The Dormant Internet: Are State Regulations of Motor Vehicle Sales by Manufacturers on the Information Superhighway Obstructing Interstate and Internet Commerce?

• Jurisdiction: United States,Federal
• Publication year: 2010
• Citation: Vol. 18 No. 3

The Dormant Internet: Are State Regulations of Motor Vehicle Sales by Manufacturers on the Information Superhighway Obstructing Interstate and Internet Commerce?

Derek E. Empie

Introduction

Tired of driving from dealership to dealership when looking for a new or used car? Hoping for a pressure-free, no-haggle experience? The solution may be a click away with automobile manufacturers going online and setting up virtual showrooms that provide consumers the opportunity to buy cars direct from the factories.[1] According to automobile manufacturers, Internet showrooms benefit consumers by reducing their search time, eliminating sales pressure, and ensuring confidence in the transaction because a credible, major manufacturer operates the Web site.[2] However, this type of e-commerce faces roadblocks as more than forty states have passed legislation that restricts Internet sales by automobile manufacturers.[3]

States contend that regulating automobile sales falls within a state's general police power.[4] Consequently, states enact franchise laws to protect consumers from potential fraud, to protect local dealers from vertical integration under circumstances where manufacturers' hold disproportionate market power over dealers, and to connect consumers with dealers who serve as their best chance for a trustworthy and long-term relationship.[5] However, the growth of commercial activity on the Internet has produced challenges to federalist principles on grounds that these state laws interfere with interstate commerce and thus violate the Commerce Clause of the United States Constitution.[6] Furthermore, many citizens opposing these regulations argue that these laws limit consumer choice and competition in the marketplace.[7]

This Note examines the impact state franchise laws have on automobile manufacturers in their efforts to connect with consumers via the Internet and analyzes these laws under the Commerce Clause. Part I provides an overview of the Commerce Clause and addresses whether its negative component, the dormant commerce clause, will continue to play a role in the twenty-first century. Part II discusses the Commerce Clause and the Internet, specifically American Libraries Ass'n v. Pataki,[8] in which a federal judge called for federal regulation of the Internet.[9] Part III looks at the aftermath of Pataki and how other courts have answered the call to remove legislative power over the Internet from the states and place it with the federal government. Part IV examines the impact that analogous wine and petroleum industry cases have had on interstate commerce law. Finally, Part V reviews state legislative reaction to automobile manufacturers' control of local dealers and examines whether this recent legislative trend interferes with interstate commerce.

I. The Commerce Clause

A. An Overview

The Commerce Clause of the United States Constitution grants Congress the power to regulate commerce among the states.[10] When a federally enacted statute applied through the Commerce Clause conflicts with state legislation, the federal law trumps state power under the Supremacy Clause.[11] However, the Constitution fails to express limitations on state economic regulations in the absence of congressional legislation.[12] Although the Constitution does not expressly instruct states to refrain from regulating interstate commerce, the Supreme Court has interpreted the Clause to grant Congress the power to invalidate state legislation that produces a discriminatory effect or unduly interferes with interstate commerce.[13] Thus, the Commerce Clause contains a negative command, known as the dormant commerce clause, which forbids states from practicing economic protectionism and blocking interstate trade in the wake of congressional silence.[14]

Dormant commerce clause analysis occurs only when state regulations appear discriminatory.[15] Courts typically recognize the following three forms of discriminatory legislation: (1) facially discriminatory; (2) facially neutral but containing a discriminatory purpose; and (3) facially neutral but producing a discriminatory effect.[16]

In Pike v. Bruce Church, Inc.,[17] the Supreme Court explained the modern standard for determining whether state regulatory power complies with the dormant commerce clause.[18] Pike involved a facially non-discriminatory statute that banned interstate shipment of cantaloupes that failed to meet Arizona packaging requirements.[19] Specifically, Arizona stopped the plaintiff from carrying uncrated cantaloupes out of state to California for packing and processing.[20] The Pike Court indicated that a state regulation supported by a legitimate local interest and producing only an incidental effect on interstate commerce will be upheld so long as the local benefit outweighs any burden imposed on interstate commerce.[21] The Court added that when "a legitimate local purpose is found, then the question becomes one of degree."[22] Thus, the Court applied a balancing test to determine whether Arizona's valid state interest overburdened interstate commerce.[23]

