The dormant Commerce Clause and state-mandated preference laws in public contracting: developing a more substantive application of the market-participant exception.

• Author: Bair, Benjamin C.

INTRODUCTION

You are a state legislator. Your state's highway construction industry has seen better days, and unemployment is rising. Nevertheless, cities and counties in your state are hiring nonresident construction workers and buying cement and gravel from nonresident suppliers. Your constituents are upset that their tax dollars are going to outsiders, so you decide to draft a bill requiring all local governments(1) in your state to fill at least half of their highway construction positions with state residents. Is such a law valid under the Commerce Clause(2) of the United States Constitution?

The Supreme Court has interpreted the Commerce Clause as restricting the states, power to regulate interstate commerce, even when Congress has chosen not to regulate in a particular area.(3) More specifically, the Court has construed the Commerce Clause to proscribe states from discriminating economically against other states or from adopting regulatory legislation that burdens interstate commerce to a substantially greater extent than it provides local benefits.(4) Because this restriction results from the Commerce Clause's unstated "negative" implications rather than its explicit command, it falls under the rubric of the "dormant Commerce Clause."(5) By interpreting "these great silences of the Constitution,"(6) the Supreme Court has used the dormant Commerce Clause to strike down state laws that discriminate against nonresidents or that unduly burden interstate commerce.(7)

The Supreme Court has created an exception to the dormant Commerce Clause, however, that grants states some power to discriminate economically against nonresidents in favor of residents. This "market-participant" exception allows a state freely to adopt contracting preferences towards residents if the state participates in the market as the buying, hiring, or selling agent.(8) Under this exception, the Supreme Court has upheld state laws favoring residents when a state purchases scrap metal,(9) buys printing services,(10) sells cement,(11) or hires construction workers.(12) Local governments can also adopt laws preferring residents for such public contracts.(13)

It remains unclear under the dormant Commerce Clause whether a state government may adopt a "state-mandated preference law"--a law requiring local governments within the state to prefer state residents for public contracts.(14) Many states have enacted such preference laws,(15) but the federal circuit courts of appeals are split as to whether the Constitution permits them. The Seventh Circuit struck down a state-mandated preference law under the dormant Commerce Clause.(16) In contrast, the Ninth and Third Circuits upheld state-mandated preference laws as constitutional under the dormant Commerce Clause.(17) The dispute between the circuits centers on the characterization of the relationship between the state and local governments within the state. The Ninth and Third Circuits followed the traditional view that local governments are merely dependent political subdivisions.(18) Thus, they held that the state acts as a market-participant when it enacts a state-mandated preference law.(19) The Seventh Circuit repudiated this traditional new and decided that the local government in the case before it possessed substantial autonomy from the state government. Thus, it held that the state acts as a market regulator, which is unconstitutional under the dormant Commerce Clause, when it adopts a state-mandated preference law, at least when that law applies to an autonomous local government.(20)

This Note argues that the current focus on the relationship between states and their local governments as the key determinant of the constitutional validity of state-mandated preference laws is flawed. Instead, a court considering the validity of a state-mandated preference law should uphold such a law only if it distributes the benefits of state expenditures to state residents and does not excessively burden interstate commerce.

Part I describes dormant Commerce Clause doctrine and the market-participant exception. This Part then argues that courts currently evaluate whether to apply the market-participant exception to state-mandated preference laws based on whether they characterize the local governments affected by the law as politically dependent subdivisions of the state or as autonomous entities. Part II examines the theoretical rationales for the market-participant exception and argues that the moral and political entitlement of state residents to state funds, and the built-in spending restraints of resident-preference laws, are the rationales that actually justify the market-participant exception and define its scope. This Part then applies these rationales to state-mandated preference laws and argues that courts should uphold some of these laws under the market-participant exception. This Part also explains why the current focus on state-local government relationships fails to identify those state-mandated preference laws that are supported by the rationales for the market-participant exception. Part III draws on dormant Commerce Clause and Privilege and Immunities Clause(21) jurisprudence and concludes that under the market-participant exception to the dormant Commerce Clause, a court should permit a particular state-mandated preference law if the state is spending the funds of its own residents, if no nondiscriminatory alternatives exist, and if the law's burden on interstate commerce does not substantially outweigh its local benefit.

