South Dakota Amendment E Ruled Unconstitutional Is There a Future for Legislative Involvement in Shaping the Structure of Agriculture?

• Publication year: 2022

37 Creighton L. Rev. 285. SOUTH DAKOTA AMENDMENT E RULED UNCONSTITUTIONAL IS THERE A FUTURE FOR LEGISLATIVE INVOLVEMENT IN SHAPING THE STRUCTURE OF AGRICULTURE?

Creighton Law Review

Vol. 37

ROGER A. MCEOWEN(fn*) & NEIL E. HARL(fn**)

In South Dakota Farm Bureau, Inc. v. Hazeltine,(fn1) the United States Court of Appeals for the Eighth Circuit affirmed the United States District Court for the District of South Dakota's decision and ruled the South Dakota anti-corporate farming law unconstitutional on dormant Commerce Clause grounds.(fn2) The court's opinion is viewed as critical to the future viability of anti-corporate farming restrictions in other states and, more generally, to the ability of state legislatures to shape the structure of agriculture within their borders.(fn3)

I. ANTI-CORPORATE FARMING RESTRICTIONS

All states permit the incorporation of a business for any lawful purpose not otherwise expressly prohibited.(fn4) However, several states, by statute or by constitutional provision, either prohibit or limit the operation of farm or ranch corporations, or the owning, holding, or operating of farmland by corporations.(fn5) These provisions have been en-acted for various reasons, but are grounded largely in the belief that the Jeffersonian ideal of numerous vibrant, independent, widely-dispersed family farmers is healthy for the nation.(fn6)

Presently, fourteen states restrict, to various degrees, corporate involvement in agriculture.(fn7) Recently, consolidation in almost every aspect of the farm economy has further threatened the continued viability of a vibrant, independently owned and widely dispersed farm production sector with the specter of being vertically integrated (largely through contractual arrangements) in the production, processing and marketing functions. Thus, as concentration of agricultural production has accelerated in recent years,(fn8) legislatures in many of these same states have attempted to legislate protections for the economic autonomy of individual farmers and the environmental health and safety of both the rural and non-rural sectors.

II. THE SOUTH DAKOTA PROVISION

Concerns over the changing structure of agriculture and the longterm viability of independent farmers and ranchers in South Dakota led the South Dakota legislature to enact an anti-corporate farming restriction in 1974.(fn9) The legislation, known as the Family Farm Act of 1974,(fn10) was modeled after the Minnesota provision enacted a year earlier.(fn11) The key part of South Dakota's 1974 enactment provided that: "[n]o . . . corporation may engage in farming; nor may any . . . corporation, directly or indirectly, own, acquire, or otherwise obtain an interest, whether legal, beneficial or otherwise, in any title to real estate used for farming or capable of being used for farming in this state."(fn12)

The provision contains numerous exemptions, including exemptions for banks and trust companies,(fn13) bona fide encumbrances taken for purposes of security,(fn14) land acquired by a corporation "solely for the purpose of feeding livestock,"(fn15) and family farm and authorized farm corporations.(fn16) In 1988, South Dakota voters approved by a wide margin(fn17) an initiative prohibiting corporations, except family corporations, from owning or operating hog confinement facilities in the state.(fn18) A hog confinement facility was defined as "any real estate used for the breeding, farrowing and raising of swine."(fn19) The 1988 provision was clearly designed to target large agricultural corporations believed to have the power to negatively threaten the economic well-being of family farmers and rural communities as opposed to family farming operations structured in the corporate form for estate planning and other reasons. However, the South Dakota Attorney General's ruling in 1995 that the term "and" was the operative word in the statutory clause "breeding, farrowing and raising of swine"(fn20) led to several large pork companies establishing hog contract feeding operations in South Dakota by the end of 1996.(fn21) Indeed, by the late 1990s, Murphy Farms, at the time the largest hog producer in the United States, was operating twenty hog-feeding facilities in South Dakota and had plans for at least forty additional operations.(fn22) These developments spurred interest in tightening the South Dakota anticorporate farming measure to curb the expansion of corporate contract feeding operations in the state, and any new rules were viewed as a "logical extension of the Family Farm Act of 1974 and the 1988 amendment . . . prohibiting corporate ownership of pork production facilities."(fn23) A coalition of family farm groups argued that additional restrictions were necessary to prevent corporate manipulation of livestock markets, protect the environment, and safeguard the social and economic well-being of rural communities.(fn24) The result was a proposed amendment to the South Dakota Constitution, referred to as Amendment E.(fn25)