With the advent of this balancing technique, courts now engage in a fact-gathering process to establish the following: (1) whether the intent behind the state law involves a legitimate state interest or discriminates against out-of-state commerce; and, if the law is facially neutral, (2) whether the state objective offsets the negative impact on interstate commerce.[24] If the state enacts legislation with the sole intent to benefit local interests over out-of-state concerns, then the statute is facially discriminatory and per se invalid.[25] When a court finds a law facially discriminatory, the burden shifts to the state to justify the legislation.[26] The state must meet the following three criteria to rationalize any discriminatory effect: (1) that the regulation serves a legitimate interest; (2) that the legislation substantially reaches the interest; and (3) that alternative measures are unavailable to reduce the discriminatory effect.[27]

Courts recognize several legitimate state interests that outweigh the burdens on interstate commerce.[28] Legitimate non-economic state interests include the health, safety, and general welfare of the community arising under state police powers, racial equality, household privacy, and preservation of natural resources.[29] Courts also recognize statutes that serve economic interests aimed at protecting consumers from fraud, confusion, and suspect sellers.[30]

B. Dormant Commerce Clause in the Twenty-First Century

The dormant commerce clause has faced increasing scrutiny, with many critics suggesting that the judiciary should abandon the doctrine altogether.[31] Focusing on the Constitution's text, opponents argue that the dormant commerce clause is not an expressed provision of the Constitution, but rather a creation of the judiciary.[32] Opponents of the doctrine also contend that the Framers intentionally left out the Clause's negative aspect.[33] Thus, to permit judicial enforcement of the dormant aspect encroaches upon state autonomy.[34] A further constitutional argument against recognition of a dormant commerce clause concerns the principle of separation of powers.[35] When courts invoke the Pike test, balancing states' interests against the burdens on interstate commerce, judges are engaging in policy decisions and thus performing a quasi-legislative function.[36] Recent United States Supreme Court decisions reveal a trend away from judicial exercise of dormant commerce clause power and toward judicial deference to state legislation.[37]

II. The Dormant Commerce Clause and the Internet: American Libraries Association v. Pataki

The development of the Internet challenged both the legislature and judiciary to find and apply workable legal guidelines to Internet-based conflicts.[38] As the Internet became more and more popular, many states enacted regulatory schemes targeting the Web.[39] Analysts contend that Internet laws that vary by state increase business costs and consequently deter companies from entering the fray.[40] Some argue that the combination of inconsistent state regulations and the Web's global reach justify Internet regulation under federal rather than state authority.[41]

Pataki was the first case to find state regulation of the Internet unconstitutional under the dormant commerce clause.[42] Pataki involved a New York regulation that made it a crime to knowingly disseminate sexually explicit material to minors.[43] Although the case appeared to involve noncommercial purposes, the court invalidated the statute on Commerce Clause grounds.[44] The court noted the Internet's unique environment and the effect of the Web's "borderless" boundaries on issues of federalism.[45] With this tension between the states and federal government at the forefront, the court cited several reasons why the statute violated the Commerce Clause, including that: (1) the Act regulated conduct wholly outside New York; (2) the Act placed an undue burden on interstate commerce that outweighed any local benefit; and (3) the Act could conflict with other states' requirements and subject out-of-state users to inconsistent obligations.[46]

The court relied on Edgar v. MITE Corp.[47] and Healy v. The Beer Institute[48] to determine whether the Act regulated conduct occurring outside of New York.[49] Edgar involved the Illinois Business Takeover Act, which required a "tender offeror" to notify the Secretary of State and the targeted company[50] of its intent to make an offer twenty days prior to an attempted takeover.[51] MITE, a Delaware corporation, offered to buy all remaining shares of an Illinois company, but failed to comply with the Act.[52] The Court ruled the Act unconstitutional under the Commerce Clause because the statute not only delayed offers to in-state shareholders, but also affected contact with out-of-state shareholders; thus, the regulation...