CHAPTER 4
THE CONSTITUTION: FOCUS ON APPLICATION TO BUSINESS
The Constitution was drafted in 1787 and became effective upon ratification by 9 of the 13 states
in 1789. Its seven articles provide the framework for the structure of the federal government and
its powers. In 1791, fearing that too many powers had been granted, the Bill of Rights was
ratified to strengthen personal liberties. There are now 27 amendments, all passed by 2/3 vote in
Congress and then approved by 3/4 of the state legislatures. Interpretation of the Constitution has
shown it to be a flexible document for over 200 years.
COMMERCE CLAUSE—Some parts of the Constitution are more relevant than others for
business; we focus on the sections that are of particular concern to business. All statutes and
regulations must not violate constitutional rights. The Commerce Clause gives Congress the
power to regulate commerce among states and with foreign nations. Supreme Court has always
read Constitution to give Congress broad powers.
The Necessary and Proper Clause—After listing specific powers, including the right to
regulate commerce, the necessary and proper clause gives Congress power “to make all
Laws…necessary and proper for carrying into Execution the foregoing Powers….” This provides
Congress with broad power to regulate business.
McCulloch v. Maryland—The Supreme Court, answering the question, in 1819, if Congress
could establish a national bank, stated that Congress was not restricted to the list of powers
“enumerated” in the Constitution. The necessary and proper clause expanded the power of
Congress, not limit it.
Federal Supremacy—The McCulloch decision also made clear that when the federal government
has the constitutional power to act, its actions are supreme over the states.
Defining “Commerce Among the Several States”—The quote from Justice Marshall in
Gibbons v. Ogden shows the S. Ct. has long given a broad reading to the commerce clause. As
Justice O’Connor said in New York v. U.S. (1992): “The volume of interstate commerce and the
range of commonly accepted objects of government regulation have…expanded considerably in
the last 200 years, and the regulatory authority of Congress has expanded along with
them….activities once considered purely local have come to have effects on the national
economy, and have accordingly come within the scope of Congress’ commerce power.” Congress
also has exclusive power over foreign commerce.
Add. Case: Crosby v. National Foreign Trade Council (S.Ct., 2000)–A Mass. statute barred
state agencies from buying goods from companies doing business with Burma (Myanmar). A
nonprofit corporation representing member companies that engage in foreign trade challenged
the constitutionality of the Burma Law. The district court granted summary judgment for the
plaintiff. Decision affirmed by the court of appeals. Massachusetts appealed.
Decision: Affirmed. Mass. law is unconstitutional. Under the Supremacy Clause, unless
Congress allows otherwise, states may not intervene in this area. Just because the federal
Power over Interstate Commerce Is Extensive—Wickard v. Filburn is the beginning of the
modern “Affectation Doctrine.” The Court upholds federal regulation of even local, personal
activities. Farmer was convicted of growing small amount of wheat for consumption on his farm
without USDA permission. “Even if [the farmer’s] activity be local, and though it may not be
regarded as commerce, it may still, whatever its nature, be reached by Congress … irrespective of
whether such effect [on interstate commerce] is what might at some earlier time have been
defined as ‘direct’ or ‘indirect’.” Any local businesses may be regulated by Congress, the Court
has ruled many times.
Add. Info.—Farmer Filburn raised livestock and crops on his 90 acre farm. The Agricultural
Adjustment Act imposed production limits to force up prices by cutting supply of crops. Filburn
planted wheat on 23 acres; the USDA told him he could plant only 11 acres in 1940. He did not
believe the government could tell him how much of what to grow on his property—and he did
not sell the output—it was consumed on his farm. He was fined $117 and fought it up to the
Supreme Court. The holding made clear the sweeping use of the Commerce Clause from that
time forward.
