Nebraska's Corporate-farming Law and Discriminatory Effects Under the Dormant Commerce Clause

• Publication year: 2021
• Citation: Vol. 88

88 Nebraska L. Rev. 50. Nebraska's Corporate-Farming Law and Discriminatory Effects under the Dormant Commerce Clause

Nebraska's Corporate-Farming Law and Discriminatory Effects under the Dormant Commerce Clause

Anthony Schutz(fn*)

TABLE OF CONTENTS

I. Introduction.......................................... 51

II. Background........................................... 54
A. Nebraska's Corporate-Farming Restriction......... 54
B. The Dormant Commerce Clause Doctrine: A Brief Primer............................................ 59
C. Corporate-Farming Laws Meet the DCC Doctrine: Jones............................................. 63

III. Analysis.............................................. 67
A. The Relevant Market and Its Competitors ......... 72
B. The Competitive Advantage ....................... 78
C. Discrimination.................................... 81
1. Insiders and Outsiders......................... 82
2. The Allocation, "The Farm," and Equality...... 88
a. Farm Residency............................ 89
b. Active Engagement........................ 93
c. A Hypothetical............................. 94
3. Disparate Allocations and Discriminatory Effects ........................................ 95
a. Under-Inclusive Burdens................... 98
b. Over-Inclusive Burdens.................... 101
c. Non-discriminatory Disparities............. 104
d. Post-Enactment Market Adjustments or "Structural" Regulation.................... 109
e. Localism and Insider Burdens.............. 112

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f. The Relevance of Costs..................... 116
D. A Clear Error: The Livestock-Feeding Market...... 119

IV. Conclusion............................................ 122

Our system, fostered by the Commerce Clause, is that every farmer . . . shall be encouraged to produce by the certainty that he will have free access to every market in the Nation, that no home embargoes will withhold his exports, and no foreign state will by customs duties or regulations exclude them. Likewise, every consumer may look to the free competition from every producing area in the Nation to protect him from exploitation by any.(fn1)

I. INTRODUCTION

Laws dealing with agriculture have generated a great deal of constitutional law.(fn2) This Article explores one more recent example. Corporate-farming laws are one hallmark of agricultural law. They regulate the use of limited liability business forms for owning agricultural land, engaging in production agriculture, or both on approximately 312 million acres of farmland in nine states. That is approximately 77% of the land in those states and approximately one-third of all farmland in the United States.(fn3) These regulations generally take the form of restricting the use of limited liability to those producers that the legislature or electorate have deemed "real farmers" or "family farmers." This Article evaluates whether the "shadows cast by the congressional commerce power"(fn4) prevent a state from defining for itself who Justice Jackson's farmers are. Stated simply, can states give these farmers preferential access to the means of production without violating the dormant Commerce Clause ("DCC") doctrine?

Recent decisions from the Eighth Circuit Court of Appeals conclude that states may not entertain this preference. One decision in particular, Jones v. Gale, (fn5) casts a great deal of doubt on the continued viability of state efforts to regulate the use of limited liability on agricultural lands.(fn6) The most far reaching aspect of the Jones court's

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analysis is its conclusion that Nebraska's corporate-farming law was facially discriminatory. This Article argues that corporate-farming laws like Nebraska's are not easily classified as facially discriminatory under the DCC doctrine. As I explain below, Nebraska's law had, at most, discriminatory effects.

