Dormant Commerce Clause: a Potential Brake on State Antitrust Legislation
| Jurisdiction | California,United States,Federal |
| Author | By Shira Liu |
| Citation | Vol. 33 No. 1 |
| Publication year | 2023 |
By Shira Liu1
The California Legislature has instructed the California Law Review Commission ("CLRC") to study expanding California's Cartwright Act.2 The CLRC has been instructed to study whether to outlaw monopolies and redefine antitrust injury.3Either of these changes could expand the Cartwright Act beyond the current reach of federal antitrust law.4 The CLRC has also been instructed to consider adding state-level merger enforcement to the federal regime.5 These proposals are similar to those in New York's proposed "Twenty-First Century Anti-Trust Act," which would expand New York's antitrust law beyond the current reach of federal antitrust law and implement state-level merger enforcement.6 New York's bill died in an Assembly Committee in June 2022, but its sponsor is seeking to reintroduce the bill in a future session.7
It is well-established that federal antitrust laws do not preempt state antitrust laws.8 But that does not mean that states have unlimited authority to expand their antitrust laws. One potential limit to state antitrust laws is the dormant Commerce Clause. As state legislatures consider expanding the reach of state antitrust laws, they should do so with an awareness of potential dormant Commerce Clause challenges.
State antitrust legislation has outpaced federal antitrust legislation before. When Congress enacted the Sherman Act in 1890, at least eleven states had already enacted their own antitrust laws.9 Nine more states passed antitrust laws in the decade that followed.10 But courts circumscribed the spheres of state and federal law very differently at the dawn of the twentieth century compared to current jurisprudence. Under the doctrine of dual federalism interpreting the federal Constitution's grant to Congress "[t]o regulate Commerce . . . among the several States" at the time, state law governed intrastate activities, while federal law governed interstate activities.11 For example, four years before the passage of the Sherman Act, the Supreme Court held that Illinois could not regulate rates for train shipments that included interstate as well as intrastate segments, because only routes "exclusively confined to the limits of the territory of the state" are "within the competency of the I llinois
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legislature to regulate."12 Therefore, the Sherman Act was originally thought of as a "supplement to state regulation," providing a remedy to police interstate commercial activities.13 This relationship between the reach of state and federal antitrust laws was confirmed in the Supreme Court's first case citing the Sherman Act. In United States v. E. C. Knight Co., the Supreme Court held that sugar refining within a single state was not "commerce"—which would have been reached by the Commerce Clause—but "manufacturing" beyond the reach of the federal government.14
Dual federalism ended as the Great Depression and World War 11 transformed commerce, prompting the Supreme Court to embrace a broad understanding of the Commerce Clause.15 In 1948, the Supreme Court held in Mandeville Island Farms v. American Crystal Sugar Co. that the Sherman Act could reach a price-fixing agreement between sugar growers in the same state.16 The Court recognized that it was reaching the opposite conclusion from E.C. Knight on functionally identical facts, but explicitly rejected the "old ideas," explaining that the "evolv[ed]" inquiry is whether there was any "aspect of or substantial effect upon interstate commerce."17 The Court observed that if E.C. Knight remained in place, the Sherman Act "today would be a weak instrument, as would also the power of Congress, to reach evils in all the vast operations of our gigantic national industrial system antecedent to interstate sale and transportation of manufactured products."18
After dual federalism fell out of favor, courts developed the dormant Commerce Clause as a new paradigm to limit state laws affecting commerce in other states.19 In contrast to the strong geographic restraint on states' reach imposed by dual federalism, the dormant Commerce Clause doctrine restrains states' ability to "discriminate against or burden the interstate flow of articles of commerce."20 In an approach familiar to antitrust lawyers, under the dormant Commerce Clause doctrine one must first evaluate if a state law should be evaluated under a per se standard or under a balancing test. The per se standard applies if the restriction on commerce is discriminatory—that is, "differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter."21 Discriminatory state laws are invalid because their "object is local economic protectionism."22