CASE: Katzenbach v. McClung—An Alabama restaurant continued to refuse to serve blacks
after passage of 1964 Civil Rights Act. The Civil Rights Act of 1964 became effective on July 1,
1964. The suit against McClung was filed immediately and heard by a three judge panel at
district court. The appeal from that case was taken immediately to the Supreme Court, argued
October 5, and the decision announced December 14. The companion case to this one (Heart of
Atlanta Motel) was also quickly run through the system.
Decision: “It is important that a decision on the constitutionality of the Act … be announced as
quickly as possible.” While most Supreme Court litigation takes 5-10 years to get to that stage,
the Court can cooperate to act quickly on issues of great political sensitivity. In McClung the
Questions: 1. Might the Court might have found differently if the restaurant could have shown
that all of its food was from sources within the state?
The Court would be unlikely to have found differently in this case even if all food served by the
restaurant was shown to be produced within the state. The Court held previously, as in the
Wickard v. Filburn case, that if Congress wishes to regulate a particular industry then the
2. Suppose evidence showed that when restaurants were required to integrate, they often closed
their doors and refused to do any more business. Does this go against the argument that the law
enhances interstate commerce?
At the time integration of public accommodations was required, some firms closed because
customers refused to patronize the businesses now that they were integrated, or because the
business owner refused to integrate. The Court noted that such consequences were unfortunate,
Add. Case: U.S. v. Lopez (S. Ct., 1995)–Lopez, a high school senior, carried a concealed
handgun into his school. He was charged with violating the Gun-Free School Zones Act of 1990,
by which Congress made it a federal offense to “knowingly possess a firearm at … a school
zone.” Lopez was convicted in federal district court. The conviction was overturned by the court
of appeals; the government appealed.
Decision: Affirmed. The Act exceeded the Commerce Clause authority of Congress. The
possession of a gun in a local school is in no sense an economic activity that might have a
substantial effect on interstate commerce. This was a local student at a local school; he did not
act in interstate commerce. To justify the Act because firearms possession in a local school zone
Federal and State Regulatory Relations—State regulations may not impede interstate
commerce without permission of Congress and may not conflict with federal regulations. State
regulations may overlap federal regulation, unless prohibited by Congress. E.g., states were
allowed to regulate intra-state trucking until 1994, when Congress prohibited controls, leaving
the pricing of trucking services largely unregulated. Congress may authorize states to regulate a
business they could not otherwise, such as insurance.
Add. Info—State Federal Regulations: State law may not conflict with federal law. Cases have
stricken state liability of pesticide makers that were in compliance with the FIFRA. As the 9th
circuit held, allowing damages (in a tort suit for failure to warn consumers of the dangers of
pesticide) would be “tantamount to allowing the state of Arizona to regulate pesticide labeling
indirectly, an action which is specifically prohibited” by the federal statute. When there are no
federal regulations, “states remain free to establish or continue in effect their own safety
standard,” the Supreme Court noted Freightliner Corp. v. Myrick. A truck maker was sued for
failing to install anti-lock brakes; it claimed the states could not regulate the matter because
there are federal rules concerning truck safety. But there are no federal regulations for truck
brakes; since state regulations would not injure interstate commerce, states could regulate the
matter. However, as the Court noted in Kassel v. Consolidated Freightways (when Iowa
prohibited trucks from being more than 60′ long when many companies were using 65′ long
double trailers), the safety interest of the state was insufficient to overcome the burden on
interstate commerce.
When State Law Impedes Interstate Commerce—The Supreme Court has had numerous cases
dealing with the problem of state regulations infringing interstate commerce or infringing on
commerce that Congress regulates but has not prohibited state regulation. Southern Pacific v.
