A bigger and better market-participant exception? Examining Justice Souter's revison of the market-participant exception to the dormant commerce clause in Department of Revenue of Kentucky v. Davis.

• Author: Slepnikoff, Lisa M.

In Part III-B of the United States Supreme Court's opinion in Department of Revenue of Kentucky v. Davis, Justice Souter found that the market-participant exception to the dormant Commerce Clause allows for market regulation when such regulation "goes hand in hand" with the government's participation in the market. Although Justice Souter 's interpretation of the market-participant exception did not command a majority vote, his opinion could nonetheless have a substantial effect on dormant Commerce Clause analysis if it were later adopted by the Court. As this article demonstrates, Justice Souter's revised market-participant exception contradicts Supreme Court precedent and expands the market-participant exception .)Car beyond its traditional reach.

1. INTRODUCTION

   In United Haulers Ass'n, Inc. v. Oneida-Herkimer Solid Waste Management Authority, (1) the Court found that laws "benefit[ing] a clearly public facility, while treating all private companies exactly the same ... do not discriminate against interstate commerce for purposes of the dormant Commerce Clause." (2) The Court later applied this "state-self-promotion" (3) exception in Department of Revenue of Kentucky v. Davis (4) to uphold a Kentucky tax scheme that exempted state municipal bonds from taxation but did not afford the same exemption to out of state municipal bonds. (5) Justice Souter wrote the controlling opinion in Davis, finding that Kentucky's tax scheme did not violate the Dormant Commerce Clause. (6) In a part of his opinion that did not command a majority, Justice Souter also proposed that United Haulers could have been decided under the market-participant exception to the dormant Commerce Clause. (7) He reasoned that, under the market-participant exception, a regulation is permissible when it "goes hand in hand" with the government's participation in the market. (8) Justice Souter then concluded that, like United Haulers, Davis could be decided as a market-participant case because the regulation at issue was closely linked to the government's participation in the market. (9)

   This article will offer an examination of Justice Souter's revised market-participant exception. To begin, a brief overview of the history and development of the dormant Commerce Clause and the market-participant exception will be provided. (10) Next, Part III will address the facts of United Haulers and review the Court's decision in that case. (11) Part IV will then examine the Court's decision in Davis, focusing on the Court's application of the analysis from United Haulers. (12) Part V will examine Justice Souter's interpretation of the market participant exception in Davis and will address the impact the judicial adoption of Justice Souter's revised market-participant exception would have on dormant Commerce Clause analysis. (13) This article concludes that Justice Souter's analysis in Davis misrepresents the Court's rulings in previous market-participant cases and represents an unjustified expansion of the market-participant exception. (14)

2. BACKGROUND

   1. A BRIEF OVERVIEW OF THE DORMANT COMMERCE CLAUSE

      The Commerce Clause of the United States Constitution provides that "It]he Congress shall have Power ... [t]o regulate Commerce ... among the several States[.]" (15) Although it does not specifically provide as such, the Supreme Court has long interpreted the Commerce Clause as an implied limitation on the ability of the states to regulate interstate commerce. (16) It is from this implied limitation inherent in the Constitution that the dormant Commerce Clause doctrine has emerged. (17)

      Modern dormant Commerce Clause analysis is based on a two-tiered model that requires the Court to first determine whether the judicially scrutinized law discriminates against interstate commerce or whether it "regulates evenhandedly with only 'incidental' effects on interstate commerce." (18) If the court finds that state legislation facially discriminates against interstate commerce, or effects economic protectionism, the regulation will trigger a "virtually per se rule of invalidity." (19) This "virtually per se rule of invalidity" has been deemed by the Court to require that the discriminatory regulation be invalidated unless it advances a legitimate local purpose unrelated to economic protectionism that cannot be adequately served by reasonable nondiscriminatory alternatives. (20)

      If the statute is facially nondiscriminatory and in furtherance of a legitimate non-protectionist governmental interest, the court must proceed to the second tier of the analysis and apply a balancing test commonly referred to as the "undue burden" standard or the "Pike balancing test." (21) Under the undue burden standard, a law will be found valid unless "the burden imposed on such commerce is clearly excessive in relation to the putative local benefits." (22)