Under the DCC doctrine, however, it is not possible to simply take a well-worn set of rules associated with discriminatory effects and critically evaluate Nebraska's law or the Jones court's decision. Thus, this Article also examines the difficult doctrinal question of discriminatory effects in an effort to better understand whether Nebraska's corporate-farming law was discriminatory. In so doing, the Article brings a level of synthesis to the Court's cases on discriminatory effects.(fn7) The development of this aspect of the doctrine is obviously important to courts but, perhaps more fundamentally, it is important to state legislatures seeking to understand the parameters of this farreaching restraint on their authority.(fn8)

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The necessary background is set forth in Part II, below. Part III evaluates the complex question of whether Nebraska's law had discriminatory effects for purposes of the DCC doctrine. The DCC doctrine's discriminatory effects rule generally prohibits a regulating state from placing outsiders at a competitive disadvantage relative to insiders. Three subsidiary tasks follow from this general rule. First, one must identify the relevant market and its competitors. Second, one must identify the relevant competitive advantage at issue. Finally, one must evaluate whether the regulating state bestows that competitive advantage on insider and outsider competitors in a discriminatory manner.

The first three sections of Part III explore these three tasks. Section III.A identifies the relevant markets in which Nebraska's law operated and the competitors affected by Nebraska's law within those markets. Section III.B identifies the competitive advantage at issue when a state regulates the use of the corporate form. Section III.C takes on the third task in three subsections. Subsection III.C.1 deals with an unanswered doctrinal question. Because the DCC doctrine's anti-discrimination rule protects competing market participants from discriminatory treatment based on insider-outsider status, I attempt to answer a seemingly simple question: "What makes an insider an insider and what makes an outsider an outsider for purposes of the DCC doctrine?" After addressing a few possible alternatives, I settle on residency and evaluate whether Nebraska's corporate-farming law treated resident and non-resident competitors differently.

Subsection III.C.2 focuses primarily on the text and operation of Nebraska's law, discussing the impact of its interpretation and operation on the question of discriminatory effect. The Jones court employed a narrow interpretation of Nebraska's corporate-farming law that was central to its discrimination conclusion. I conclude that a broader interpretation would eliminate the existence of discrimination. However, even under the narrow interpretation, the Jones court employed an imprecise look at what Nebraska's law did and how it did it. A closer look at what Nebraska's law allowed qualifying operations to do reveals a colorable, though perhaps unconvincing, argument that it had no discriminatory effect.

While this more demanding examination draws the Jones court's analysis into question, it also exposes a further doctrinal question. If one accepts residency as the determinant of insider-outsider status, and if one employs the Jones court's narrow interpretation of Ne-

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braska's law, then Nebraska's law at most prevented some (but not all) outsiders from using the corporate form, while allowing some (but not all) insiders with the ability to use it. Subsection III.C.3 therefore explores whether and when this sort of treatment constitutes discrimination. In so doing, I reap a set of rules from the Court's DCC cases that helps explain when the Court is willing to deem the effects of a state's law discriminatory. As I glean those rules, I apply them to Nebraska's law, providing further support for the notion that corporate-farming laws do not easily qualify as discriminatory. This analysis concludes that the farm-residency requirement Nebraska used was discriminatory, but that Nebraska's active-engagement requirement was not.

In section III.D, I take a step back and evaluate the prospect of discriminatory effects within the feeding-services market. While the presence of discriminatory effects within other markets may be possible, my analysis shows that a look at the feeding-services market reveals no discriminatory effects.

The challenge of conducting this sort of a study is evident from the length of this Article. It deals with a somewhat complex state-law restriction operating within a diverse agricultural industry, while at the same time evaluating that law under a notoriously complex body of unsettled doctrine that, at times, needs further development. And it does this in response to a particular court's disposition of the issue. But complexity is far from atypical in DCC challenges. So I have resisted the temptation to oversimplify the DCC doctrine and corporate-farming measures in favor of a thorough analysis of both. In the end, this exercise sheds a great deal of light in the shadows of Congress' power to regulate commerce and states' ability to provide favorable treatment to those that it deems farmers.

II. BACKGROUND

A. Nebraska's Corporate-Farming Restriction

Nebraska's measure(fn9) was adopted in 1982 as an amendment to the Nebraska State Constitution.(fn10) "Initiative 300" (or "1-300") was placed on the ballot by popular initiative after various attempts at

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regulating corporate farming had...