Chapter One | The Legal System

Sources of American Law

To a large part, the roots of our legal heritage can be traced to England, although the American legal system also has roots in Spanish and Dutch law. Once a British colony ruled by King George III through his appointed governors, the United States adopted the greatest share of our laws and legal traditions from the English. For all intents, English law began with the Norman invasion of England in 1066. William the Conqueror and his successors established the king’s court (Curia Regis) to help create a unified nation. Before the Norman Conquest, disputes were settled according to local tribal customs. The king’s court began to develop a common or uniform set of customs applica­ble to the whole population. This evolved into what became known as the common law, so named because it was intended to be common to the entire British kingdom.

As the number of courts and disputes increased, the more important rulings made each year were compiled into Year Books. Judges referred to these Year Books as a source of guidance in settling cases similar to those already decided. If a dispute was unique (called a case of first impression), judges had to create new law, but they attempted to base their decisions on previously established legal principles as much as possible. Today we still rely on this body of judge-made law developed over the centuries. It is called common law or case law in the United States.

The common law was carried to the colonies by the first English settlers and used by courts during the pre-Revolutionary War period. Common law continued to be applied after the Revolution and during the writing of the U.S. Constitution. It is still a valuable source of law, especially in tort, contract, and agency law. States have also codified some parts of the common law, such as the penal code in criminal law, the probate code in estate law, or the Uniform Commercial Code (UCC), which codifies much of the common law relating to the sale of goods.

The Doctrine of Stare Decisis

In cases governed by the common law, courts follow the doctrine of stare decisis. Stare decisis literally means, “to adhere to decided cases” and holds that similar cases should be decided in a similar manner and should yield a similar result. Precedent is the legal decision or holdings from a prior case that courts use to determine the outcome of a similar case or a similar question of law. If a court determines that the facts in the precedent case are not the same as those in the case before it and, therefore, should not control the ruling, the court may distinguish the current case from the precedent. Courts also can, but rarely do, overrule their prior decisions. Courts strive to avoid overruling earlier cases because it upsets the principle of stare decisis and the reliance people place on settled law in planning business and personal affairs.

Constitutional Law

The United States Constitution is the seminal legal document in this country. A state’s constitution holds similar importance within its borders. A constitution establishes the structure of government for the political unit (federal or state) by providing for the branches, subdivisions, and functions of government and by conferring and denying powers to each part. The U.S. Constitution created three branches of government: legislative, executive, and judicial. The Constitution provides each with unique powers that theoretically make each branch equal to the other two.  The doctrine of separation of powers provides a system of checks and balances so that one branch may not trammel over the rights and prerogatives of the others. Thus, the Constitution establishes a Congress to make laws, a president to enforce the laws, and a judiciary to interpret them. It also delegates to the states certain powers and casts a basic relationship between the states and the federal government. The relationship created is by definition a federal form of government. Each state possesses a limited amount of sovereignty, but the law of the federal government is supreme and applicable to all of the states.

The U.S. Constitution
Articles I to VII

Article I — Creates in the legislature [the Congress] the authority to enact laws. Article I defines the functions, powers, and role of Congress. Section 8 relates directly to matters affecting business in the United States: the power to lay and collect taxes; to regulate commerce with foreign nations and the states; to promulgate uniform bankruptcy laws; and to establish courts inferior to the U.S. Supreme Court. Section 9 also affects business affairs, states may not impose a tax on exports to a foreign country and they may not give preference to one state over another by regulating commerce.

Article II — The subject of this article is the executive power. The President has the duty to enforce all federal laws. It establishes the President’s term of office, the requirements to become President, and sets forth the presidential election process. It identifies the President as Commander in Chief of the Armed Forces, confers in the President the power to make treaties with the advice and consent of the Senate, and permits the President to make executive agreements with other nations without the advice and consent of the Senate. At the root of this power is the President’s authority to speak and act on behalf of the country in matters of foreign relations.

Article III — Article III establishes the judicial branch of the government. Article III authorizes the establishment of the U.S. Supreme Court and other federal courts. It confers the power to interpret laws and adjudicate certain disputes to the courts. Article III also provides for trials by jury for crimes and contains a definition of treason. The power of the courts was affirmed in the precedent case of Marbury v. Madison.

Article IV — Concerns the relationships between the states. Each state is bound to recognize the public acts and proceedings of the other states through the “full faith and credit” clause. The power to extradite a criminal from one state to another is also found here.

Article V — Lays out the means by which the U.S. Constitution may be amended.

Article VI — Confers supremacy of the U.S. Constitution, federal laws, and treaties over all other laws. All officials – federal and state – are sworn under oath to uphold the U.S. Constitution.

Article VII — Includes original acceptance of the U.S. Constitution by the states.

Constitutional Amendments

The Bill of Rights is the collective name of the first ten amendments to the U.S. Constitution. The Bill of Rights contains the freedoms of speech, press, religion, and assembly; the requirement that law enforcement authorities must possess a warrant in order to perform a search and seizure; provisions for protection from self-incrimination; the establishment of a grand jury for capital offenses; requirements for just compensation in eminent domain cases; a prohibition against double jeopardy; and, important provisions for “due process of law.”

The Fourteenth Amendment — While each amendment to the U.S. Constitution is intrinsically and equally important, the Fourteenth Amendment may be considered the “first among equals” in that it makes most of the fundamental guarantees of the Bill of Rights applicable to the states.

Supremacy of the U.S. Constitution

Since the 1930s and the presidency of Franklin D. Roosevelt, the U.S. Constitution has been interpreted to allow the federal government to become involved in the conduct of many areas of our daily lives. The regulation of some activities may also be relegated or delegated to the states. In this situation, any federal law that conflicts with a state law on the same subject matter takes precedence over and preempts the state law, unless, of course the federal action is ruled unconstitutional. Should Congress determine that federal law takes priority, its decision generally will be accepted. If Congress is silent on the matter, a court of competent jurisdiction would apply the following analysis to the federal law to determine whether it takes precedence over a state enactment:

  • Does the U.S. Constitution permit the federal government to regulate the area of law in which this particular law resides? If yes, the federal law will likely prevail.
  • Does the federal law violate a right guaranteed by the U.S. Constitution, for example, the right to a speedy trial? If yes, the federal law is preempted by the U.S. Constitution.
  • If not, does a state law address the same subject mater? If so, is there an inconsistency between the two laws? If one exists, the federal law prevails.

