The Dormant Commerce Clause and Geolocation: Some Background About Federalism
[Jack Goldsmith and I will have this article out in the Texas Law Review early next year, and I’m serializing it here. There is still plenty of time for editing, so we’d love to hear any recommendations you folks might have; in the meantime, you can read the entire PDF of the latest draft (though with some formatting glitches stemming from the editing process) here.]
Let’s begin with a few words about the Dormant Commerce Clause and how it interacts with federalism principles.
The U.S. Constitution presumptively preserves state authority to control what happens within state borders, especially state power to protect citizens and residents from what legislators or voters perceive as harms. This state “police power” to regulate “health, safety, and morals” is implicitly acknowledged by the Constitution’s structure of enumerated powers, and by the Tenth Amendment.
The Constitution’s preservation of the police power in the states ensures that “the facets of governing that touch on citizens’ daily lives are normally administered by smaller governments closer to the governed.” Regulatory preferences differ across states because states differ in their citizens’ tastes, moral views, wealth, willingness to pay, and the like. State lawmakers are generally better positioned than federal lawmakers to ascertain such in-state preferences and implement the best policies based on them. Because policy preferences differ across states, regulating at the state level can in the aggregate satisfy more individual preferences than a uniform national law. And federalism also lets states serve as “laboratories” that can experiment with various options, and show the way for other states (and perhaps for an eventual national rule).
A uniform national law is sometimes appropriate to implement important national values or correct various state-level pathologies. But such uniform rules are typically imposed by a provision in the U.S. Constitution, such as the Takings Clause or the First Amendment, or by federal legislation within Congress’ enumerated powers.
Alongside these principles of vertical federalism, the Constitution imposes horizontal limitations that prohibit states from unduly impinging on the prerogatives of sister states or the proper operation of the interstate system. The Full Faith and Credit and Due Process Clauses prohibit states from regulating out-of-state conduct unless the conduct involves a “significant contact” or “significant aggregation of contacts” with the state. The Privileges and Immunities Clause prevents states from enacting certain types of laws that give a benefit to in-staters but not out-of-staters. And of central relevance to this article, the Dormant Commerce Clause prevents states from enacting certain regulations that affect interstate commerce.
Two principal tests govern Dormant Commerce Clause analysis. First, state regulations cannot discriminate against interstate commerce. In practice this usually means that state regulation cannot favor in-state over out-of-state firms.
Second, neutral state regulations cannot unduly burden interstate commerce. “Where the statute regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.” The Supreme Court has not been clear about how to apply this undue burden test. But the economic efficiency criterion that animates Dormant Commerce Clause jurisprudence suggests that the out-of-state costs of a state regulation are often justified, and that courts should balance the costs and benefits of a state regulation and strike down only those that impose costs on out-of-staters that clearly exceed the benefits they bring in-staters.
A handful of Supreme Court cases have invoked the Dormant Commerce Clause to invalidate state laws on a third, ostensibly different, ground: that the laws regulate extraterritorially or impose inconsistent regulatory burdens. The extraterritoriality argument is particularly often raised in lower-court Dormant Commerce Clause challenges to state regulations of the internet. Yet the Supreme Court has not applied the extraterritoriality test or the inconsistent regulation test in recent decades, and commentators and lower courts have doubted whether these tests have much practical contemporary relevance beyond what the two standard Dormant Commerce Clause principles—discrimination and undue burden—prohibit.
The Court articulated the modern extraterritoriality test in two alcohol price-affirmation cases in the 1980s. Brown-Forman Distillers Corp. v. New York State Liquor Authority involved a New York law under which liquor distillers could not sell to wholesalers in New York except in accordance with a monthly price schedule that affirmed that prices in New York were no higher than the lowest prices charged in other states. Healy v. Beer Institute, Inc. involved a Connecticut statute that required out-of-state beer shippers to affirm that prices posted for products sold to Connecticut wholesalers were, in the relevant period, no higher than prices in bordering states. The Court invalidated these price affirmation schemes on the narrow grounds that they had the “practical effect of controlling . . . prices” in another state, and thus “deprive[d] businesses and consumers in other States of ‘whatever competitive advantages they may possess’ based on the conditions of the local market.”
Beyond this narrow holding, Healy, relying on Brown-Forman and earlier decisions, stated more generally that the “Commerce Clause . . . precludes the application of a state statute to commerce that takes place wholly outside of the State’s borders, whether or not the commerce has effects within the State,” as well as laws for which the “practical effect of the regulation is to control conduct beyond the boundaries of the State.” This dicta, if taken seriously, would require a dramatic rethinking of state authority.
But it is clear that this dicta has not and cannot be taken seriously. It is widely accepted that, consistent with the Dormant Commerce Clause, a firm doing multistate business must bear the cost of discovering and complying with state laws—tort laws, tax laws, franchise laws, health laws, privacy laws, and much more—everywhere it does business.
People and firms operating in “real space” must take steps to learn and comply with state law in places they visit or do business, or must avoid visiting or doing business in those states—and that often means that the “practical effect of the regulation is to control conduct beyond the boundaries of the State.” McDonald’s can (and must) craft different franchise contracts to comply with different state franchise laws, even if most of the conduct involved in creating and implementing such contracts would likely take place in the state in which McDonald’s is headquartered. Walmart’s data collection at checkout in its thousands of stores must conform to the potentially different privacy laws in all fifty states. Conagra can label its cooking oil “100% Natural,” but may need to include different disclaimers in different states, to the extent that the label is seen as potentially misleading.
One “practical effect” of all these state schemes is the cost—legal cost, compliance cost, and m
Article from Reason.com