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Chapter 4
Business and the Constitution
INTRODUCTION
Many people assume that a government acts from a vague position of strength and can enact any regulation
it deems necessary or desirable. This chapter emphasizes a different perspective from which to view the law: action
taken by the government must come from authority and this authority cannot be exceeded.
Neither Congress nor any state may pass a law in conflict with the Constitution. The Constitution is the
supreme law in this country. The Constitution is the source of federal power and to sustain the legality of a federal
2 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
CHAPTER OUTLINE
I. The Constitutional Powers of Government
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.
A. A FEDERAL FORM OF GOVERNMENT
The U.S. Constitution established a federal form of government, through which the states and the na-
tional government share sovereign powers.
1. Federal Powers
2. Regulatory Powers of the States
The states regulate affairs within their borders through their police powers, which derive in part from
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
2. The Full Faith and Credit Clause
The Constitution’s full faith and credit clause ensures that rights established under deeds, wills,
decisions with respect to such property rights are honored and enforced in all states.
C. THE SEPARATION OF POWERS
Deriving power from the Constitution, each of the governmental branches (the executive, the legislative,
and the judicial) performs a separate function. No branch may exercise the authority of another, but
each has some power to limit the actions of the others. This is the system of checks and balances.
• Congress, for example, can enact a law, but the president can veto it.
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
CHAPTER 4: BUSINESS AND THE CONSTITUTION 3
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
CASE SYNOPSIS—
Case 4.1: Heart of Atlanta Motel v. United States
A motel owner, who refused to rent rooms to African Americans despite the Civil Rights Act of 1964,
brought an action to have the Civil Rights Act of 1964 declared unconstitutional. The owner alleged that, in
passing the act, Congress had exceeded its power to regulate commerce because his motel was not engaged
in interstate commerce. The motel was accessible to state and interstate highways. The owner advertised
nationally, maintained billboards throughout the state, and accepted convention trade from outside the state
(75 percent of the guests were residents of other states). The district court sustained the constitutionality of
the act and enjoined the owner from discriminating on the basis of race. The owner appealed. The case went
to the United States Supreme Court.
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Notes and Questions
Does the Civil Rights Act of 1964 actually regulate commerce or was it designed to end the
practice of race (and other forms of) discrimination? In this case, the Supreme Court said, “[T]hat
Are there any businesses in today’s economy that are “purely local in character”? An individual
who contracts to perform manual labor such as lawn mowing or timber cutting within a small geographic area
Which constitutional clause empowers the federal government to regulate commercial activities
among the states? To prevent states from establishing laws and regulations that would interfere with trade
4 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
If this case had involved a small, private retail business that did not advertise nationally, would
the result have been the same? Why or why not? It is not likely that the result in this case would have
ENHANCING YOUR LECTURE—
GIBBONS V. OGDEN (1824)
The commerce clause, which is found in Article I, Section 8, of the U.S. Constitution, gives Congress the
power “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian
Tribes.” What exactly does “to regulate commerce” mean? What does “commerce” entail? These questions
came before the United States Supreme Court in the case of Gibbons v. Ogden.a
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. Fulton and Livingston licensed Aaron Ogden, a former governor of New Jersey and a
MARSHALL’S DECISION
Sitting as chief justice on the Supreme Court was John Marshall, an advocate of a strong national gov-
ernment. In his decision, Marshall defined the word commerce as used in the commerce clause to mean all
commercial intercourse—that is, all business dealings that affect more than one state. The Court ruled
against Ogden’s monopoly, reversing the injunction against Gibbons. Marshall used this opportunity not only
CHAPTER 4: BUSINESS AND THE CONSTITUTION 5
APPLICATION TO TODAY’S WORLD
Marshall’s broad definition of the commerce power established the foundation for the expansion of na-
tional 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
2. The Commerce Clause Today
The United States Supreme Court has recently limited the clause in its reach, in decisions that
3. The “Dormant” Commerce Clause
States do not have the authority to regulate interstate commerce. When state regulations affect in-
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
AN EXTENSION OF STATE LICENSING LAWS
6 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
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
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
ARE NEW YORK AND OTHER STATES VIOLATING THE DORMANT COMMERCE CLAUSE?