Arizona is a good example of a state regulation asserted to exist to protect public safety, but
rejected by the Court as impeding interstate commerce. Arizona law shortened trains when they
went through Arizona, which required more engines to be used (its real purpose was to increase
the number of union railroad jobs); the state safety claim was rejected by the Court as impeding
interstate commerce. The text gives several brief examples of state regulations stricken by the
Supreme Court
CASE: Hughes v. Oklahoma (S.Ct., 1979)—For the express purpose of protecting natural
minnows (ones that live in state waters), the Oklahoma legislature prohibited selling or shipping
minnows out of state, although it was legal to sell and ship minnows within the state. Hughes
was convicted of violating the statute for shipping minnows to Texas. The Oklahoma supreme
court upheld the statute as within the state’s interest of protecting its natural resources. The
Supreme Court reviewed.
Decision: States have legitimate interests, such as protecting natural resources. Such regulations
must not be designed to discriminate against interstate commerce. Oklahoma could have
accomplished this by controlling the number of minnows that could be taken, but it could not
Questions: 1. The Court held that the Oklahoma law unfairly discriminated against interstate
commerce. How could the state have designed a regulation to achieve the same result, protecting
minnows, that would not harm interstate commerce?
If Oklahoma wanted to protect its minnows, it would prohibit their being caught or restrict the
2. Suppose Oklahoma got other states to agree on such a restriction on the shipment of minnows,
and that Oklahoma similarly agreed on shipments in the other direction to help other states
protect their resources. Would that be a reasonable compromise?
That has been tried. Mississippi would not accept milk certified as safe from another state
(supposedly for public health purposes) unless the other state agreed to accept Mississippi milk
with its safety designation attached. The Court struck down that law (Great A&P Tea Co. v.
Add. Case: Biotechnology Industry Org. v. D.C. (Fed. Cir., 2007)–The District of Columbia
City Council adopted a law that prohibited any patented drug from being sold in the District for
an “excessive price.” The Excessive Pricing Act specifically prohibited minimum resale price
requirements for prescription drugs. It prohibited wholesale drug prices from being more than
30% higher than prices in Germany, Canada, Australia, or the United Kingdom. The
Pharmaceutical Research and Manufacturers of America (PhRMA) and the Biotechnology
Industry Organization (BIO) sued to challenge the law as in violation of the Commerce Clause.
The district court held that the Act was preempted by federal patent laws and enjoined its
enforcement. The City appealed.
Affirmed. PhRMA and BIO had standing to challenge the Act, as they stand to be injured by it.
The Excessive Pricing Act was preempted by federal patent law, since it was a clear obstacle to
the accomplishment and execution of the purpose and objective set by congress in passing
federal patent laws regarding prescription drugs. The Supremacy Clause provides general
principles of preemption that prohibit the states, and the District, from infringing in this area.
State law must yield to congressional enactments if they stand as an obstacle to the intent of the
federal statute.
Add. Case: Fulton County v. City of Atlanta (Sup. Ct., Ga., 2006)–Atlanta contracted with
Advanced Disposal Services and Republic Services of Georgia to collect, transport, and dispose
of the city’s garbage. The waste is collected in town, taken to transfer stations, and then
transported to landfills in counties outside of the city. A state statute gave counties in George the
power to veto the importation of solid waste. Fulton County vetoed the moving of Atlanta trash
through the County. The city sued. The trial court held for the city. The county appealed.
Decision: Affirmed. The Supreme Court specifically struck down a Michigan statute that
prohibited a private landfill from receiving waste that came from outside the county. Such
Add. Case: Minnesota v. Clover Leaf Creamery (S. Ct., 1981)–A Minnesota law prohibited
retail milk sales in plastic, non-returnable, non-refillable containers, but allowed sales in other
non-returnable, non-refillable containers, such as paperboard milk cartons.
Decision: The statute is not unconstitutional. Its primary purpose was to promote conservation
and to ease solid waste disposal problems, not to protect Minnesota dairy farmers and
Add. Case: State v. Labor Ready (Ct. App., Wash., 2000)–Labor Ready was charged with
violating the Washington state strikebreaker law, a criminal statute, which prohibits anyone
involved in a labor strike or lockout dispute to recruit workers from out of state. Labor Ready
helped Kaiser Aluminum find replacement workers for a plant where there had been a year-long
lockout. The trial court dismissed the suit, ruling the statute unconstitutional. The state
appealed.