State antitrust laws are typically non-discriminatory, meaning that they apply with equal force to in-state and out-of-state economic interests. Non-discriminatory state laws are evaluated under the balancing test articulated in Pike v. Bruce Church, Inc.23 The Pike balancing test asks whether the burden on interstate commerce is "clearly excessive in relation to the putative local benefits."24Challenges to non-discriminatory laws regulating national sports leagues and transportation, where the burden of state-by-state regulation is easier to conceptualize, have had the most success under the Pike balancing test.25 In contrast, challenges applying the Pike balancing test to other state economic or social regulations have had less success.26 Commentators have decried application of Pike to such cases as "notoriously unclear"27 and "unsettled and poorly understood."28 In National Pork Producers Council v. Ross, Justice Gorsuch, writing for three justices who would have overruled the Pike balancing test, asked "How is a court supposed to compare or weigh economic costs (to some) against noneconomic benefits (to others)? . . . Really, the task is like being asked to decide whether a particular line is longer than a particular rock is heavy."29
In May 2023, a majority of the Supreme Court in National Pork Producers reaffirmed that the Pike balancing test continues to apply, even as the Court failed to reach a majority that provided further guidance in its application.30 The California statute at issue in National Pork Producers governed cruelty standards for pork sold, but not necessarily raised, in California. Writing for two justices, Justice Sotomayor wrote that the "complaint fails to allege a substantial burden on interstate commerce."31Writing for four justices, Justice Roberts wrote that interstate commerce was substantially burdened because the challengers identified not just compliance costs but "broader, market-wide consequences" which require "compliance even by
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producers who do not wish to sell in the regulated market."32 Justice Roberts would have remanded the case "consider whether petitioners have plausibly claimed that the burden alleged outweighs any putative local interests."33 Separately, the Ninth Circuit has expressed reluctance to assess the "constitutionality of the challenged laws based on our assessment of the benefits of those laws and the State's wisdom in adopting them."34
One relatively clear area of guidance in the caselaw is that Commerce Clause challenges to state antitrust laws fail when they attack the extraterritorial application of state laws that are consistent with federal laws. A state does not, for example, violate the dormant Commerce Clause when it enforces its state law condemning price-fixing conduct extraterritorially.35 Similarly, the Ninth Circuit and the District of Columbia have both rejected dormant Commerce Clause challenges where an in-state plaintiff was harmed by price-fixing conduct that occurred out of state.36 And a California Court of Appeal rejected a dormant Commerce Clause attack on a Cartwright Act claim that the defendant tied products and services out of state.37 As the Supreme Court recently explained in National Pork Producers, "[i]n our interconnected national marketplace, many (maybe most) state laws have the 'practical effect of controlling' extraterritorial behavior," and banning laws which have extraterritorial effects would "invite endless litigation and inconsistent results."38 These holdings are consistent with the shift away from dual federalism, with its focus on the geographic limits of state authority.
There is little precedent to guide the harder question of how expansive state antitrust legislation would fare when faced with dormant Commerce Clause challenges. The lack of precedent specific to antitrust cases is due to the fact that by the time the dormant Commerce Clause doctrine developed several decades ago, most states had "adopted statutes that either copied or paraphrased the language of the Sherman Act," causing state antitrust law to become "increasingly superfluous to the substantively almost identical federal law."39 Indeed, in 1983 Professor Hovenkamp wrote that "[w]hen state antitrust laws are alleged to be in direct conflict with federal antitrust law, the courts have found them not to be so."40 Even when states had antitrust statutes on their books, they were rarely enforced.41 If a new era in state antitrust enforcement dawns, courts will no longer be able to avoid these inconsistencies. Courts will have no choice but to evaluate these new and expansive state antitrust laws under the balancing test, and determine whether the laws place a burden on interstate commerce that is "clearly excessive in relation to the putative local benefits."42
The 1979 opinion in State of Connecticut v. Levi Strauss & Co. encapsulates the uncertainty in the law.43 In that case, Levi Strauss & Co. argued that application of Connecticut's antitrust law was unconstitutional because "to the extent state and federal laws differ and state...
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