THE DORMANT/NEGATIVE COMMERCE CLAUSE
In class this evening we reviewed cases concerning an aspect of the commerce clause (Art. I, Sec. 8, Cl. 3) by which the original thirteen states conferred the power to regulate commerce on the new national congress.
We recall that when Congress regulates (passes laws that prohibit or control an activity, civil or criminal) in an area, the Supremacy Clause provides that Congress’s laws are paramount to conflicting state laws on the same subject. Sometimes there’s an issue whether Congress has intended to fully occupy the field or has left room for some non-conflicting state regulation to exist alongside. Where Congressional law knocks state law aside, we say the Congressional law has pre-empted the state law.
You’ll recall in the Cooley case (Port of Philadelphia harbor pilot requirement) that a compromise was reached such that if the activity was considered national, only Congress could regulate, but that if the activity was local in nature, such as navigating harbors where no two are alike, the states could regulate (i.e. require the hiring of a local pilot) under their police powers.
Police powers, as we discussed, consist of measures promoting health, safety, welfare and morals. This is the big one not given to the federal government but reserved to the states under the Tenth Amendment (all powers not expressly conferred are reserved to the states or the people).
So, here we have a federal power, to regulate commerce sitting alongside the state police power. They’re not supposed to conflict, but they do, often enough, or at least that’s the claim, as we’ve been reading.
Sometimes the states pass laws affecting interstate commerce using their police powers in order to protect local business interests against outside competition. Then there’s trouble.
Because now we’re into this dormant or negative commerce clause. This is where Congress has not spoken to an issue or activity, meaning it hasn’t regulated or passed laws, but a state has, under its police power. Congress has been sleeping while the state has been active. Congress could never pass enough laws to equal what the 50 states could pass, so there’s bound to be plenty of areas for the states to regulate in the meantime. This is the area covered by the dormant or negative (the terms are used interchangeably) commerce clause.
The basic rule is that under the negative commerce clause no state may isolate itself from the national common market that envisions a free-flow of goods and services. States interfere with the free-flow of the stream of commerce by erecting obstacles, tax or non-tax, including
(1) licensing restrictions (or denial of licenses);
(2) combinations of equal taxation of in-state and out-of-state suppliers coupled with subsidies to in-state suppliers only (thus killing the lower production cost advantage of more efficient foreign producers) and the like;
(3) import or export restrictions (such as the two cases on garbage, Clarkstown and New Jersey)
(3) alleged quarantine or sanitary measures (dairy cattle, milk, inspection requirements);
Sometimes these health measures are genuine, but sometimes their intent, or their effect, is to protect local economic interests at the expense of outsiders. That’s a no-no. A good example is the Florida case where three days after the New York investment banking firm applied to do business in Florida, Florida passed a law that prohibited all businesses that met certain characteristics from doing business in Florida. A so-called “Red-haired Eskimo” statute reaching only one person or company. I don’t remember where I first saw that, sorry, but I like it. Florida was not allowed to get away with such disguised protectionism. Local business interests have a way of influencing local law-making bodies to protect themselves to the disadvantage of outsiders. Fancy that. The federal courts are on to that trick. So must you be.
Then we reach the situation where a state tries to protect its own against seven years of famine, as Joseph advised Pharaoh, from the Bible story. Shouldn’t we encourage that? Justice Holmes thought this was okay, but he was in the minority in the 1923 West Virginia pipeline case where the state was running out of natural gas drilled there because too much was being sold out of state. No hoarding was the rule.
But South Dakota embraced the Joseph principle of conserving resources and looking out for your own when it opened a cement plant to protect against shortages of building materials it had been experiencing. It sold cement to all comers, including out-of-state buyers. But then a shortage developed and the state-owned cement plant stopped selling to out of staters.
State protectionism in violation of the negative commerce clause? That’s what disappointed out-of-state customers who had become dependent on supplies from this plant hollered all the way to the Supreme Court.
Did the Court help them out?
Nope, not this time. This was not fatal local protectionism.
Why?
Because the state had performed a magic act: it had turned itself from a lawmaking body into a private business simply by setting up a corporation to do what the legislature could not do. It’s amazing what you can do by playing with the forms of things, isn’t it? The Court refused to pierce the corporate veil, which had become a magician’s veil. The state morphing into a private manufacturer or contractor. Just switched hats. Legislator’s top-hat one day, contractor’s hard-hat the next.
The Court even put a neat sounding label on this exception to the negative commerce clause that let’s states get away with playing games with the negative commerce clause: The Market Participant Exception. Wow! You can do that? You can if you’re the Supreme Court and have four other votes on your side.
