Chapter 4
Constitutional Authority
to Regulate Business
See Separate Lecture Outline System
INTRODUCTION
The Constitution does not expressly give the states the power to regulate, but limits the states’ exercise of powers not
delegated to the federal government.
ADDITIONAL RESOURCES —
VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 2.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. These clips apply legal concepts to common experiences to ignite discussion and illustrate core
concepts. Clips on topics covered in this chapter include the following.
• Drama of the Law
Free Speech: Constitutional Issues—The right to free speech is guaranteed in the Constitution. When an
individual chooses to speak freely about a business, there may be legal consequences.
• Legal Conflicts in Business
CHAPTER 4: CONSTITUTIONAL AUTHORITY TO REGULATE BUSINESS 67
Before 1789, the Articles of Confederation defined the central federal government, which was perceived as too weak
when state laws interfered with commerce. A national convention was called to amend the Articles, but instead the
delegates drafted the U.S. Constitution.
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B. RELATIONS AMONG THE STATES
1. The Privileges and Immunities Clause
Under the Constitution’s Article IV privileges and immunities clause, when a citizen of one state engages in
2. The Full Faith and Credit Clause
The Constitution’s full faith and credit clause ensures that rights established under deeds, wills, contracts,
and so on in one state will be honored by other states. It also ensures that judicial decisions with respect to
such property rights are honored and enforced in all states.
C. THE SEPARATION OF THE NATIONAL GOVERNMENT’S POWERS
D. THE COMMERCE CLAUSE
1. The Expansion of National Powers under the Commerce Clause
The Constitution expressly provides that Congress can regulate commerce with foreign nations, interstate
commerce, and commerce that affects interstate commerce. This provision—the commerce clause—has
had a greater impact on business than any other provision in the Constitution. At one time the clause was
interpreted to allow Congress to regulate even intrastate commerce that affected interstate commerce.
ENHANCING YOUR LECTURE—
GIBBONS V. OGDEN (1824)
BACKGROUND
In 1803, Robert Fulton, the inventor of the steamboat, and Robert Livingston, who was then American minister to
France, secured a monopoly on steam navigation on the waters in the state of New York from the New York legislature.
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Fulton and Livingston licensed Aaron Ogden, a former governor of New Jersey and a U.S. senator, to operate steam–
powered ferryboats between New York and New Jersey. Thomas Gibbons, who had obtained a license from the U.S.
government to operate boats in interstate waters, competed with Ogden without New York’s permission. Ogden sued
Gibbons. The New York state courts granted Ogden’s request for an injunction—an order prohibiting Gibbons from
operating in New York waters. Gibbons appealed the decision to the United States Supreme Court.
MARSHALL’S DECISION
Sitting as chief justice on the Supreme Court was John Marshall, an advocate of a strong national government. In
his decision, Marshall defined the word commerce as used in the commerce clause to mean all commercial
APPLICATION TO TODAY’S WORLD
Marshall’s broad definition of the commerce power established the foundation for the expansion of national
powers in the years to come. Today, the national government continues to rely on the commerce clause for its
constitutional authority to regulate business activities. Marshall’s conclusion that the power to regulate interstate
2. The Commerce Clause Today
The United States Supreme Court has recently limited the clause in its reach, in decisions that significantly
3. Medical Marijuana and the Commerce Clause
4. The “Dormant” Commerce Clause
70 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
CASE SYNOPSIS—
Case 4.1: Family Winemakers of California v. Jenkins
Massachusetts imposes a three-tier system on the sale of alcoholic beverages. Producers can sell only to in-state
wholesalers, who must obtain licenses to sell to retailers, who must be licensed to sell to consumers. Wineries can
obtain licenses to sell outside this network directly to consumers, but only small wineries—producing less than 30,000
gallons—can sell through both methods. Under this definition, the “large winery” category encompasses the producers
of 98 percent of the wine in the United States—all of whom are located outside Massachusetts. The Family
Winemakers of California and others filed a suit in a federal district court against Eddie Jenkins and other members of
the Massachusetts Alcoholic Beverages Control Commission. The court held that the state’s system violated the
dormant commerce clause. The defendants appealed.
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Notes and Questions
The Twenty-First Amendment to the U.S. Constitution provides that the “transportation or importation into any
State, Territory, or possession of the United Sates for delivery or use therein of intoxicating liquors, in violation of the
laws thereof, is hereby prohibited.” Doesn’t this allow states to enforce discriminatory liquor regulations? No.
