LIBERTY COINS, LLC; John Michael Tomaso; Worthington Jewelers, LTD.; Robert Capace, Plaintiffs-Appellees, v. David GOODMAN, et al., Defendants, Jacqueline T. Williams, in her official capacity as Director, Ohio Department of Commerce; Amanda McCartney, in her official capacity as Consumer Finance Attorney of Division of Financial Institutions, Ohio Department of Commerce, Defendants-Appellants.
No. 16-3735
United States Court of Appeals, Sixth Circuit.
Argued: June 22, 2017 Decided and Filed: January 22, 2018
880 F.3d 274
For the forgoing reasons, we AFFIRM.
ARGUED: Jennifer S. M. Croskey, OFFICE OF THE OHIO ATTORNEY GENERAL, Columbus, Ohio, for Appellants. Maurice A. Thompson, 1851 CENTER FOR CONSTITUTIONAL LAW, Columbus, Ohio, for Appellees. ON BRIEF: Jennifer S. M. Croskey, Keith O‘Korn, OFFICE OF THE OHIO ATTORNEY GENERAL, Columbus, Ohio,
Before: SILER, McKEAGUE, WHITE, Circuit Judges.
OPINION
McKEAGUE, Circuit Judge.
Plaintiffs Liberty Coins, LLC, and Worthington Jewelers, Ltd., bring facial and as-applied Fourth Amendment challenges to four warrantless search provisions in Ohio‘s Precious Metals Dealers Act and the accompanying regulations:
For the reasons set forth below, we affirm in part and reverse in part. We agree with the district court that the warrantless searches authorized by
I
We first provide a brief overview of the Precious Metals Dealers Act before turning to the facts of this appeal.
A. Precious Metals Dealers Act
For over a century, Ohio indirectly regulated precious metals dealers through statutes governing pawnbrokers and secondhand dealers. See generally R. 14-1 (compiling the legislative history of these various laws). As prices for gold and silver increased, the state found that such dealers provided easy avenues for thieves to re-sell and profit from stolen jewelry and coins. See Appellant Br. at 31; R. 23-3, Exh. DXD at 4, PID 369. Therefore, in 1987, the Ohio General Assembly sought to impose stricter standards on them through the passage of the Precious Metals Dealers Act (PMDA). The Act defines a “precious metals dealer” as any person who “holds himself, herself, or itself out to the public” as being “engaged in the business of purchasing articles made of or containing gold, silver, platinum, or other precious metals or jewels....”
The PMDA requires every dealer in precious metals to first apply for and obtain a license.
Beyond licensure, the PMDA also imposes recordkeeping requirements and provides state agents and local police with power to search the records and businesses of dealers without a warrant. The four sections of the PMDA that authorize warrantless searches form the heart of this appeal. The first challenged provision,
Section 4728.06—the second provision at issue—requires licensees to maintain books and records in a form approved by the state. The records must include a detailed description of all precious metals purchased as well as identifying information about the seller. This information must be kept at the licensed location “open to the inspection of the superintendent or chief of or head of the local police department.....” Section 4728.06 also requires licensees, “upon demand,” to show authorities any precious metal within their possession that is listed in these records.
Similarly,
The fourth and final challenged provision is a regulation promulgated pursuant to the PMDA, which elaborates on licensees’ recordkeeping duties and advises them how to comply with state inspections. This regulation,
In addition to these four sections authorizing warrantless searches, several other sections of the PMDA are pertinent to this appeal. Section 4728.09(A) prohibits licensees from either reselling or altering the form of any article purchased for at least five days. This holding period can be extended to thirty days if the police have “probable cause” to believe that an article within a licensee‘s possession is stolen property.
B. Factual Background
Liberty Coins, LLC, is a coin shop, located in Delaware County, Ohio, that buys and sells various forms of gold and silver. R. 72, Amended Compl. ¶¶ 5-6, PID 826. It is owned by John Michael Tomaso.
