The Market-Participant Exception And The Dormant Foreign Commerce Clause

• Author: J.T. Hutchens
• Position: A.B., College of William & Mary; Candidate for J.D., Benjamin N. Cardozo School of Law
• Pages: 445-477

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A.B., College of William & Mary; Candidate for J.D., Benjamin N. Cardozo School of Law. I am grateful to Laura Grosshans and Professors Paul R. Verkuil and Martin J. Stone for their thoughtful critiques of earlier drafts of this Note.

The Supreme Court has long accepted the proposition that the Constitution`s Commerce Clause¹ contains an implied prohibition against a state² law that burdens interstate or international trade.3 While the bulk of Dormant Commerce Clause jurisprudence and literature relates to state impediments to interstate commerce, the first, and perhaps more fundamentally important, part of the Commerce Clause gives Congress power over trade with foreign countries.⁴ Thus, the Court has imposed the strictures of the Dormant Commerce Clause on state regulation of foreign trade.⁵

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For the past three decades the Supreme Court has recognized an exception to the Dormant Interstate Commerce Clause rule when the state acts not to regulate the market but instead behaves as a "market participant."⁶ This relatively young exemption was born in the Court`s decision in Hughes v. Alexandria Scrap Corp.<sup>7</sup> and was succinctly stated in South-Central Timber Development, Inc. v. Wunnicke: "If a State is acting as a market participant, rather than as a market regulator, the Dormant Commerce Clause places no limitation on its activities."<sup>8</sup> To date, the Court has not settled the question of whether the market- participant exception applies to foreign commerce. While the circuits have held opposing views on this question,<sup>9</sup> the Supreme Court has not reached the issue.<sup>10</sup> This Note will argue that the exception should not apply to foreign commerce. Arguments that might support the exception`s application to domestic commerce are vulnerable on their own terms and fail when applied to foreign commerce. Moreover, even state participation in (as distinct from regulation of) the market infringes on and impedes the federal government`s constitutionally-vested power to attend to foreign affairs.

I The Market-Participant Exception: A Primer

In Reeves, Inc. v. Stake,¹¹ the Court expounded on the principle that supports its application of the market-participant exception. When Page 447 a state, whose primary duty is to attend to its citizens` well-being, conducts business in the marketplace, it is subject to the same limitations as a private party. Thus, it should enjoy the same freedoms as a private actor, including the ability "to exercise [its] own independent discretion as to parties with whom [it] will deal."¹²

In South-Central Timber, a seller of unprocessed logs challenged an Alaska law that required that timber harvested from state land be processed, prior to being exported, at mills inside the state. The Court began to sketch the boundary for actions that qualify as market participation:

The limit of the market-participant doctrine must be that it allows a State to impose burdens on commerce within the market in which it is a participant, but allows it to go no further. The State may not impose conditions, whether by statute, regulation, or contract, that have a substantial regulatory effect outside of that particular market.¹³

The Court distinguished between the timber market, in which it decided the state was a participant, and the processing market, in which the Court found the state not to be a mere participant. The Court noted that it is highly unusual for a seller to be able to dictate the buyer`s use of a product once it has been sold.<sup>14</sup> The Court saw Alaska`s market-participant argument as an attempt to "avail itself of the market- participant doctrine to immunize its downstream regulation of [a] market in which it is not a participant."¹⁵

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More recently, in Camps Newfound/Owatonna v. Town of Harrison,¹⁶ the Court specifically stated that a general tax exemption is market regulation, not participation.¹⁷ In that case, Maine disallowed church camps that served predominantly out-of-state visitors from taking advantage of an exemption from one of the state`s property tax laws. Justice Stevens defined more clearly the Court`s theory of the market- participant exception by explaining that the law at issue in that case was too broad to be classified as anything but market regulation by the state acting as a state:

Maine`s tax exemption-which sweeps to cover broad swathes of the nonprofit sector-must be viewed as action taken in the State`s sovereign capacity rather than a proprietary decision to make an entry into all of the markets in which the exempted charities function... The Town`s version of the "market-participant" exception would swallow the rule against discriminatory tax schemes.¹⁸

Unless a state narrowly targets its action toward a specific market, the action cannot be considered participation; otherwise a tax code, for example, that applies to individuals and corporations in any commercial area would arguably constitute the state`s entry into every one of those markets.¹⁹ The Dormant Commerce Clause would thus cease to have meaning, because the exception would apply to every field of commerce.

II The Market-Participant Exception Applied To The Foreign Commerce Clause

Few academics have directly addressed the question of whether to broaden the market-participant exception to include foreign trade and Page 449 scant literature supports such an expansion. The argument for application of the exception to foreign commerce amounts to "what`s sauce for the goose is sauce for the gander," that is, the benefits and rationale for its application to interstate commerce carry over to international commerce.<sup>20</sup> The justifications presented by courts and commentators, however, do not hold in the realm of foreign commerce;<sup>21</sup> the importance of the federal government`s power as the sole voice of foreign policy, including economic policy, demands that states be weakened in regulating foreign commerce. Simply put, in the realm of interstate commerce, the stakes are lower than they are in foreign commerce.

In Barclays Bank PLC v. Franchise Tax Board,²² the Supreme Court noted that foreign commerce involves special considerations that do not exist in interstate trade questions: "In the unique context of foreign commerce,` a State`s power is further constrained because of the special need for federal uniformity.`"<sup>23</sup> International relationships rely in large part on trade arrangements, and the risk of retaliation against all of the United States because of a policy of one is too great to allow an exception to the federal government`s constitutional power.²⁴ For example, in response to the Massachusetts Selective Purchasing Act ("Massachusetts Burma Law"),²⁵ Japan and the European Union began dispute settlement proceedings before the World Trade Organization, arguing that the state restrictions violated the United States` international obligations under the WTO Agreement on Government Procurement.²⁶

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Professor Laurence Tribe argues that the federal government has a broad and exclusive duty to attend to international affairs:

[W]hatever the division of foreign policy responsibility within the national government, all such responsibility is reposed at the national level rather than dispersed among the states and localities.

...

[A]ll state action, whether or not consistent with current federal foreign policy, that distorts the allocation of responsibility to the national government for the conduct of American diplomacy is void as an unconstitutional infringement upon an exclusively federal sphere of responsibility.²⁷

When an individual state assumes a role as a participant in foreign affairs, there is a risk that other countries will impute that state`s action to all of the United States; it is as if the government of that lone state, lacking any authority to act on behalf of the citizens of another state, nevertheless purports to serve as the United States` representative in the international market.²⁸ Regardless of whether the state action flatly contradicts a federal law or policy, or simply addresses a topic on which the federal government has declared no opinion, the risk and possible repercussions of confusion and insult in the international forum are too great to permit states such deference.

Any state regulation of trade burdens businesses related to the regulated market, but that burden is especially severe when it is imposed on international trade. Such state regulation would engender a "patch- work" of laws, forcing businesses to tailor their activities for each set of local and state laws in addition to the federal government`s restrictions.<sup>29</sup> Companies with any relationship to international trade, whether through subsidiaries, consumers, or suppliers, would have to ensure compliance with not only federal law but also state law that, while not contradictory, might operate at cross purposes with the federal policy. Investors, foreign and domestic alike, would be less inclined to put money behind businesses subject to such regulation. Those companies would also be the pawns in the middle of any retaliatory measures taken by the countries targeted by states` activities. The resulting Page 451 inefficiency and loss of financial support could be devastating for international businesses (the number of which increases as global markets expand) and, by extension, the global...