The face of the competitive landscape of New Orleans short-term rentals is headed for significant change.[1] On August 22, 2022, the United States Court of Appeals for the Fifth Circuit held that the City of New Orleans’ residency requirement that applies to residential short-term rentals (“STR’s”) was unconstitutional.

In November 2019, a group of homeowners who had been denied STR licenses sued the City of New Orleans under 42 U.S.C. § 1983 alleging violations of their constitutional rights. First, they alleged that refusal to renew licenses issued under a prior legal regime constituted a violation of the Takings Clause. Second, they alleged that the residency requirement violated the dormant Commerce Clause because it interfered with interstate commerce. Third, they alleged that advertising restrictions on the platforms violate the First Amendment. The district court granted summary judgment in favor of the City on the Takings Clause claim, holding that the plaintiffs had no property interest in renewal of the licenses. It also denied the plaintiffs’ dormant Commerce Clause challenge. The district court noted that the First Amendment claim was “viable.”

The plaintiffs appealed the grant of summary judgment on the dormant Commerce Clause and Takings Clause claims. The City cross-appealed the court’s preliminary ruling on the First Amendment claim.

On appeal, the Fifth Circuit agreed that the district court was correct to deny the Takings Clause claim, holding that while a license holder has a property interest for procedural due process, for purposes of the Takings Clause, he does not. It emphasized that the original STR regime specifically described the license as “a privilege, not a right” and that an applicant could technically meet the requirements for the license and still not be issued the license. The court further held that the interest had not been long-standing enough custom to have been elevated to a property interest.

The court then moved on to the dormant Commerce Clause claim. It highlighted that a law that discriminates against interstate commerce “is virtually per se invalid.”[2] It went on to emphasize that “[i]f there are ‘any available alternative methods for enforcing the government’s legitimate policy goals,’ the law is unconstitutional.”[3]

The court agreed with the district court that the residency requirement discriminated against interstate commerce, rather than merely creating an incidental burden. However, the Court held that at that juncture, the district court erred because it applied the wrong test. It should have asked “whether the City had reasonable nondiscriminatory alternatives to achieve its policy goals.” Because there were many alternatives available to the City, the residency requirement was unconstitutional.

The City set forth three interests that the residency requirement served. For each one, the Court held that the objective could be achieved via alternative means. First, the City argued that the residency requirement helped to address the nuisance of unmonitored STRs. The Court held that nuisance properties could be enforced through better enforcement. Second, the City argued that the residency requirement helps to preserve affordable housing. The Court held that affordable housing could be addressed by increasing the price of an STR permit or capping the number of licenses in a given neighborhood. It could also simply increase housing supply. Finally, the City argued that the residency requirement was important to maintain neighborhood character. The Court held that neighborhood character could also be maintained by capping the number of STR permits in a neighborhood.

The Court held that it did not have jurisdiction to review the district court’s “holding” that the First Amendment claim was “viable,” because the finding was not a final judgment subject to review on appeal.

The Court vacated the summary judgment in favor of the City on the residency requirement. It is now presumably up to the plaintiffs to move for summary judgment on that issue upon remand.

In closing, the Court made its holding on the residency requirement refreshingly simple: “The City has many options to address the problems caused by STRs in residential neighborhoods. But it chose one the Constitution forbids. So we vacate the summary judgment for the City on this claim.”

This will likely result in new regulations on RSTRs and may trigger a review of the entire regulatory scheme. Possible solutions include increasing the cost of the licenses and capping the number of licenses on a block or in a neighborhood, but if the entire scheme is opened up there could be unforeseen consequences.