Tomaso never responded to the state‘s inquiries, and Liberty Coins never applied for a PMDA license. Instead, they filed a
On remand, Liberty Coins and Tomaso added Worthington Jewelers, an “upscale jewelry store and bridal boutique” located in Worthington, Ohio, and its owner, Robert Capace, as plaintiffs. R. 72, Amended Compl. ¶¶ 8-11, PID 826; Appellee Br. at 7. Unlike Liberty Coins, Worthington Jewelers was licensed under the PMDA at the time this amended complaint was filed. R. 72, Amended Compl. ¶ 54, PID 833. That license has since lapsed, and Worthington Jewelers spent several years operating without a license before obtaining another one on October 26, 2015. R. 98-1, Capace Decl. ¶ 2, PID 1141. Under the Act, that license expired on June 30, 2017, see
In their amended complaint, Tomaso, Liberty Coin, Worthington Jewelers, and Capace again sought various forms of constitutional relief, but their Fourth Amendment claim is the only one pertinent to this appeal. Specifically, they alleged that four sections of the PMDA—
The district court granted summary judgment to plaintiffs and denied both of the state‘s motions. It agreed that the warrantless searches authorized by the PMDA were facially unconstitutional and enjoined their enforcement. R. 113, Op. and Order at 35, PID 1433. The district court based its ruling primarily on the Supreme Court‘s recent decision in City of Los Angeles v. Patel, 576 U.S. 409, 135 S.Ct. 2443, 192 L.Ed.2d 435 (2015). See
II
The Fourth Amendment protects “[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures.”
There are, however, exceptions to this warrant requirement. When a search is conducted for a “special need” other than to investigate criminal wrongdoing, the probable-cause standard is modified. For example, when a search is conducted pursuant to an administrative regime, the government need only make a lesser showing that a search is in accord with “reasonable legislative or administrative standards.” Camara, 387 U.S. at 538, 87 S.Ct. 1727. For an administrative-search scheme to be constitutional, it generally must offer the subject of the search an opportunity to seek precompliance review of the request by a neutral decisionmaker prior to the imposition of criminal penalties. See Patel, 135 S.Ct. at 2452-53.
The tempered reasonableness standard governing administrative searches is relaxed even further for searches of businesses in “closely regulated” industries.
Nevertheless, even warrantless searches of businesses in closely regulated industries must meet three criteria, as delineated by the Supreme Court in New York v. Burger, in order to be deemed reasonable, and thus constitutional, under the Fourth Amendment: (1) “there must be a ‘substantial’ government interest that informs the regulatory scheme pursuant to which the inspection is made“; (2) “the warrantless inspections must be necessary to further the regulatory scheme“; and (3) “the statute‘s inspection program, in terms of the certainty and regularity of its application, must provide a constitutionally adequate substitute for a warrant.” Burger, 482 U.S. at 702-03, 107 S.Ct. 2636 (internal quotations omitted; brackets removed) (the “Burger test“). When the government seeks to impose a penalty for failure to comply with a warrantless inspection, it is the government‘s burden to establish that the warrantless search fits within this exception. McLaughlin v. Kings Island, 849 F.2d 990, 994 (6th Cir. 1988).
Lastly, plaintiffs lodging Fourth Amendment challenges to statutes may bring either facial or as-applied challenges. Patel, 135 S.Ct. at 2449. “A facial challenge is an attack on the statute itself,” and while more difficult to “mount successfully” than challenges to particular applications of a statute, the Supreme Court recently clarified that these types of challenges “are not categorically barred or especially disfavored.”
A. The PMDA does not provide dealers the opportunity to seek precompliance review.
The warrantless searches in question are authorized by the PMDA for the purpose of ensuring compliance with the Act, which the state believes will allow it to retrieve stolen jewelry and coins and both deter criminals from selling these items to licensed dealers and prevent their resale back into the marketplace. Given this “special need,” the question is whether the PMDA warrantless search provisions are constitutional under the administrative search doctrine. Answering this ultimate question involves answering two sub-questions: (1) Does the PMDA give dealers the chance to seek precompliance review, that is, to challenge a warrantless search request prior to being criminally sanctioned?; and (2) if not, is precious metals dealing a closely regulated industry, and, if so, is Burger‘s three-part test satisfied?
The answer to the first of these subquestions is no. City of Los Angeles v. Patel governs our analysis. Patel involved a Los Angeles city ordinance that required hotel operators to make their guest registries open to warrantless inspections by local police. Patel, 135 S.Ct. at 2447. A failure to do so was punishable by up to six months in jail and a $1,000 fine.
The PMDA is indistinguishable from Patel with regards to its lack of precompliance review. Like the Los Angeles city ordinance, the challenged PMDA provisions authorize warrantless searches of the books, records, articles, and other items pertaining to the businesses of precious metals dealers. And while the PMDA does
The state argues that division of finance officials do not have the power to bring criminal actions, and thus the threat of criminal penalties is illusory. But the statute requires these regulators to “notify the proper prosecuting officer whenever [they] ha[ve] reasonable grounds to believe that a violation has occurred.”