In the fall of 1998, South Dakota voters, with nearly a sixty percent majority,(fn26) amended the South Dakota Constitution (known as "Amendment E") to prohibit corporations and syndicates from owning an interest in farmland (with numerous exceptions).(fn27) Section 21 states, "[n]o corporation or syndicate may acquire, or otherwise obtain an interest, whether legal, beneficial, or otherwise, in any real estate used for farming in this state, or engage in farming."(fn28) Section 22 exempts "family farm corporations" or "family farm syndicates" as follows:

a corporation or syndicate engaged in farming or the ownership of agricultural land, in which a majority of the partnership interests, shares, stock, or other ownership interests are held by members of a family or a trust created for the benefit of a member of that family. The term, family, means natural persons related to one another within the fourth degree of kinship according to civil law, or their spouses. At least one of the family members in a family farm corporation or syndicate shall reside on or be actively engaged in the day-to-day labor and management of the farm. Day-to-day labor and management shall require both daily or routine substantial physical exertion and administration.(fn29)

III. THE CONSTITUTIONAL CHALLENGE

In the summer of 1999, the plaintiffs, a collection of farm groups, South Dakota feedlots, public utilities and other farm organizations, challenged Amendment E on various grounds, but the essence of the claims was that the provision would prevent the continuation of their existing farming enterprises unless those enterprises changed organi-zationally to come within a statutory exemption.(fn30) Specifically, several of the plaintiffs fed livestock in their South Dakota feedlots under contracts with out-of-state firms and claimed Amendment E would apply to their out-of-state contracting parties and hurt economically their South Dakota livestock feeding businesses.(fn31) Hence, the plaintiff's primary claim was that Amendment E violated the dormant Commerce Clause of the United States Constitution by discriminating against these out-of-state firms.(fn32)

IV. THE DORMANT COMMERCE CLAUSE

"The Congress shall have the power . . . to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes . . . ."(fn33)

Clearly, the Commerce Clause of the U.S. Constitution grants Congress the power to regulate interstate commerce. From the mid1930s until the mid-1990s, the United States Supreme Court interpreted the scope of the Congressional power under the Commerce Clause in a manner which gave Congress expansive authority to regulate commerce.(fn34) Indeed, there exists today little question that the Commerce Clause has general application to farm and ranch operations.(fn35) Undoubtedly, Amendment E impacts interstate commerce because it restricts nonfamily, corporate ownership and operation of farms, ranches and other livestock production facilities.(fn36)

A tougher question, however, is whether Amendment E exceeds the limits of the dormant Commerce Clause.(fn37) The Constitution does not specifically address whether the states have the authority to regulate commerce when Congress has not acted to regulate a particular area of commerce.(fn38) Consequently, the question of a state's authority to regulate commerce when Congress has not acted (the existence of a so-called "dormant" Commerce Clause) is left open to the original intent of the Framers and judicial interpretation.(fn39) Chief Justice Mar-shall made the first reference to the existence of a dormant Commerce Clause in the Court's 1829 opinion of Willson v. Blackbird Creek Marsh Co.,(fn40) when he described a "power to regulate commerce in its dormant state."(fn41)

The driving force behind the concept of a dormant Commerce Clause was to prevent economic trade barriers that had emerged among the colonies, and later the states, under the Articles of Confederation(fn42) in order to create and foster the development of a common market among the states and to eradicate internal trade barriers.(fn43) Over time, the judicial interpretation of the dormant Commerce Clause that emerged was one barring discrimination against commerce, which repeatedly has been held to mean that states and localities may not discriminate against the transactions of out-of-state actors in interstate...