State regulation of alcohol is limited by the nondiscrimination principle of the commerce clause. State laws violating
other provisions of the Constitution are not saved by the Twenty-First Amendment, which does not abrogate
Congress’s commerce clause power with regard to liquor. The purpose of the Twenty-First Amendment was not to
empower individual states to favor local liquor industries by restricting out-of-state competitors.
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Suppose that the states had only required the out–of-state wineries to obtain a special license that was
readily available. How might this have affected the outcome of the case? Possibly, although the effect of this
requirement on interstate commerce would have been subject to scrutiny and the result might have depended on its
economic impact and other considerations. It seems unlikely that this type of regulation would have as heavily
burdened the interstate sale of wine as the requirements at issue in this case, but in some cases, even slight
infringements on interstate commerce have been invalidated.
ANSWERS TO QUESTIONS AT THE END OF CASE 4.1
1. The court held that the Massachusetts statute discriminated against out-of–state wineries “by design”
(intentionally). How can a court determine legislative intent? Courts often look to legislative proceedings
2. Suppose that most “small” wineries, as defined by the 2006 Massachusetts law, existed out of state. How
could the law be discriminatory in that situation? This was one of Massachusetts’s arguments before the appellate
court. Massachusetts claimed that because most “small” wineries were located out of state, the law
disproportionately benefited—rather than discriminated against—out-of-state wineries. The court, however,
concluded that the much greater disadvantages that the law imposed on out–of–state “large” wineries exceeded the
benefits that the out-of–state “small” wineries received.
E. THE SUPREMACY CLAUSE AND FEDERAL PREEMPTION
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ENHANCING YOUR LECTURE—
DOES
STATE REGULATION OF INTERNET PRESCRIPTION
TRANSACTIONS VIOLATE THE COMMERCE CLAUSE?
Every year, about 30 percent of American households purchase at least some prescription drugs online. There is
nothing inherently unlawful in such a transaction. Consider that Article X of the Constitution gives the states the
authority to regulate activities affecting the safety and welfare of their citizens. In the late 1800s, the states developed
systems granting physicians the exclusive rights to prescribe drugs and pharmacists the exclusive right to dispense
prescriptions. The courts routinely upheld these state laws.a All states use their police power authority to regulate the
licensing of pharmacists and the physicians who prescribe drugs.
AN EXTENSION OF STATE LICENSING LAWS
About 40 percent of the states have attempted to regulate Internet prescription transactions by supplementing
their licensure rules in such a way to define a “safe” consulting relationship between the physician prescribing and the
SOME STATES ARE ATTEMPTING TO REGULATE INTERSTATE COMMERCE
Recently, the New York State Narcotic Bureau of Enforcement started investigating all companies in New Jersey
and Mississippi that had been involved in Internet prescription medicine transactions with residents of New York.
None of the companies under investigation has New York offices. The legal question immediately raised is whether the
New York State investigations are violating the commerce clause. Moreover, it is the Food and Drug Administration
(FDA) that enforces the regulation of prescription drugs, including their distributors.
ARE NEW YORK AND OTHER STATES VIOLATING THE DORMANT COMMERCE CLAUSE?
states. This is called the dormant commerce clause. As such, this clause prohibits state regulations that discriminate
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interstate commerce. The dormant commerce clause has been used in cases that deal with state regulation of
pharmacy activities.b
In this decade, there is an opposing view based on a line of cases that suggest that state regulation of Internet
activities do not violate the dormant commerce clause. In one case, a New York state law that banned the sale of
cigarettes to its residents over the Internet was found not to violate the dormant commerce clause because of public
health concerns.d In another case, a Texas statute that prohibited automobile manufacturers from selling vehicles on
WHERE DO YOU STAND?
Clearly, there are two sides to this debate. Many states contend that they must regulate the provision of
prescription drugs via the Internet in order to ensure the safety and well-being of their citizens. In some
instances, however, the states may be imposing such regulations at the behest of traditional pharmacies,
which do not like online competition. What is your stand on whether state regulation of Internet prescription
F. THE TAXING AND SPENDING POWERS
Congress has the power to impose taxes, but all taxes must be uniform among the states. In reviewing tax laws,
the United States Supreme Court focuses on whether the tax can be sustained as a valid exercise of federal
regulation. If a tax measure is reasonable, it is generally upheld. Also, a broad interpretation of the commerce
clause can provide a basis for sustaining a federal tax. Through its spending power, Congress disposes of tax
revenue.