B. Precious metals dealing is a closely regulated industry.
In determining whether an industry is closely regulated, we consider (1) “the pervasiveness and regularity” of regulations governing an industry; (2) “the duration of a particular regulatory scheme“; and (3) whether other states have imposed similarly extensive regulatory requirements. Burger, 482 U.S. at 701, 705, 107 S.Ct. 2636. Most recently, the Supreme Court has reiterated that closely regulated industries are the “exception,” and suggested that businesses operating within these industries all “pose[] a clear and significant risk to the public welfare.” Patel, 135 S.Ct. at 2454-55. The Court has identified four closely regulated industries: (1) liquor sales (Colonnade Corp. v. United States, 397 U.S. 72, 90 S.Ct. 774, 25 L.Ed.2d 60 (1970)); (2) gun sales (United States v. Biswell, 406 U.S. 311, 312, 92 S.Ct. 1593, 32 L.Ed.2d 87 (1972)); (3) mining (Donovan v. Dewey, 452 U.S. 594, 601, 101 S.Ct. 2534, 69 L.Ed.2d 262 (1981)); and (4) automobile junkyards (Burger, 482 U.S. 691, 707, 107 S.Ct. 2636, 96 L.Ed.2d 601 (1987)). It has concluded that hotels are not closely regulated (Patel, 135 S.Ct. at 2443) and also rejected giving “all businesses involved in interstate commerce” this label (Barlow‘s, Inc., 436 U.S. 307, 98 S.Ct. 1816).
The Sixth Circuit has categorized pharmacies (United States v. Acklen, 690 F.2d 70 (6th Cir. 1982)) and the sand and gravel industry (Marshall v. Nolichuckey Sand Co., 606 F.2d 693 (6th Cir. 1979)) as closely regulated, but not bee apiaries (Allinder v. Ohio, 808 F.2d 1180 (6th Cir. 1987)). The Fourth Circuit and the Michigan Court of Appeals have found precious metals dealing to fit within this category of businesses. See Gallaher v. City of Huntington, 759 F.2d 1155 (4th Cir. 1985); see also People v. Pashigian, 150 Mich.App. 97, 388 N.W.2d 259 (1986) (per curiam).
The state argues that precious metals dealing is analogous to running an automobile junkyard, so it qualifies as a
First, the regulations governing precious metals dealers are sufficiently pervasive. In fact, they are nearly identical to those the Supreme Court deemed “extensive” in Burger, 482 U.S. at 703-04, 107 S.Ct. 2636. There, the Court recognized the numerous obligations placed on junkyard owners: to obtain a license, which meant meeting certain requirements and paying a fee; to maintain a “police book” containing a record of each car or part bought and sold; to make this book available for inspection “by the police or any agent of the Department of Motor Vehicles“; and to display their registration numbers at their businesses and on all vehicle parts. See
Indistinguishably, the PMDA requires business owners to obtain a license by meeting delineated criteria and paying a fee (
These requirements are more comprehensive than those applicable to the hotel industry in Patel. For example, while the licensing requirement there carried little weight since “[a]ll businesses in Los Angeles need a license to operate,” Patel, 135 S.Ct. at 2455, the PMDA‘s licensing requirements are carefully tailored to precious metals dealers specifically. See, e.g.,
Second, the history of regulation governing precious metals dealers and automobile junkyards stems from a common origin. In Burger, while the Court noted that “automobile junkyards and vehicle dismantlers ha[d] not been in existence very long” at that time, these businesses were “simply [ ] new branch[es] of an industry that ha[d] existed, and ha[d] been closely regulated, for many years“—the secondhand shop or general junkyard.
Ohio has regulated precious metals even longer than New York had regulated automobile junkyards at the time Burger was decided. The New York law had only been in effect for seven years at the time Burger was decided, yet the first iteration of the PMDA went into effect in 1987, more than thirty years ago. Moreover, just like automobile junkyard owners had been governed by more universal laws pertaining to general junkyards and secondhand goods, Burger, 482 U.S. at 706, 107 S.Ct. 2636, precious metals dealers, too, were previously subject to regulation under pawnbroker and secondhand dealing statutes since 1863. See, e.g., R. 14-1, Appendix to Leg. Hist. at 3-4, PID 196-97. These old laws subjected dealers to periodic searches as well.
Third, and relevant to the question of close regulation, Ohio has provided evidence that many other states also regulate precious metals dealers.
