Wang’s real-estate broker’s license and is trying to shut down the online service. She has refused to apply for the apartment information vendor license because she maintains that the statute does not apply to her online venture. And now she has taken the issue to the New York supreme court, which recently heard oral arguments on the case.

E-commerce can make economic transactions more efficient and less costly, and increase consumer choice. Certain industries, such as real estate, are perfect candidates for the benefits of Internet connectivity. Real estate internet portals can easily bring together all of the players in a real-estate transaction-buyers, sellers, renters, landlords, and brokers. These sites are serious challengers to the old way of real estate-broker intermediaries, high commissions, and controlled information flow.

The case of exemplifies how some old laws simply do not fit when applied to new business models. The apartment information vendor law is an antiquated relic that has a newfound purpose — protecting the entrenched, deep-pocketed industry that controls the country’s most lucrative real-estate market. Ironically, in trying to enforce a consumer protection statute, New York is hurting consumers by enforcing a law that hinders innovation.

Old-economy regulations shield established industries from having to adapt to new and better ways of doing business. All too often, regulators skew the regulatory process in favor of established, “traditional” off-line companies.

Under the rationale of protecting consumers, regulators have enacted rules banning the online purchase of wine, contact lenses, and even caskets. Texas, at the behest of car-dealer trade groups, stopped Ford Motor Company from marketing used cars on the web — despite the potentially huge savings to consumers.

Courts often overturn these types of protectionist laws on constitutional grounds. Let’s hope that Ms. Wang wins her fight with Albany — and sets a precedent against anti-e-commerce legislation. It is time for the New York legislature to stop protecting brick-and-mortar businesses and allow all companies to serve consumers on an equal footing.