If both the federal and state laws are not contradictory, and Congress has not specifically preempted state action, the state law is said to be concurrent with federal law and may be applied.

State Constitutions

Powers not delegated to the federal government are retained by the states unless prohibited in the states’ own constitutions. Therefore, laws on the same subject matter can differ from one state to another in many ways. Businesses need to be aware of these distinctions, including differences between federal and state authority. Conflicting perceptions may appear with respect to the point at which federal power ends and so-called “state rights” begin.

Statutory Law

Statutes are written laws enacted by Congress or a state legislature for the purpose of declaring, ordering, or prohibiting something. Counties, cities, and towns may enact laws, as well. These “local laws” are generally called ordinances. Neither statutes nor ordinances can violate the U.S. Constitution or the applicable state constitution.

State statutory law varies throughout the country, partly because of cultural and geographical differences, and partly because of diverging needs. For example, eight western states enacted marital property statutes, called community property laws, originally derived from the Spanish legal system that originated in Mexico. Louisiana has laws that originated under the Napoleonic Code, because the French initially settled that area and brought with them their system of law. New York has adopted aspects of Dutch property law as it relates to condominium and co-op ownership.

Throughout the text, you will encounter various state and federal statutes. As you read these statutes, you will begin to understand the difficulty in interpreting and applying them. A large portion of the work that modern courts do consists of interpreting what the legislators meant when they passed a law and applying that understanding or meaning to the current circumstances. In this task, a court may be guided by consulting the legislative history of any law, in order to ascertain the intention of the writers of any statute.

Equity

Equity is that body of law that carries out justice when the law itself fails to provide a fair or adequate remedy or no remedy at all. Equity originated in medieval England. During this period, the existing common law rules were highly technical and rigid. The remedies available in the common law courts were scarce. As a result, a prevailing party might not be able to obtain adequate relief in many courts. To rectify this problem, the chancellor, the king’s highest-ranking advisor, heard cases that could not be settled satisfactorily. The Court of Chancery, an offshoot of the Curia Regis, was the court of the king’s chancellor. The most famous chancellor in British history was perhaps Sir Thomas More.

The American colonies adopted the principles of equity along with the common law. Eventually, law and equity became merged, so that today, the majority of states have eliminated separate equity (chancery) and law courts. The same court handles both types of claims. Further, courts may award both monetary damages (“a remedy in law”) and an equitable remedy in specific cases.

Actions at law and suits in equity resolve issues using different procedures. In actions at law, disputes are generally resolved by the application of statutes and previously decided cases. Suits in equity are decided by principles of fairness and equity.

Examples of equitable principles include the doctrines of laches and the “Clean Hands” doctrine. Laches is the product of the maxim that “equity aids the vigilant and not those that slumber on their rights.” This means that if one neglects or omits to do what one should do in a timely fashion it is presumed that he has abandoned his right or claim. The “Clean Hands” doctrine means that the court will not provide an equitable remedy to one who has violated conscience or good faith or other equitable principles. Simply stated, it means that “he who seeks equity must do equity.”

Equitable decisions are called decrees. Unlike legal relief, which involves awards of money or something else of value, equity decrees order a party to do or refrain from doing something. For example, the remedy may come in the form of an injunction—either temporary or permanent—prohibiting one party from doing an act or commanding a party to perform an act. Another type of equitable relief is that of specific performance, where the losing party is ordered to perform the contractual promise he or she made. It is imposed when monetary damages are inadequate. For example, Ross offers to buy Joan’s building for his motorcycle shop and Joan accepts. Joan later changes her mind and decides to keep the property. Since real estate is considered to be unique, and there is no other piece of property or building exactly like Joan’s, a court may order specific performance on the contract. Joan would be compelled to go through with the sale.

Additional equitable remedies include rescission (canceling a contract, thereby putting the parties to the contract in the same position they were in before the contract was formed), restitution (returning property or money to a party), and reformation (where the court of equity will rewrite all or part of a contract to reflect the parties’ actual intentions).

Administrative Law

Congress or a state legislature will oftentimes enact a statute using general language leaving it up to the appropriate administrative agency to create more detailed rules.  Federal and state regulatory agencies (for example, the Environmental Protection Agency and the Federal Trade Commission) promulgate their own “rules and regulations” to implement the statutes enacted by the legislatures.  These regulations generally have the same impact as a statute, and therefore are often termed administrative laws.    

Administrative Agencies

As the United States became industrialized in the latter half of the 19th century, the need arose to create divisions of government that could handle the ever-complex situations that evolved. Congress and state legislatures began to establish administrative agencies. The duties that Congress could not perform in regulating certain activities because of the lack of time and specialized knowledge were delegated to these agencies.

To date, Congress and the executive branch have created over 100 administrative agencies to make, interpret, and enforce laws. These agencies provide a forum where complex issues and disputes can be adjudicated with efficiency, expertise, and fairness. Administrative agencies are authorities in their particular areas of law. Their expertise is critical given the complexities of the law and the complexities of the areas of business the laws seek to regulate.

Administrative agencies exist at every level of the government and they derive their power from the particular branch of the government that created them. For example, Congress creates federal agencies, state legislatures create state agencies, and city councils create their cities’ administrative agencies. An example of a federal agency is the Securities and Exchange Commission (SEC), which is authorized to enforce the federal securities laws that apply to issuers and persons who trade in securities. The New Jersey Department of Environmental Protection is an example of a state agency. It regulates air and water quality, wetlands, solid and hazardous waste management, parks and forestry, fish and wildlife. An example of local agency is the Business Integrity Commission of New York City. This agency regulates the trade waste industry, shipboard gambling industry, Fulton Fish Market distribution area and other seafood distribution areas, and public wholesale markets.