Plaintiffs argue that Patel forecloses this result by limiting the businesses that may qualify as closely regulated to only those that are “ultra-hazardous.” Appellee Br. at 13. We disagree. While Patel undoubtedly clarified the application of Burger, we do not read Patel as narrowly as plaintiffs, suggest. Patel simply recognized that the industries the Court had deemed closely regulated in the past—liquor, firearms, mining, and automobile junkyards—all involved “a clear and significant risk to the public welfare” and were “intrinsically dangerous.” Patel, 135 S.Ct. at 2444-45 & n.5. For example, the Court acknowledged that, unlike hotels, automobile junkyards met these standards because they “provide[d] the major market for stolen vehicles and vehicle parts.”
C. Under Burger‘s 3-part test governing warrantless searches of closely regulated industries, the searches contemplated by O.R.C. § 4728.05(A) 1 and Ohio Administrative Code § 1301:8-6-03(D) are unconstitutional on their face, but those in O.R.C. §§ 4728.06 and 4728.07 withstand plaintiffs’ facial challenge.
Both parties concede that the state has a substantial interest in regulating precious metals. See Appellant Br. at 31; Appellee Br. at 26. Therefore, only the latter two parts of the Burger test—whether the warrantless searches are necessary to further the state‘s proffered interests and whether the statutory provisions serve as adequate warrant substitutes—are at issue. First, warrantless searches are necessary if “a warrant requirement could significantly frustrate effective enforcement of the Act.” Dewey, 452 U.S. at 603, 101 S.Ct. 2534. This may be the case when the objects of a search lend themselves to easy concealment or alteration, making “unannounced, even frequent, inspections [] essential.” Biswell, 406 U.S. at 316, 92 S.Ct. 1593. For example, in Dewey, the Court determined that warrantless searches of mines were necessary due to the “notorious ease with which many safety or health hazards may be concealed if advance warning of inspection is obtained.” 452 U.S. at 603, 101 S.Ct. 2534 (quoting S. REP. 95-181 at 27 (1977)).
Warrantless searches might also be necessary if the search objects are likely to change hands quickly or if unannounced inspections will otherwise constrain the market in illicit goods. For example, in Burger, state officials professed the need to conduct impromptu inspections of automobile junkyards in order to identify stolen items before they were resold. Burger, 482 U.S. at 710, 107 S.Ct. 2636. The Burger Court sanctioned warrantless searches for this purpose because “stolen cars and parts often pass quickly through an automobile junkyard,” so “frequent” and “unannounced” inspections were necessary to detect them.
Beyond the necessity requirement, a statute‘s inspection program must also, “in terms of the certainty and regularity of its application,” serve as a “constitutionally adequate substitute for a warrant.” Burger, 482 U.S. at 702, 107 S.Ct. 2636 (internal quotation marks and citation omitted). This means a statute must do
In Dewey, the Supreme Court upheld an inspection regime that required searches of all surface mines “at least twice annually” and of all underground mines “at least four times annually,” and also mandated routine follow-up searches when violations were found.
1. Sections 4728.06 and 4728.07
Given this precedent, we think that the warrantless searches authorized by
a. Necessity
Section 4728.07 requires licensees to detail, on police-approved forms, a description of all precious metals purchased, and to make these forms available to the police each business day. That section, being challenged in its entirety, is reproduced below:
Each person licensed under Chapter 4728. of the Revised Code, shall, every business day, make available to the chief or the head of the local police department, on forms furnished by the police department, a description of all articles received by the licensee on the business day immediately preceding, together with the number of the receipt issued.
Providing the police access to this information without having to obtain a warrant furthers the state‘s interest in tracking down stolen items containing precious metals and returning them to their lawful owners.2 See Appellant Br. at 16, 34. Police will be able to cross-reference the lists of items purchased by dealers with reports of stolen coins, rings, or other precious metals. It is important for police to have access to these forms quickly in order to recover stolen items before a dealer melts the precious metal into another form, thus making it unidentifiable, or resells it back into the marketplace, making it difficult to trace. See Burger, 482 U.S. at 710, 107 S.Ct. 2636; Dewey, 452 U.S. at 602-03, 101 S.Ct. 2534.