All of which leads us up to the best student question of the semester, and we’re only halfway through. Mr. Mengisto asked whether a state could operate a bank offering cheaper loans than private commercial banks. Wouldn’t that be a violation of the negative commerce clause by favoring locals with cut-rate loans, thus putting the big national banks at a commercial disadvantage? All the locals would go to the Schwarzenegger State Bank here in California for their cheap loans. Maybe only local residents buying their first homes would be eligible. The state would be subsidizing homes for young marrieds and new grownups seeking to buy homes near their parents and other family members. Great social benefits. Helping one another in the family. Avoiding old folks and people falling on hard times leaning on the state. Wonderful idea.
Anything wrong with it?
Who would complain?
Wells-Fargo, Citicorp, Nation’s Bank, that’s all. “Foul,” they’d cry, “this is a violation of the negative commerce clause.”
“Not so fast,” Gov. Schwarzenegger would reply, “I’m not passing laws setting the price of loans for locals. Any bank, local or foreign is free to compete with me when I put on my banker’s hat, ‘cuz I’m not regulating, I’m contracting, buying and selling in the market. I’m a market-participant, not a regulator. I’m not affecting the market by any laws I’m signing. I’m affecting the market by my sales policies, which just happen to be underwritten by the general fund of the state.”
Oh. By switching hats the state can do what it can’t do.
Mr. Mengisto wondered whether this was allowed.
The reason I admired the question so much, in addition to its obvious thoughtfulness and intelligence, was because it presented a challenge to our thinking as a group of Con-law students and I certainly don’t know the answer to it. I don’t think the Supreme Court has had occasion to address this question. Therefore it’s up in the air. Isn’t that nice. We get to speculate on it and try out our Con-law water wings.
What do you think each side should argue. Is this just illegal protectionism in disguise, an impermissible restriction on fair competition in the national market place, or is it a legitimate exercise of the Market Participant Exception, the Joseph Principle.
The Court allowed the Mayor of Boston to use Boston tax funds to hire only Bostonians (half actually, but that may be a quibble) on a construction project where Boston acted as the general contractor. Who squawked. Employment agencies representing out of state workers deprived of job opportunities? There’s always someone, but here they lost.
It looks like some of the more conservative justices don’t think much of the negative commerce clause if they’re willing to allow the state to evade the restriction through the device of setting up a different formal structure, in these cases either a corporation or a proprietorship. Either way, the state is buying, selling, and otherwise participating in the market-place just like a private business.
It’s amazing how you can make it up as you go along if you’re on the Supreme Court. For the rest of us, we’ll learn the rules and then we’ll learn to play with them.
Like playing Monopoly, only instead of rolling the dice, we’ll argue the rules. That’s Con-law.
This is a little different than studying cases in other classes, like contracts and torts, right? So much more broad national policy overlain with state sovereignty. Just enough to make it seem a lot fuzzier. Can’t help it if Con-law seems fuzzy. Ain’t my fault. It was that way before I got here. I just try to deal with it. Figure out a principle for each case, stick it in the quiver, and pull out the arrow when I need to shoot it, sharpen it up a bit, and let it fly. Have you a better idea? Let me know what it is.
The trick, of course is to make the arrows in the first place, one per case, minimum, and in the second place to remember which arrows you’ve got in your quiver.
This is where your team arrangement can help. You ought to be consulting with each other to review the cases to see if the three of you can agree what each case stands for. Relate it to the table of contents.
Watch out you don’t say “It” too often when you really mean the principle you’re trying to articulate. We use “it” sometimes to refer to something that seems too hard to put into words. We know what we mean, all right, it’s just that the effort to say the words gets us all balled up. That's why I was giving Ms. Williams what she thought was such a hard time. I was trying to get her to state the principle of the case she briefed. She was giving it a long run-up. The nutshell version, twenty-five words or less, I said. She was still in the run-up, killing it with words. In Con-law, you have to slow down and give yourself time for the thoughts to jell. The fewer words to express what you're trying to get at the better. It sez here. Sorry Patrice. Nuttin' personal. Chalk it up.
The experienced ones, the experts, don’t get all balled up with verbiage. The justices rarely use “it” to refer to some complex idea. They might state it first and then hang a label on it, but they won't resort often (weasel word) to "it."
They'll spell the idea out in exquisite detail, lest the principle be thought broader than it is. Plus they drop in a few weasel words, like ‘reasonable’ or ‘appropriate,’ in case some other case comes up and it would be way too inconvenient politically or otherwise to feel stuck with applying that principle or overruling it. It's breaks less china to make a variance or an exception.
It must be great to be on the Court and make it up as you go along. Hell, someone has to do it. It sure isn’t going to be the legislature. Can you imagine them deliberating the way the Court does? I can’t.