Decision: Affirmed. The strikebreaker statute is preempted by the National Labor Relations Act;
it attempted to regulate actions that Congress intended to be left unregulated. Under the NLRA,
Imitation Not Allowed—Even if Congress regulates commerce in some manner, the states may
not imitate such regulations without permission. In Wunnicke, the state of Alaska imitated federal
regulations about the processing (milling) of timber in Alaska prior to shipment from the state;
the Supreme Court struck down the Alaska statute as obstructing interstate commerce. Congress
can obstruct interstate commerce, even if only from one state, but the states may not follow suit
without permission.
THE TAXING POWER—The Constitution gives Congress the power to “lay and collect Taxes,
Duties, Imposts and Excises.” Taxes may be used for punitive or regulatory purposes.
Federal Taxation—The power of Congress to impose taxes is nearly unlimited; the Supreme
Court rarely questions the rationality of tax laws: “Inquiry into the hidden motives which may
move Congress to exercise a power constitutionally conferred upon it is beyond the competency
of courts….” (Note: some students have heard about various tax scams in which someone asserts
that there is no constitutional basis for the income tax or some other tax; note that hundreds of
people are convicted each year for having some bogus challenge to federal taxing authority.)
State Taxation—Numerous cases have concerned schemes by states to impose heavier taxes on
out-of-state businesses relative to in-state businesses. States usually may tax in-state businesses
more heavily than out-of-state businesses. The Supreme Court is not concerned with the level of
state taxes, or the kinds of taxes imposed, so long as the tax is not discriminatory in interstate
commerce.
Issue Spotter: Unconstitutional Business Activity?
Companies lobby for special favors for one firm, or for an industry, all the time. This particular
special benefit would be unconstitutional since it would give a special tax status to in-state
companies compared to out-of-state competitors. It may be unethical to lobby for a benefit that is
Apportioning State Tax Burden—A complex issue in state taxation is apportionment of tax
burden on interstate businesses. Different accounting methods attribute very different levels of
income to the same companies’ operations in different states. [E.g., GM buys parts that go into
their vehicles from about 30 states. Most of those states tax GM based on the value added from
Add. Case: Assoc. Industries of Missouri v. Lohman (S. Ct., 1994)–Missouri had a uniform
“additional use tax” on goods purchased outside the state that are stored or used within the
state. The tax is to “compensate” local jurisdictions for the sales taxes they do not get from such
goods that are used locally compared to goods sold locally with a sales tax. Since the sales tax
rate in Missouri varies, in some locales the additional use tax rate was higher than the sales tax
rate. The Missouri S. Ct. upheld the tax; an industry group appealed.
Decision: Reversed. The tax discriminates against interstate where the additional use tax
exceeds the local sales tax. The use tax would be constitutional if it did not discriminate in the
locales where it was higher. “Requiring equal treatment of intrastate and interstate commerce
Add. Case: Hunt-Wesson v. Franchise Tax Board of Calif. (S. Ct., 2000)–“California’s rules
for taxing its share of a multistate corporation’s income authorize a deduction for interest
expense. But they permit (with only one adjustment) use of that deduction only to the extent that
the amount exceeds certain out-of-state income arising from the unrelated business activity of a
discrete business enterprise, i.e., income that the State could not otherwise tax.” Hunt
challenged the constitutionality of this tax rule, which was upheld by California courts.
Decision: Reversed. “A State may tax a proportionate share of the ‘unitary’ income of a
non-domiciliary corporation that carries out a particular business both inside and outside that
State, but may not tax ‘non-unitary’ income received by a non-domiciliary corporation from an
State Taxes May Not Impede Foreign Trade—Congress may tax foreign trade; the states may not
impose taxes that discriminate against goods in international commerce.