How Can Businesses Use the Dormant Commerce Clause to Their Advantage?

The Commerce Clause of the U.S. Constitution grants broad authority to Congress “to regulate Commerce...among the several States.” In connection with Congress’ Commerce Clause powers, courts have inferred that state governments do not have the power to regulate commerce in other states. The Dormant Commerce Clause (DCC) prohibits California and other states from discriminating against interstate commerce. Businesses that operate across state lines can benefit from the DCC’s restrictions on state governments’ power, such as when the laws of another state impose harsher regulations on them than on local businesses.

What is the Dormant Commerce Clause?

The DCC does not actually appear in the Constitution. Courts have inferred it from the powers granted by the Commerce Clause itself. To help you understand the Dormant Commerce Clause, we will describe some history about the Commerce Clause first.

Over the past 80 years, the Supreme Court has taken a rather expansive view of the powers conferred by the Commerce Clause. It has affirmed the constitutionality of laws covering a wide range of areas under the banner of “regulating interstate commerce.” One particularly famous example is the Civil Rights Act of 1964, which prohibits discrimination by private businesses, employers, property owners, and others on the basis of race, religion, and other factors. A motel owner filed suit against the federal government shortly after the Civil Rights Act became law, arguing that Congress exceeded its authority by attempting to regulate his business. The Supreme Court ruled against him in Heart of Atlanta Motel, Inc. v. United States, 379 U.S. 241 (1964). It found that the Commerce Clause authorized the law because of “overwhelming evidence that discrimination by hotels and motels impedes interstate travel.”

The Supreme Court first identified the Dormant Commerce Clause in several decisions from the 1820s. As the Supreme Court’s interpretation of the scope of the Commerce Clause has expanded, the DCC has taken on greater importance. The Supreme Court has used the DCC to invalidate state laws imposing taxes on out-of-state commerce, barring the importation of goods or other materials from other states, and requiring local processing of goods, to name a few examples.

Claims Based on the Dormant Commerce Clause

Like the federal antitrust laws, the Dormant Commerce Clause can function as a check on state government conduct. The best way to understand how the DCC can help businesses is to examine examples of successful DCC claims decided by the Supreme Court.

Protectionism

Some state laws flagrantly favor in-state businesses over their out-of-state competitors. The DCC prohibits this sort of protectionism. Laws that place greater burdens on out-of-state businesses might therefore be invalid.

In Granholm v. Heald, 544 U.S. 460 (2005), the Supreme Court considered a challenge to state laws in Michigan and New York that allowed wineries located within the respective states, but not out-of-state wineries, to ship their products directly to consumers. For example, a consumer in New York could order wine directly from a winery located in New York, but not from a winery in California. The California winery would only be able to sell wine to a wholesaler in New York, which could sell wine to a retailer, which could sell wine to a consumer. The court held that these laws violated the Dormant Commerce Clause by discriminating against out-of-state wineries.

An earlier Supreme Court decision, Baldwin v G. A. F. Seelig (1935), dealt with a state law that came between a company and its out-of-state parent company. New York passed a law that effectively required milk dealers to buy milk from in-state milk producers. A New York company that bought its milk from its parent company in Vermont sued to invalidate the law, and it won.

Importation

A state cannot, in most circumstances, prohibit the importation of goods or other materials from other states. The Supreme Court determined this principle in City of Philadelphia v. New Jersey, 437 U.S. 617 (1978), after New Jersey passed a law to prevent Philadelphia from shipping its waste to New Jersey landfills.

Taxation

State tax laws that discriminate against out-of-state businesses also may violate the Dormant Commerce Clause. In West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994), the Supreme Court struck down a Massachusetts law that taxed milk imported from other states and used the revenue to provide subsidies to in-state producers.

The Supreme Court has reached conflicting decisions about laws that impose sales tax across state lines. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), it held that states could not collect sales tax on purchases made from out of state, unless the vendor had a “physical presence” in that state. The court overturned this ruling, however, in South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018). The vast increase in e-commerce between 1992 and 2018 was likely a factor in the reversal.

Local Processing Requirements

States cannot enact laws requiring local processing of goods imported into the state, or intended for shipment out of the state. In Minnesota v. Barber, 136 U.S. 313 (1890), for example, the court struck down a law requiring that meat products imported from out of state be inspected by a Minnesota inspector. Arizona could not require an in-state cantaloupe grower to use an in-state packer to crate their product before shipping it to California, according to Pike v. Bruce Church, Inc., 397 U.S. 137 (1970).

Defenses to the Dormant Commerce Clause

If you assert a claim based upon the dormant commerce, you should anticipate that the state will respond with one or more of the following defenses:

Balancing Test

In the Pike decision mentioned above, the Supreme Court established a “balancing test” for laws that are not blatantly discriminatory. A state law that has only an “incidental” impact on interstate commerce will fail a Dormant Commerce Clause review only if “the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.”

Congressional Authorization

If Congress has granted authority to one or more states to regulate interstate commerce, any state law that fits within the scope of that authority does not violate the Dormant Commerce Clause. In Western & Southern Life Ins. Co. v. State Bd. of Equalization of Cal., 451 U.S. 648 (1981), for example, the Supreme Court held that Congress had authorized a law imposing a tax on certain out-of-state businesses.

Market Participant Exception

A state does not violate the DCC when it is acting as a consumer or a business, rather than as a “market regulator.” South Dakota, for example, did not violate the DCC when, during a cement shortage, state regulators directed a state-owned cement plant to stop selling to a customer in Wyoming in order to make sure that certain in-state customers had an adequate supply. Reeves, Inc. v. Stake, 447 U.S. 429 (1980).

The market participant exception, of course, works differently for the Dormant Commerce Clause than it does for state-action immunity to the antitrust laws. Under antitrust law, the US Supreme Court has left open the question of whether a state or local government entity that acts as a commercial or market participant has the ability to utilize state-action immunity for antitrust liability, even if they satisfy the Midcal test. You can read a law review article co-authored by Jarod Bona if you are interested in more about this.

Bona Law likes to challenge government conduct. If you want help with that, please contact us. You can also call us at 858-964-4589 or email us at info@bonalawpc.com. We also recommend that you check out our Antitrust Website.