   2. THE MARKET-PARTICIPANT EXCEPTION

      Over the years, the Court has carved out an exception to the two-tiered dormant Commerce Clause analytical model for instances in which a state enters the market to trade its own resources. (23) This "market-participant exception has emerged, in part, out of the recognition that states should be afforded the same discretion as private business entities in electing with whom to engage in business.(24) The Court has also acknowledged that states entering into the market face similar challenges as private market-participants. (25) Thus, "States should similarly share existing freedoms from federal constraints, including the inherent limits of the Commerce Clause." (26) Finally, the Court has repeatedly emphasized that the market-participant exception is appropriate because states are sovereign entities that bear the responsibility of acting "as guardian and trustee for its people." (27)

      The market-participant exception first emerged in Hughes v. Alexandria Scrap Corp., (28) in which the Court upheld a Maryland program offering subsidies to scrap processors in an effort to clear abandoned cars from Maryland streets. (29) The subsidy scheme effectively favored in-state processors over out-of-state processors and led to a decline in the number of abandoned cars that were delivered to out-of-state processors. (30) In upholding the subsidy scheme, the Court explained that Maryland was merely attaching conditions to its expenditure of state funds. (31) Thus, the state was not "regulating" the market but was acting as a purchaser that "restrict[ed] its trade to its own citizens." (32) The Court went on to declare, "Nothing in the purposes animating the Commerce Clause prohibits a State, in the absence of congressional action, from participating in the market and exercising the right to favor its own citizens over others." (33)

      In Reeves, Inc. v. Stake, (34) the Court again applied the market-participant exception to evaluate the constitutionality of discriminatory sale practices undertaken by a cement plant owned and operated by the state of South Dakota. (35) In response to a cement shortage in 1974, the plant restricted the sale of cement to residents of the state. (36) A former out-of-state buyer challenged the cement plant's preferential treatment of South Dakota residents on dormant Commerce Clause grounds. (37) The Court upheld the resident preference under the market-participant exception, noting that the cement plant was acting as a private business and thus had the right to choose its own trading partners. (38) Reeves solidified the rule that the dormant Commerce Clause is not implicated when a state acts as a market-participant, as opposed to a market regulator. (39)

      The development of the market-participant exception continued in White v. Massachusetts Council of Construction Employers, Inc. (40) in which the Court sustained an executive order of the Mayor of Boston requiring all private construction companies working on public construction projects to hire Boston residents for at least half of their workforce. (41) The Court found that, "insofar as the city expended only its own funds in entering into construction contracts for public projects, it was a market-participant and entitled to be treated as such[.]" (42) In upholding the executive order under the market-participant exception, the Court emphasized that a vital consideration in the Court's analysis was the fact that all of the employees covered by the mandate were "in a substantial if informal sense, 'working for the city.'" (43)

      The following year, the Court placed an important limitation on the market-participant exception to the Dormant Commerce Clause in South-Central Timber Dev., Inc. v. Wunnicke. (44) The issue in South-Central Timber involved an Alaska statute that required all timber taken from state lands to be partially processed in Alaska before being shipped outside of the state. (45) In striking down the statute, the Court found that it amounted to a "downstream" regulation because the purchaser was not free to remove the timber from the state prior to processing. (46) The Court reasoned:

      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 ... that have a substantial regulatory effect outside of that particular market. (47) Four years later, the Court placed an additional restraint on the applicability of the market-participant exception in New Energy Co. v. Limbach. (48) Limbach involved an Ohio statute that awarded a tax credit for the sale of ethanol produced in Ohio or in states that afforded a similar tax credit for Ohio-produced ethanol. (49) The same tax credit, however, was not available to ethanol produced in states that did not afford a similar tax credit for Ohio-produced ethanol. (50) The Court struck down the statute as a violation of the dormant Commerce Clause, stating that the market participant doctrine "differentiates between a...