Legislative supervision over agencies may be minimal; however, administrative agencies are subject to the Administrative Procedure Act (APA) which requires agencies to follow uniform procedures in making rules and establishes basic notice and hearing requirements, which are collectively known as “due process” rights.

While the vast majority of administrative actions are processed informally, certain administrative agencies have been assigned quasi-judicial authority to adjudicate cases through an administrative proceeding. These proceedings are not identical to court trials; however, the agency must comply with the Due Process Clause of the U.S. Constitution. In other words, the individual or business must be given adequate notice and a meaningful opportunity to be heard, and fair trial procedures must be utilized in making administrative determinations. Administrative actions may also be challenged by claiming that an agency has acted ultra vires, that is, beyond the scope of their own power and authority.

Administrative law judges (ALJs) preside over administrative proceedings. There is no jury. Counsel may represent the administrative agency and the respondent and may call witnesses and introduce evidence. Upon hearing the case, the ALJ will render a decision in the form of an order that will state “the findings of fact and the conclusions of law” upon which the decision is based. The order becomes final if it is not appealed. If either party is dissatisfied with the decision, it may seek an appeal that consists of a review by the agency or perhaps by a court. In some cases, a successful appeal will result in a completely new or “de novo” hearing on the merits of the case. In other cases, the scope of appellate review is limited. A court will defer to the findings of the ALJ and only decide whether those findings could reasonably have been reached on sufficient or substantial credible evidence present in the record.

Treaties

According to the U.S. Constitution, a treaty is made by the President with the head of a foreign country. It must be ratified by two-thirds of the Senate. It then becomes “the supreme law of the land.” A conflict of law between a treaty and a state or federal law causes that law to become invalid.

Basis of Commercial Law

The area of law pertaining to commercial dealings is called commercial or business law. It includes aspects of contract law, sales, corporations, agency, partnerships, and other subjects included in this text.

Uniform Laws

Since each state is a sovereign, with a different set of laws, the differences created issues for commerce between the states. Beginning in the late 18th century, a group of legal scholars formed the National Conference of Commissioners on Uniform State Laws (NCCUSL) and began meeting to draft uniform statutes. State legislatures were encouraged to adopt the uniform law. In addition to the NCCUSL the American Law Institute [ALI], founded in 1923, has also developed a number of comprehensive codes of law. Each state may adopt all or part (or none, for that matter) of a uniform law. Therefore, the law on any particular subject is not “uniform” throughout the country.    

Examples of uniform laws include the Model Business Corporation Act, the Uniform Gifts to Minors Act, the Uniform Arbitration Act, and the Uniform Federal Lien Registration Act. A number of other uniform laws have been written as well. Students of business law become familiar with the Uniform Commercial Code or “UCC,” one of the most important legal codes.

The Uniform Commercial Code

The UCC is a unified body of statutes governing nearly all commercial transactions. Nevertheless, the interpretations of the UCC are found in case law, or the reported decisions of the courts. By providing uniformity and stability among the states, the UCC encourages the advancement of business and assures businesspeople that their legal contracts will be carried out and enforced by the courts.

The UCC did not result in drastic changes in the basic principles of commercial law. There are, however, important differences from the common law. While the common law was guided, to a large extent, by the principle of caveat emptor or “let the buyer beware,” the UCC envisions a different role of a merchant in commercial transactions. Merchants are held to a very high standard of performance and must act to act in good faith within the commercial sphere.  UCC § 2-103 defines good faith as “honesty in fact” and the “observance of reasonable commercial standards of fair dealing in the trade.” This is a far cry from caveat emptor!

The UCC defines and explains important and sometimes commonly misunderstood legal and business terms, thus assisting parties in the drafting of contracts and aiding courts in their interpretation and enforcement. For example, courts may rule that certain contracts or terms within a contract are unconscionable and therefore unenforceable. The case law governing contracts in one state has persuasive value in courts of other states because adoption of the UCC results in “uniformity.”

All fifty states have adopted the UCC, as well as, the District of Columbia, the Virgin Islands, and Guam. Louisiana was the last state to adopt the UCC. Why do you think Louisiana was so late in adopting the UCC?

Classification of Law

Laws may be classified into three different groupings. They are: (1) criminal law and civil law; (2) substantive law and procedural law; and (3) public law and private law.

Criminal and Civil Law

Philosophically, a crime may be considered a wrong committed against society. Federal and state prosecutors who bring the case against the defendant, or the person committing the wrongdoing, represent society. The respective criminal law applies in these cases. In certain instances, a city or municipality may initiate a criminal action, such as charging a person with theft, assault, public disorderliness, or some other criminal offense. The formal charge is made in the name of the state in which the alleged violation took place. In some cases, “persons” may include corporations and other types of business entities. Crimes are punishable by imprisonment and/or fines, and in some cases, the making of restitution to the victim of a crime.

In general terms, civil law is applied when an injured party, or a plaintiff, brings an action against another party, a defendant, because the defendant did not meet or breached a legal duty owed to the plaintiff. Anyone may be a party to a civil suit—individuals, business entities, and government entities. If the defendant loses a civil case, the plaintiff is usually awarded some form of damages (money, property) or some form of equitable relief.

At times, the same behavior may violate both criminal and civil laws. For example, a car thief may be charged for violating a criminal statute and may also be sued in a civil court by the owner of the car for money damages.

Substantive and Procedural Law

Laws that prescribe the rights and obligations of people in their everyday lives are called substantive laws. A statute that makes theft illegal is a substantive law.

Procedural laws establish the means and rules by which substantive laws are applied. For example, in federal civil suits all individuals involved (judge, defendant, jury, plaintiff, etc.) act in compliance with the rules set down in the Federal Rules of Civil Procedure. By way of example, one such rule sets forth time limits for the filing of law suits in federal courts.

Public and Private Law

Public law is law enacted by an authorized government body. Examples include the U.S. Constitution, state constitutions, federal aviation laws, state laws of incorporation, municipal parking ordinances, and zoning laws.

