In a victory for small taxicab owners, a federal judge has thrown out a lawsuit filed by drivers of Minneapolis' largest cab companies challenging the city's plan to increase the number of taxi licenses it issues.

U.S. District Judge James Rosenbaum dismissed the case Tuesday based on a recommendation by U.S. Magistrate Judge Franklin Noel two months ago.

"This is a great victory for those of us who believe in opportunity and low barriers into entrepreneurship," said Lee McGrath, executive director of the Institute for Justice Minnesota, representatives for A New Star Limousine and Taxi service, a small cab company that was allowed to intervene as an interested third party in the suit.

Last spring, a group called the Minneapolis Taxi Owners Coalition Inc. sued the city, arguing that the change, which essentially allows for more cabdrivers and competition, was unconstitutional. The group claims most of its drivers bought their transferable taxi licenses from other drivers for as much as $25,000.

"This stops that practice," Council Member Gary Schiff said Wednesday. "That bit of exploitation was ended overnight."

Now, under the new rules, a taxi driver can pay $475 for a license.

"I'm disappointed," said Lawrence Crosby, the Taxi Owners Coalition attorney. He said he plans to take the case to the Eighth U.S. Circuit Court of Appeals.

"Our suit argues that you can't change the rules without reimbursing the drivers, and the city balked," Crosby said. "These drivers feel misled because the licenses have lost absolutely all of their value."

The Minneapolis City Council approved the change last year, lifting the city's longstanding cap on the number of taxis that can legally operate in city limits. In 2006, there were about 343 taxis operating in the city.

Now, the change allows 45 more cabs on the street each year until 2010 and then scraps the cap after that. Ten percent of the new cabs must be wheelchair-accessible and fuel-efficient vehicles.

"We're not deregulating taxicabs. We're opening up the competition," said Council Member Paul Ostrow, who introduced the ordinance. "We live in a free-market system, and this should be no exception."

Since the ordinance took effect in late March, four companies -- A New Star, Gold Star Taxi, Skybird Taxi and Latino Express -- have been granted licenses under the new rules, Schiff said.

About 67 percent of all cab companies in Minneapolis are now minority-owned, Schiff added.

Crosby said a majority of the 80 cabdrivers he's representing are immigrants from countries such as Somalia, Ethiopia, Morocco and Russia. He said the licenses they paid thousands for are "lifetime investments they may never see a return on."

But Nick Dranias, an attorney for the Institute of Justice, said that Tuesday's dismissal prevents the larger taxi companies from having a monopoly.

"An ordinary person should be able to earn an honest, decent living," Dranias said. "This allows people to try reaching a higher economic status."

Luis Paucar, owner of A New Star Taxi, said Wednesday that after four years of trying to work in Minneapolis, he's grateful for his opportunity. He now has 22 licenses.

"I'm excited," Paucar, 37, said. "All I ever wanted was to have the chance to enter the market and compete."

Terry Collins • 612-673-1790