Should the report of a missing ring, for example, match the description of a ring recently purchased by a precious metals dealer in the area,
Every person licensed under this chapter shall keep and use books and forms approved by the superintendent of financial institutions, which shall disclose, at the time of each purchase, a full and accurate description including identifying letters or marks thereon of the articles purchased, with the name, age, place of residence, driver‘s or commercial driver‘s license number or other personal identification, and a short physical description of the person of the seller. The licensee also shall write in the book the name of the maker. The licensee shall keep the books in numerical order at all times at the licensed location, open to the inspection of the superintendent or chief of or head of the local police department, a police officer deputed by the chief or head of police, or the chief executive officer of the political subdivision thereof. Upon demand of any of these officials, the licensee shall produce and show an article thus listed and described which is in the licensee‘s possession.3
If the ring bought by the dealer indeed appears to be the stolen item, the dealer will then be required under the PMDA to return it to its rightful owner, see
Like in Burger, warrantless searches of the articles themselves, as provided for in
Moreover, it is rational for the state to believe that warrantless searches of a licensee‘s purchasing records are necessary to (1) deter thieves from stealing precious metals in the first place because their chances of cashing out without suspicion would be diminished; and (2) prompt dealers themselves to be more vigilant in the purchases that they make. See Burger, 482 U.S. at 709, 107 S.Ct. 2636. And these interests are sufficiently weighty to pass Fourth Amendment scrutiny. See, e.g., Biswell, 406 U.S. at 315-16, 92 S.Ct. 1593 (finding warrantless inspection of weapons dealers “crucial” to the regulatory scheme since it ensured “weapons [were] distributed through regular channels and in a traceable manner and ma[de] possible the
The state‘s professed needs in this case are distinguishable from the one the Supreme Court deemed inadequate in Patel. There, Los Angeles claimed that warrantless searches of hotel registries were necessary to prevent operators from falsifying their records. Patel, 135 S.Ct. at 2456. The Court explained that the city could prevent this risk without resorting to warrantless searches by, for example, obtaining an ex parte, warrant or by “guarding the registry” while an administrative warrant is challenged.
b. Constitutionally Adequate Substitute
Additionally,
Furthermore, we do not think that the absence of a specific temporal limitation on searches in
When
In the absence of evidence that the state or the police are conducting searches of licensees’ records and inventory under
2. Section 4728.05(A) and Ohio Administrative Code § 1301:8-6-03(D)
Unlike the narrow warrantless searches contemplated by
a. Necessity
While the former search provisions allow access to only discrete information, the latter are not so cabined, providing the state with ability to investigate the entire businesses of both licensees and non-licensees alike:
The superintendent of financial institutions may, either personally or by a person whom the superintendent appoints for that purpose, if the superintendent considers it advisable, investigate the business of every person licensed as a precious metals dealer under this chapter, and of every person, partnership, and corporation by whom or for which any purchase is made, whether the person, partnership, or corporation acts, or claims to act, as principal, agent, or broker, or under, or without the authority of this chapter, and for that purpose shall have free access to the books and papers thereof and other sources of information with regard to the business of the licensee or person and whether the business has been or is being transacted in accordance with this chapter. The superintendent and every examiner may examine, under
oath or affirmation, any person whose testimony may relate to any business coming within this chapter.
Inspection of books and records: All books, forms, and records, and all other sources of information with regard to the business of the licensee, shall at all times be available for inspection by the division for the purpose of assuring that the business of the licensee is being transacted in accordance with law. All purchased items shall be kept at the licensed location for seventy-two hours from the time of purchase. All books, forms, records, etc., shall be kept at the licensed location.
The state‘s specified reason for needing access to this additional information is merely so that it can ensure compliance with the Act. As an example, it explains that it may need access to all of a dealer‘s records in order to ascertain whether he may qualify for exemption from licensure. But it is unclear why warrantless searches would be required to effectuate this compliance-based purpose. The need for quick action is gone, and in that sense, these subsections are more akin to the statute struck down in Patel, where Los Angeles was simply concerned that hotels were maintaining records in accordance with law. Patel, 135 S.Ct. at 2456.
As the Court found in Patel, most precious metals dealers will likely acquiesce to routine investigations.
Furthermore,
b. Constitutionally Adequate Substitute
Because we find that
D. We need not address plaintiffs’ as-applied challenges to § 4728.05(A) and Ohio Administrative Code 1301:8-6-03(D) and find the challenges to §§ 4728.06 and 4728.07 not ripe.
Because we agree with the district court that the warrantless-search language found in
While it is unclear whether Worthington Jewelers still maintains a license, there is likewise no evidence that the state or police ever requested or subjected it to either of the warrantless searches authorized by
III
For the foregoing reasons, we AFFIRM in part the district court‘s grant of summary judgment to plaintiffs on their facial Fourth Amendment challenges to