Private law develops from a relationship between parties and creates a framework of rules to establish rights and obligations of the parties. For example, an employment contract creates a legal relationship between the employer and employee. The terms of the contract are a type of private law to be obeyed by the parties. The requirements for executing the contract and the means for enforcing the contract are a matter of public law; however, the terms for performance are private law created by the parties to the employment contract.

Primary and Secondary Sources of Law

Primary sources of law, or binding authority, are those sources of law a court must follow when deciding cases. Primary sources include, constitutions, statutes, regulations, and case law. Secondary sources of law, or persuasive authority, include case law from other jurisdictions, legal dictionaries, law review articles, and treatises.  Secondary sources of law are not binding on the court but may help guide the court in deciding a case.

Schools of Jurisprudential Thought

The Natural Law School

The natural law school is one of the oldest legal philosophies, at least dating back the days of Aristotle.  He noted the natural law applies to all humankind.  There is a higher and universal law transcending all creation, and the human law, or civil law, aspires to embody these general, universal principles.  Every human being has an inclination to discern good from bad, right from wrong.  The notion of “natural rights” comes from the natural law.

The Positivist School

The adherents to the legal positivist school do not believe natural rights come from a higher form of law.  Instead, laws are created by societies.  Whether there are good laws or bad laws does not matter.  Under their philosophy, all laws must be obeyed until they are changed.

The Historical School

Followers of the historical school look to history, tradition, or customs.  They look to what legal doctrines have withstood the passage of time—what works and what does not work.  Adherents to the historical school will look to past cases for guidance and follow those decisions.

Legal Realism

Legal realists will look outside the statutory framework, as they believe the law cannot always be applied with total uniformity.  Judges are permitted to bring in their own psychological, economic, and political predispositions into their decisions.  They believe that law is not a scientific enterprise in which deductive reasoning can be applied consistently to reach an outcome in every case.  Instead, judges must resolve cases by balancing the interests of the parties with that of society.

 

Questions

    1. How did the common law develop?
    2. What is a “case of first impression”?
    3. Explain the principle of “stare decisis.”
    4. Why is the U.S. Constitution so important in this country?
    5. What are the various rights protected in the Bill of Rights?
    6. Explain the federal powers conferred in Articles I, II, and III. What is the doctrine of separation of powers?
    7. Differentiate between courts of equity and law. Why are each needed?
    8. What is preemption and when is a state law preempted by a federal law?
    9. What role do administrative agencies play in government? Name a federal agency and a state agency.
    10. What is the difference between a state constitution and the federal constitution?
    11. How would a secondary source of law guide a court?
    12. Explain what a treaty is and when the courts have to follow it.
    13. What is the difference between statutory law and constitutional law?
    14. What is the difference between public and private law? Give examples.
    15. Give an example of substantive law. How does the procedural law compliment the substantive law?
    16. Who brings the charges against the accused in a criminal matter?
    17. Why are uniform laws important? What is the UCC?
    18. What is the definition of “good faith” under the UCC?
    19. What is the difference between civil law and criminal law?
    20. What are the differences between the various schools of jurisprudential thought? Which is more convincing?

Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin

Chapter Two | Court Systems

Introduction

The vast and complex body of American law is based on several components: case law and legal reasoning that form the common law; statutes enacted at the federal and state levels; federal and state constitutions; codes such as the Uniform Commercial Code and the Uniform Bankruptcy Code; and, administrative law promulgated by agencies, such as the Federal Trade Commission or the IRS. Laws alone, however, would have no significance if it were not for the court system that was created for the purpose of interpreting and applying the law.

Principles of law are imbued in every aspect of the business environment; government regulations actively facilitate and restrict business operations. It is, therefore, essential for managers to have a basic knowledge of the legal system in order to understand how the applications of the rules affect their trade or business. In all likelihood many businesspeople will be involved, at one time or another, in the legal system. Thus, it is important to know the basic structure of the court system and the route a lawsuit takes through that system.

Before examining the federal and state court structures, the chapter will discuss the important concept of jurisdiction. Jurisdiction plays an important part in understanding where and why a suit starts in one court rather than in another.

Jurisdiction of Courts

The word “jurisdiction” is derived from two Latin words, juris meaning “law,” and dictum meaning “to speak.” In order to hear a case, a court must be able “to speak the law,” i.e., it must possess the power to rule on that case. In order to have this power, a court must have jurisdiction over the parties and subject matter of the case. Federal courts have subject matter jurisdiction in two types of cases: federal question cases, where the application of a federal law is necessary to resolve the dispute; and diversity cases, where a suit arises between citizens of two or more different states and the amount in controversy is $75,000 or greater.

Even though a case may be tried in a federal court, diversity cases require that federal courts apply the statutory and case law of the state in which the trial is conducted—not federal law. Federal courts are used to maintain impartiality in deciding this type of dispute.

In Personam Jurisdiction

In addition to subject matter jurisdiction, courts must have jurisdiction over the parties to a law suit. The legal term is in personam jurisdiction. A court may obtain in personam jurisdiction in any of three ways: 1) compulsory process — if a defendant is served with a summons, giving notice of the suit and requiring a response in court; 2) the party is a resident or does business in the state where the court is located; and, 3) consent — the party appears in court without objecting to the court’s jurisdiction.

Under all three methods, a court will always have in personam jurisdiction over a plaintiff who has consented to its jurisdiction by bringing a case. Subject matter jurisdiction, however, cannot be obtained merely by consent. Note: a nonresident defendant may make what is termed a “special appearance” to challenge the court’s jurisdiction without consenting to that jurisdiction.

Long-Arm Statutes

States protect their citizens from unscrupulous non-residents by enacting laws that grant courts in personam jurisdiction over non-residents having at least “minimum contacts” within the state. These so-called “long-arm statutes” allow one party to sue another living in a distant state without bearing the burden and expense of traveling to the defendant’s state—but only under limited and special circumstances.