As you learned in this chapter, the federal government regulates all commerce not specifically granted to
the states. This is called the dormant commerce clause. As such, this clause prohibits state regulations that
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 drug transactions violates the dormant commerce clause of the
Constitution? Realize that if you agree that it does, then you probably favor less state regulation. If
you believe that it does not, then you probably favor more state regulation.
a. See, for example, Dent v. West Virginia, 129 U.S. 114, 9 S.Ct. 231, 32 L.Ed. 623 (1889).
CHAPTER 4: BUSINESS AND THE CONSTITUTION 7
E. THE SUPREMACY CLAUSE AND FEDERAL PREEMPTION
The Constitution, laws, and treaties of the United States are the supreme law of the land. When there is
a direct conflict between a federal law and a state law, the state law is held to be invalid.
1. Preemption
2. Congressional Intent
Generally, congressional intent to preempt will be found if a federal law is so pervasive,
F. THE TAXING AND SPENDING POWERS
• Congress has the power to impose taxes, but all taxes must be uniform among the states. In re-
II. Business and the Bill of Rights
The first ten amendments to the Constitution, known as the Bill of Rights, embody protections against various
types of interference by the federal government.
A. LIMITS ON FEDERAL AND STATE GOVERNMENTAL ACTIONS
1. The Fourteenth Amendment
2. Judicial Interpretation
The rights secured by the Constitution are not absolute. The government gives constitutional
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.
8 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
1. Reasonable Restrictions
CHAPTER 4: BUSINESS AND THE CONSTITUTION 9
a. Content-Neutral Laws
If a restriction imposed by the government is content neutral (aimed at combating a societal
b. Laws That Restrict the Content of Speech
ENHANCING YOUR LECTURE—
DO COMPUTERS HAVE FREE SPEECH RIGHTS?
When you do a Web search using Microsoft’s Bing, Google, or any other search engine, the program
inherent in those engines give you a listing of results. When you use a document-creation program, such as
Microsoft Word, it often guesses at your misspellings and corrects them automatically. Do computers that
make such choices engage in “speech,” and therefore do they enjoy First Amendment protections? This
question is not as absurd as it may seem at first glance.
ARE GOOGLE’S SEARCH RESULTS “SPEECH?”
More than a decade ago, a company dissatisfied with its rankings in Google’s search results sued.
GOOGLE VERSUS THE FEDERAL TRADE COMMISSION (FTC)
There has never been any question in the last few years that Google is the dominant search engine.
THE FIRST AMENDMENT PROTECTION ARGUMENT
Google commissioned Eugene Folokh and Donald Falk, two legal experts in this field, to research the
First Amendment protection issue for search engine search results.b The researchers argue that search
10 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
Columbia Law professor Tim Wu does not agree. He has argued that protecting a computer’s “speech” is
not related to the purposes of the First Amendment, which was intended to protect humans against the evils
of state censorship. At best, you can call search engine results commercial speech. First amendment
coverage of such speech has always been limited. After all, computers make trillions of invisible decisions
each day. Is each of those decisions protected speech?
...............................................................................................................................................
CRITICAL THINKING
Facebook has numerous computers, all programmed by humans, of course. If Facebook’s
computers make decisions that allow your private information to be shared without your knowledge,
should the First Amendment protect Facebook? Why or why not? The issue of protecting privacy has
both technological and ethical aspects. From the technological point of view, Facebook and other social
2. Corporate Political Speech
Speech that otherwise would be protected does not lose that protection simply because its source
is a corporation. For example, corporations cannot be entirely prohibited from making political
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
CHAPTER 4: BUSINESS AND THE CONSTITUTION 11
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 the NYSLA, asking for, among other things, an injunction
against this denial. The court granted a summary judgment in favor of the NYSLA. Bad Frog appealed.
..................................................................................................................................................
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.
ADDITIONAL CASES ADDRESSING THIS ISSUE—
Advertising and the Commerce Clause
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); and This That and Other Gift and Tobacco, Inc. v. Cobb County, 285 F.3d 1319 (11th
Cir. 2002) (restrictions on advertising of sexual devices).
12 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
3. Commercial Speech
Commercial speech is not protected as extensively as noncommercial speech. Even if commercial
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
Obscene material is unprotected. But other than child pornography, there is little agreement
b. Online Obscenity
Some recent legislation has included—
• The Communications Decency Act (CDA) of 1996, portions of which were struck as
c. Virtual Pornography
The Prosecutorial Remedies and Other Tools to End the Exploitation of Children Today
been upheld.
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.
a. Applicable Standard
b. Religious Displays