1. THE DORMANT COMMERCE CLAUSE, THE MARKET-PARTICIPANT EXCEPTION, AND THE CURRENT APPROACH TO STATE-MANDATED PREFERENCE LAWS

   Because state-mandated preference laws interfere with interstate commerce and discriminate economically against nonresidents, such laws may violate the dormant Commerce Clause. If state-mandated preferences are to pass constitutional muster under current law, they must fall within the market-participant exception to the dormant Commerce Clause. Section I.A summarizes dormant Commerce Clause jurisprudence. Section I.B then describes the market-participant exception to the dormant Commerce Clause. Finally, section I.C argues that courts currently evaluate whether to apply the market-participant exception to state-mandated preference laws based on how they characterize the relationship between the state and the local governments within the state.

   1. The Dormant Commerce Clause

      The dormant Commerce Clause prohibits state regulations that unnecessarily burden interstate commerce. Its main thrust is to preserve the national economy and to prevent the political and economic balkanization of the states that occurred under the Articles of Confederation, when states fought destructive trade wars with each other.(22) Although Commerce Clause doctrine has varied considerably over time,(23) the current test for state regulations under the dormant Commerce Clause focuses on two distinct elements.

      First, the state must be pursuing a legitimate state end.(24) The Court generally has accepted health, safety, and welfare concerns as legitimate state ends,(25) but it usually rejects economic concerns, particularly when the state economically discriminates in favor of residents over nonresidents.(26) One of the primary motivations for protecting nonresidents from such discriminatory measures is that they are not represented in the political process of the discriminating state. Therefore, they have no way of protecting themselves from the adverse economic effects of other states, regulations.(27) The Court has upheld even facially discriminatory statutes, however, when the proffered justifications were sufficiently important.(28)

      If a court determines that the state is pursuing a legitimate state end, then it will measure whether the burden of the regulation on interstate commerce substantially outweighs the putative local benefit.(29) In performing this analysis, the court may look to whether the state could have adopted any less discriminatory or less burden some alternatives.(30) On the one hand, if the state cannot present sufficient evidence that the regulation provides a substantial and legitimate local benefit, especially if the statute discriminates against nonresidents, then the court will usually strike down the statute as a violation of the dormant Commerce Clause.(31) On the other hand, if the state can present evidence that the statute presents only a small burden, particularly when that burden applies to both residents and nonresidents equally, then the court will probably uphold the law.(32)

   2. The Market-Participant Exception to the Dormant Commerce Clause

      Under the market-participant exception to the dormant Commerce Clause, a state may burden commerce or even facially discriminate against nonresidents whenever it engages in "direct . . . participation in the market."(33) The Supreme Court created the exception in Hughes v. Alexandria Scrap Corp.,(34) in which it upheld a Maryland statute that promised a cash "bounty" to scrap processors licensed by the state for the destruction of any vehicle formerly titled in Maryland. The Court held that when the state eschews its role as a government entity and enters the market as a "private actor," as Maryland did when it offered to buy the vehicles, then the dormant Commerce Clause does not govern it activities.(35) Under this market-participant exception, the Court has also upheld a state's ability to sell state-produced cement preferentially to residents(36) and to hire residents over nonresidents for public construction projects.(37)

      The Court has created two notable limitations on the applicability of the market-participant exception. In South-Central Timber Development v. Wunnicke,(38) Alaska adopted a requirement that all successful bidders on state-owned timber resources partially process the timber in Alaska prior to shipping it out of the state.(39) The Supreme Court held that this...