The following case, International Shoe Co. v. State of Washington, still provides a perfect example of and demonstrates the application of these jurisdictional principles. Note the statement of the legal question found in the citation to Milliken v. Meyers.

 

Case Summary

INTERNATIONAL SHOE CO. v. STATE OF WASHINGTON

326 U.S. 310 (1945)

The questions for decision are (1) whether, within the limitations of the due process clause of the Fourteenth Amendment, appellant, a Delaware corporation, has by its activities in the State of Washington rendered itself amenable to proceedings in the court of that state to recover unpaid contributions to the state unemployment compensation fund exacted by state statutes, *** and (2) whether the state can exact those contributions consistently with the due process clause of the Fourteenth Amendment.

The statutes in question set up a comprehensive scheme of unemployment compensation, the costs of which are defrayed by contributions required to be made by employers to a state unemployment compensation fund. The contributions are a specified percentage of the wages payable annually by each employer for his employees’ services in the state. The assessment and collection of the contributions and the fund are administered by respondents. Section 14(c) of the Act *** authorizes respondent Commissioner to issue an order and notice of assessment of delinquent contributions upon prescribed personal service of the notice upon the employer if found within the state, or, if not so found, by mailing the notice to the employer by registered mail at his last known address. That section also authorizes the Commissioner to collect the assessment by distraint if it is not paid within ten days after service of the notice*** . 

By §§14(e) and 6(b) the order of assessment may be administratively reviewed by an appeal tribunal within the office of unemployment upon petition of the employer, and this determination is by §6(i) made subject to judicial review on questions of law by the state Superior Court, with further right of appeal in the state Supreme Court as in other civil cases.

In this case notice of assessment for the years in question was personally served upon a sales solicitor employed by appellant in the State of Washington, and a copy of the notice was mailed by registered mail to appellant at its address in St. Louis, Missouri. Appellant appeared specially before the office of unemployment and moved to set aside the order and notice of assessment on the ground that the service upon appellant’s salesman was not proper service upon appellant; that appellant was not a corporation of the State of Washington and was not doing business within the state; that it had no agent within the state upon whom service could be made; and that appellant is not an employer and does not furnish employment within the meaning of the statute.

The motion was heard on evidence and a stipulation of facts by the appeal tribunal which denied the motion and ruled that respondent Commissioner was entitled to recover the unpaid contributions. That action was affirmed by the Commissioner; both the Superior Court and the Supreme Court affirmed***. Appellant in each of these courts assailed the statute as applied, as a violation of the due process clause of the Fourteenth Amendment, and as imposing a constitutionally prohibited burden on interstate commerce***. Appellant is a Delaware corporation, having its principal place of business in St. Louis, Missouri, and is engaged in the manufacture and sale of shoes and other footwear. It maintains places of business in several states, other than Washington, at which its manufacturing is carried on and from which its merchandise is distributed interstate through several sales units or branches located outside the State of Washington.

Appellant has no office in Washington and makes no contracts either for sale or purchase of merchandise there. It maintains no stock of merchandise in that state and makes there no deliveries of goods in intrastate commerce. During the years from 1937 to 1940, now in question, appellant employed eleven to thirteen salesmen under direct supervision and control of sales managers located in St. Louis. These salesmen resided in Washington; their principal activities were confined to that state; and they were compensated by commissions based upon the amount of their sales. The commissions for each year totaled more than $31,000. Appellant supplies its salesmen with a line of samples, each consisting of one shoe of a pair, which they display to prospective purchasers. On occasion they rent permanent sample rooms, for exhibiting samples, in business buildings, or rent rooms in hotels or business buildings temporarily for that purpose. The cost of such rentals is reimbursed by appellant.

The authority of the salesmen is limited to exhibiting their samples and soliciting orders from prospective buyers, at prices and on terms fixed by appellant. The salesmen transmit the orders to appellant’s office in St. Louis for acceptance or rejection, and when accepted the merchandise for filling the orders is shipped f.o.b. from points outside Washington to the purchasers within the state. All the merchandise shipped into Washington is invoiced at the place of shipment from which collections are made. No salesman has authority to enter into contracts or to make collections.

The Supreme Court of Washington was of opinion that the regular and systematic solicitation of orders in the state by appellant’s salesmen, resulting in a continuous flow of appellant’s product into the state, was sufficient to constitute doing business in the state so as to make appellant amenable to suit in its courts. But it was also of opinion that there were sufficient additional activities shown to bring the case within the rule frequently stated, that solicitation within a state by the agents of a foreign corporation plus some additional activities there are sufficient to render the corporation amenable to suit brought in the courts of the state to enforce an obligation arising out of its activities there***. The court found such additional activities in the salesmen’s display of samples sometimes in permanent display rooms, and the salesmen’s residence within the state, continued over a period of years, all resulting in a substantial volume of merchandise regularly shipped by appellant to purchasers within the state*** . 

Appellant *** insists that its activities within the state were not sufficient to manifest its “presence” there and that in its absence the state courts were without jurisdiction, that consequently it was a denial of due process for the state to subject appellant to suit. It refers to those cases in which it was said that the mere solicitation of orders for the purchase of goods within a state, to be accepted without the state and filled by shipment of the purchased goods interstate, does not render the corporation seller amenable to suit within the state***. And appellant further argues that since it was not present within the state, it is a denial of due process to subject it to taxation or other money exaction. It thus denies the power of the state to lay the tax or to subject appellant to a suit for its collection.

Historically the jurisdiction of courts to render judgment in personam is grounded on their de facto power over the defendant’s person. Hence his presence within the territorial jurisdiction of a court was prerequisite to its rendition of a judgment personally binding him. Pennoyer v. Neff, 95 U.S. 714, 733, ***. But now that the capias ad respondendum [a writ commanding the sheriff to take the defendant to answer the plaintiff in an action] has given way to personal service of summons or other form of notice, due process requires only that in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of the suit does not offend “traditional notions of fair play and substantial justice.” 