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A. LIMITS ON BOTH FEDERAL AND STATE GOVERNMENTAL ACTIONS
Through the Fourteenth Amendment, most of these guarantees have been held to apply at the state level as well.
B. FREEDOM OF SPEECH
The freedoms of religion, speech, press, assembly, and petition are guaranteed by the First Amendment.
Symbolic speech (gestures, clothing, and so on) is protected.
1. Reasonable Restrictions
A balance must be struck between the government’s obligation to protect its citizens and those citizens’
2. Corporate Political Speech
Speech that otherwise would be protected does not lose that protection simply because its source is a
3. Commercial Speech
Freedom-of-speech cases generally distinguish between commercial and noncommercial messages.
CASE SYNOPSIS—
Case 4.2: Bad Frog Brewery, Inc. v. New York State Liquor Authority
Bad Frog Brewery, Inc., sells alcoholic beverages with labels that display a frog making a gesture known as “giving
the finger.” Bad Frog’s distributor, Renaissance Beer Co., applied to the New York State Liquor Authority (NYSLA) for
label approval, required before the beer could be sold in New York. The NYSLA denied the application, in part because
children might see the labels in grocery and convenience stores. Bad Frog filed a suit in a federal district court against
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Notes and Questions
The free flow of commercial information is essential to a free enterprise system. Individually and as a society, we
have an interest in receiving information on the availability, nature, and prices of products and services. Only since
1976, however, have the courts held that communication of this information (“commercial speech”) is protected by the
First Amendment.
Because some methods of commercial speech can be misleading, this protection has been limited, particularly in
solicitation of clients by attorneys. Currently, the Supreme Court allows each state to determine whether or not in–
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 4.2
If Bad Frog had sought to use the offensive label to market toys instead of beer, would the court’s ruling
likely have been the same? Why or why not? Probably not. The reasoning underlying the court’s decision in the
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 4.2
Whose interests are advanced by the banning of certain types of advertising? The government’s interests
the state to restrict the locations where certain ads could be displayed, that banning of “vulgar and profane”
ADDITIONAL CASES ADDRESSING THIS ISSUE—
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Recent cases involving the constitutionality of government restrictions on advertising under the commerce
clause include the following.
• Cases in which restrictions on advertising were held unconstitutional include Thompson v. Western States
Medical Center, __ U.S. __, 122 S.Ct. 1497, 152 L.Ed.2d 563 (2002) (restrictions on advertising of compounded drugs);
4. Unprotected Speech
Constitutional protection has never been afforded to certain classes of speech—defamatory speech,
threats, child pornography, “fighting” words, and statements of fact, for example.
a. Obscene Speech
b. Online Obscenity
With respect to obscenity online, the text discusses some of the legislation. The “community” of the
Internet is national or global—too large for applying the “standards of the community” test, which
restricts non-pornographic materials. The Children’s Internet Protection Act of 2000, which requires
libraries to use filters, was held to be not unconstitutional
ANSWER TO CRITICAL ANALYSIS QUESTION IN THE FEATURE—
ADAPTING THE LAW TO THE ONLINE ENVIRONMENT
Why should it be illegal to “pander” virtual child pornography when it is not illegal to possess it? This is a
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C. FREEDOM OF RELIGION
1. The Establishment Clause
Under the establishment clause, the government cannot establish a religion nor promote, endorse, or show
a preference for any religion. Federal or state law that does not promote, or place a significant burden on,
religion is constitutional even if it has some impact on religion.
CASE SYNOPSIS—
Case 4.3: In re Episcopal Church Cases
The Episcopal Church in New Hampshire ordained a gay man as bishop. Members of St. James Parish did not agree
with this ordination. St. James voted to end its affiliation with the Episcopal Church. A dispute then arose as to who
owned the church building that the parish used for worship and the property on which it stands. The Episcopal Church
and others filed a suit in a California state court against St. James and others, with both sides claiming ownership. The
court ruled that the parish owned the building and the property, but a state intermediate appellate court reversed. St.
James appealed.
The California Supreme Court affirmed. The First Amendment prohibits state courts from deciding questions of
religious doctrine. But to the extent that a secular court can resolve a property dispute without referring to church
doctrine, it should apply “neutral principles of law.” The court should consider the deeds to the property, the local
including state statutes. Although the deeds to the property in this case had long been in the name of the parish, the
local church agreed from the beginning of its existence to be part of the greater church and to be bound by its
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Notes and Questions
Should a secular court ever accept and apply ecclesiastical rules, customs, or laws? Yes. Most churches