Since the corporate personality is a fiction, although a fiction intended to be acted upon as though it were a fact, *** it is clear that unlike an individual its “presence” without, as well as within, the state of its origin can be manifested only by activities carried on in its behalf by those who are authorized to act for it. To say that the corporation is so far “present” there as to satisfy due process requirements, for purposes of taxation or the maintenance of suits against it in the courts of the state, is to beg the question to be decided. For the terms “present” or “presence” are used merely to symbolize those activities of the corporation’s agent within the state which courts will deem to be sufficient to satisfy the demands of due process. L. Hand, Jr., in Hutchinson v. Chase & Gilbert, ***. Those demands may be met by such contacts of the corporation with the state of the forum as make it reasonable, in the context of our federal system of government, to require the corporation to defend the particular suit which is brought there. An “estimate of the inconveniences” which would result to the corporation from a trial away from its “home” or principal place of business is relevant in this connection ***. 

“Presence” in the state in this sense has never been doubted when the activities of the corporation there have not only been continuous and systematic, but also give rise to the liabilities sued on, even though no consent to be sued or authorization to an agent to accept service of process has been given ***. Conversely it has been generally recognized that the casual presence of the corporate agent or even his conduct of single or isolated items of activities in a state in the corporation’s behalf are not enough to subject it to suit on causes of action unconnected with the activities there***. To require the corporation in such circumstances to defend the suit away from its home or other jurisdiction where it carries on more substantial activities has been thought to lay too great and unreasonable a burden on the corporation to comport with due process.

While it has been held in cases on which appellant relies that continuous activity of some sorts within a state is not enough to support the demand that the corporation be amenable to suits unrelated to that activity, *** there have been instances in which the continuous corporate operations within a state were thought so substantial and of such a nature as to justify suit against it on causes of action arising from dealings entirely distinct from those activities ***. Finally, although the commission of some single or occasional acts of the corporate agent in a state sufficient to impose an obligation or liability on the corporation has not been thought to confer upon the state authority to enforce it, ***, other such acts, because of their nature and quality and the circumstances of their commission, may be deemed sufficient to render the corporation liable to suit. Cf. Kane v. New Jersey *** True, some of the decisions holding the corporation amenable to suit have been supported by resort to the legal fiction that it has given its consent to service and suit, consent being implied from its presence in the state through the acts of its authorized agents ***. But more realistically, it may be said that those authorized acts were of such a nature as to justify the fiction ***. 

It is evident that the criteria by which we mark the boundary line between those activities which justify the subjection of a corporation to suit, and those which do not, cannot be simply mechanical or quantitative. The test is not merely, as has sometimes been suggested, whether the activity, which the corporation has seen fit to procure through its agents in another state, is a little more or a little less ***. Whether due process is satisfied must depend rather upon the quality and nature of the activity in relation to the fair and orderly administration of the laws which it was the purpose of the due process clause to insure. That clause does not contemplate that a state may make binding a judgment in personam against an individual or corporate defendant with which the state has no contacts, ties, or relations ***. But to the extent that a corporation exercises the privilege of conducting activities within the state, a procedure which requires the corporation to respond to a suit brought to enforce them can, in most instances, hardly be said to be undue ***. 

Applying these standards, the activities carried on in behalf of appellant in the State of Washington were neither irregular nor casual. They were systematic and continuous throughout the years in question. They resulted in a large volume of interstate business, in the course of which appellant received the benefits and protection of the laws of the state, including the right to resort to the courts for the enforcement of its rights. The obligation which is here sued upon arose out of those very activities. It is evident that these operations establish sufficient contacts or ties with the state of the forum to make it reasonable and just according to our traditional conception of fair play and substantial justice to permit the state to enforce the obligations which appellant has incurred there. Hence we cannot say that the maintenance of the present suit in the State of Washington involves an unreasonable or undue procedure.

We are likewise unable to conclude that the service of the process within the state upon an agent whose activities establish appellant’s “presence” there was not sufficient notice of the suit, or that the suit was so unrelated to those activities as to make the agent an inappropriate vehicle for communicating the notice. It is enough that appellant has established such contacts with the state that the particular form of substituted service adopted there gives reasonable assurance that the notice will be actual ***. Appellant having rendered itself amenable to suit upon obligations arising out of the activities of its salesmen in Washington, the state may maintain the present suit in personam to collect the tax laid upon the exercise of the privilege of employing appellant’s salesmen within the state. For Washington has made one of those activities, which taken together establish appellant’s “presence” there for purposes of suit, the taxable event by which the state and to suit to recover the tax ***. 

AFFIRMED.

There are two types of jurisdiction involving “minimum contacts” analysis: (1) specific jurisdiction, where the plaintiff’s claims “arise out of or are related to” the defendant’s contacts; and, (2) general jurisdiction, where the defendant’s contacts are “continuous and systematic” enough that the court can exercise jurisdiction. In the following case, the Court found the defendant did not make the minimum contacts necessary for the forum state to maintain jurisdiction. 

 

Case Study

Goodyear Dunlop Tires Operations, S.A. v. Brown

564 U.S. 915 (2011)

Procedural Posture

Respondent parents sued defendant parent corporation and petitioner foreign subsidiaries, alleging that a tire was defective. The state trial court denied the subsidiaries’ motion to dismiss for want of personal jurisdiction. The Court of Appeals of North Carolina affirmed. Certiorari was granted to decide whether the general jurisdiction asserted over the subsidiaries was consistent with the Due Process Clause of the Fourteenth Amendment.

Overview

Two boys from North Carolina died in a bus accident that occurred in France. Attributing the accident to a tire that failed, their parents alleged negligence in the design, construction, testing, and inspection of the tire, which was manufactured in Turkey. The three subsidiaries were incorporated in Turkey, Luxembourg, and France and manufactured tires primarily for sale in European and Asian markets. A small percentage of their tires were distributed within North Carolina by other affiliates. The state court relied on the subsidiaries’ placement of their tires in the “stream of commerce” to justify the exercise of general jurisdiction over the subsidiaries. The Supreme Court determined that the subsidiaries were not amenable to general jurisdiction in North Carolina courts because their attenuated connections to the State fell far short of the continuous and systematic general business contacts necessary to empower North Carolina to entertain suit against them on claims unrelated to anything that connected them to the State. The sporadic sales of the subsidiaries’ tires in North Carolina through intermediaries were insufficient to warrant the assertion of general jurisdiction.

Opinions in the wake of the pathmarking International Shoe decision have differentiated between general or all-purpose jurisdiction, and specific or case-linked jurisdiction. A court may assert general jurisdiction over foreign (sister-state or foreign-country) corporations to hear any and all claims against them when their affiliations with the State are so “continuous and systematic” as to render them essentially at home in the forum State. Specific jurisdiction, on the other hand, depends on an affiliation between the forum and the underlying controversy, principally, activity or an occurrence that takes place in the forum State and is therefore subject to the State’s regulation. In contrast to general, all-purpose jurisdiction, specific jurisdiction is confined to adjudication of issues deriving from, or connected with, the very controversy that establishes jurisdiction.**** The Due Process Clause of the Fourteenth Amendment sets the outer boundaries of a state tribunal’s authority to proceed against a defendant. The canonical opinion in this area remains International Shoe, in which the Supreme Court held that a State may authorize its courts to exercise personal jurisdiction over an out-of-state defendant if the defendant has certain minimum contacts with the State such that the maintenance of the suit does not offend “traditional notions of fair play and substantial justice.”**** Endeavoring to give specific content to the “fair play and substantial justice” concept, the Supreme Court has classified cases involving out-of-state corporate defendants. First, jurisdiction unquestionably could be asserted where the corporation’s in-state activity is “continuous and systematic” and that activity gave rise to the episode-in-suit. Further, the commission of certain “single or occasional acts” in a State may be sufficient to render a corporation answerable in that State with respect to those acts, though not with respect to matters unrelated to the forum connections. The heading courts today use to encompass these two International Shoe categories is “specific jurisdiction.” Adjudicatory authority is “specific” when the suit arises out of or relates to the defendant’s contacts with the forum.**** International Shoe distinguished from cases that fit within the “specific jurisdiction” categories, instances in which the continuous corporate operations within a state are so substantial and of such a nature as to justify suit against it on causes of action arising from dealings entirely distinct from those activities. Adjudicatory authority so grounded is today called “general jurisdiction.” For an individual, the paradigm forum for the exercise of general jurisdiction is the individual’s domicile; for a corporation, it is an equivalent place, one in which the corporation is fairly regarded as at home. Domicile, place of incorporation, and principal place of business have been identified as “paradigm” bases for the exercise of general jurisdiction.****Since International Shoe, the Supreme Court’s decisions have elaborated primarily on circumstances that warrant the exercise of specific jurisdiction, particularly in cases involving “single or occasional acts” occurring or having their impact within the forum State. As a rule in these cases, the Supreme Court has inquired whether there was some act by which the defendant purposefully availed itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.**** Many States have enacted long-arm statutes authorizing courts to exercise specific jurisdiction over manufacturers when the events in suit, or some of them, occurred within the forum state. For example, the “Local Injury; Foreign Act” subsection of North Carolina’s long-arm statute authorizes North Carolina courts to exercise personal jurisdiction in any action claiming injury to person or property within North Carolina arising out of the defendant’s act or omission outside North Carolina, if, in addition, at or about the time of the injury, products manufactured by the defendant were used or consumed, within North Carolina in the ordinary course of trade.****Flow of a manufacturer’s products into the forum may bolster an affiliation germane to specific jurisdiction. Where the sale of a product is not simply an isolated occurrence, but arises from the efforts of the manufacturer or distributor to serve the market for its product in several States, it is not unreasonable to subject it to suit in one of those States if its allegedly defective merchandise has there been the source of injury to its owner or to others. But ties serving to bolster the exercise of specific jurisdiction do not warrant a determination that, based on those ties, the forum has general jurisdiction over a defendant.**** In the personal jurisdiction context, a corporation’s continuous activity of some sorts within a state is not enough to support the demand that the corporation be amenable to suits unrelated to that activity.

Outcome

The Supreme Court reversed the judgment of the state court.

In Rem Jurisdiction

In rem jurisdiction relates to the court’s power “about or against the thing.” A court will have power over property that is the subject of a legal dispute and is located within a given state. This gives the state courts the power to determine rights in that property even though persons whose rights are affected may be outside the state’s in personam jurisdiction. For example, a New Jersey court would have in rem jurisdiction to hear a dispute involving ownership of real property located in New Jersey, even if one of the parties to the dispute lived outside the state.

A second type of in rem jurisdiction is called quasi in rem jurisdiction. In this case, a plaintiff who obtains a judgment in one state may attach the defendant’s property in another state in an attempt to collect a judgment rendered by a court in a particular case. In the following case, Harrods, the famous British retailer, sued an Argentine company that registered with a Virginia company sixty domain names bearing the “Harrods” name. The Fourth Circuit, relying on Shaffer v. Heitner, 433 U.S. 186 (1977), upheld in rem jurisdiction in the district where the domain names had been registered.

 

Case Study

Harrods Ltd. v. Sixty Internet Domain Names

302 F.3d 214 (4th Cir. 2002) 

Procedural Posture

Appellant London store challenged the judgment of the United States District Court for the Eastern District of Virginia, at Alexandria, which dismissed its trademark infringement and dilution claims against appellee domain names under the Anticybersquatting Consumer Protection Act (ACPA), 15 U.S.C.S. § 1125(d)(1), and granted summary judgment as to six domain names. Fifty-four domain names  challenged the judgment against them.

Overview

A London store sued 60 internet domain names for trademark infringement under the Anitcybersquatting Consumer Protection Act (ACPA). The domain names had been registered by a Buenos Aries store with the same name as the London store, and the domain names all contained some form of the name. Both stores had legitimate rights to use the name in different parts of the world. On appeal of the district court’s judgment, the court determined that 15 U.S.C.S. § 1125(d)(2) was not limited to violations of 15 U.S.C.S. § 1125(d)(1), but rather it also authorized in rem actions for infringement and dilution claims, and therefore the district court erred by dismissing the London store’s infringement and dilution claims. The court held that the district court properly found that domain names  were registered by the Buenos Aries store with a bad faith intent to profit because the evidence indicated that the Buenos Aries store intended to use the  domain names to market its goods and services to non-South American customers in a manner calculated to divert and deceive consumers seeking to do business with the London store. The district court erred by granting summary judgment to six domain names  as almost no discovery had been completed.

The Due Process clause of the Fifth Amendment permits a federal court to exercise personal jurisdiction over a defendant only if that defendant has certain minimum contacts with the forum such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice. The minimum contacts rule applies to actions in rem and quasi in rem, as well as to actions in personam. Accordingly, the court applies the minimum contacts test to the district court’s exercise of in rem jurisdiction over the defendant. Under this test the court asks whether there has been some act by which the defendant purposefully availed itself of the privilege of conducting activities within the forum state, thus invoking the benefits and protections of its laws. A federal district court can exercise personal and in rem jurisdiction to the same extent as courts in the state where the district court is located. Thus, to determine whether the defendant has sufficient minimum contacts to justify the exercise of in rem jurisdiction by the district court, the court must determine whether the defendant has sufficient contacts with the Commonwealth of Virginia to justify the exercise of in rem jurisdiction by the courts of Virginia. **** In the case of disputes involving property, the presence of the property in the jurisdiction does not always justify the exercise of in rem jurisdiction, but when claims to the property itself are the source of the underlying controversy between the plaintiff and the defendant, it would be unusual for the State where the property is located not to have jurisdiction. **** Specifically, the Supreme Court said in Shaffer that in rem jurisdiction is appropriate in “suits for injury suffered on the land of an absentee owner, where the defendant’s ownership of the property is conceded but the cause of action is otherwise related to rights and duties growing out of that ownership.” Shaffer, 433 U.S. at 208, 97 S.Ct. 2569. The dispute in this case is roughly analogous to such a suit. Harrods UK has allegedly suffered injury by way of property, the Domain Names, owned by Harrods BA, an absentee owner. Harrods BA’s initial ownership of the Names is conceded, but the cause of action is related to Harrods BA’s rights and duties arising out of that ownership. **** Likewise, Virginia’s “interests in assuring the marketability of property within its borders and in providing a procedure for peaceful resolution of disputes about the possession of that property” also support the exercise of in rem jurisdiction in this case. . . . Moreover, Virginia’s interest in not permitting foreign companies to use rights emanating from, and facilities located in, its territory to infringe U.S. trademarks also supports the exercise of in rem jurisdiction. By registering these Domain Names in Virginia, Harrods BA exposed those Names to the jurisdiction of the courts in Virginia (state or federal) at least for the limited purpose of determining who properly owns the Domain Names themselves. This is not a case where “the only role played by the property is to provide the basis for bringing the defendant into court.” . . . Rather, because “claims to the property itself are the source of the underlying controversy,” . . . and because Virginia has important interests in exercising jurisdiction over that property (the Names), we conclude that courts in Virginia, the state where the Domain Names are registered, may constitutionally exercise in rem jurisdiction over them. Thus, the district court’s exercise of in rem jurisdiction over the Domain Names was constitutional.

Outcome

The judgment dismissing the London store’s trademark infringement and dilution claims against the domain names and granted summary judgment as to six domain names was reversed. The judgment against the 54 domain names ordering them to transfer the names to the London store was affirmed.

Venue

Venue determines which particular trial court is the appropriate one in which a case will be heard. Venue should not be confused with subject matter jurisdiction. State statutes prescribe what the proper venue is for a case. Venue is usually a matter of geographic location, based on the defendant’s place of residence, the location of the property if that property is the subject of the dispute, or the place in which the incident occurred that is the subject of the dispute. If multiple defendants reside in various geographical locations, the plaintiff may usually select the venue from any of these locations. Under the doctrine of forum non conveniens, if the location of a trial is inconvenient to a party, he or she may file a request with the court to move the case from that court. The judge then decides whether to move the case to a different location after a hearing on the motion. The famous Bhopal case, dealing with a major accident at the Union Carbide pesticide factory in Bhopal, India, involved the international application of the forum non conveniens principle. In that case, 145 lawsuits were consolidated in one action before the federal district court for the Southern District of New York. The court, however, granted the defendant’s motion and dismissed the suits on the grounds of forum non conveniens. The court ruled the case would be better handled in India. The decision was upheld by the Second Circuit.

The Federal Court System

The federal judicial system was created by the U. S. Constitution in Article III. It is structured in a three-tiered format consisting of trial courts (federal district courts), intermediate courts of appeal (circuit courts of appeal), and the United States Supreme Court. The federal courts have limited jurisdiction, except in diversity cases, meaning they can only hear cases authorized under the federal Constitution and federal statutes. Federal judges are appointed by the President, with the advice and consent of the Senate. Federal judges usually hold their positions for life, unless they retire or resign. They can also be removed if they are impeached by the House of Representatives and convicted at trial in the Senate.

Federal magistrate judges do not have lifetime appointment, as they are selected by district judges to assist them with various procedural matters. Article I courts are also federal courts, but they are created by Congress. Article I courts include the U.S. Bankruptcy Courts, U.S. Court of Appeals for Veterans Claims, U.S. Court of Federal Claims, U.S. Tax Court, Court of Military Commission Review, and United States Court of Appeals for the Armed Forces. Article I judges do not share the same protections as Article III judges. They have term limits and their compensation may be reduced.

U.S. District Courts

The district courts are the trial level in the federal court system and are considered courts of “original jurisdiction.” This means federal cases start in the district court. Each state has at least one federal district court that serves a certain prescribed geographical area, called a district. Currently there are 96 federal district courts. The court has both a “fact-finding” and “law-determining” function. The jury or judge may perform the function of fact-finding; however, the judge always determines the law.

As noted earlier, the jurisdiction of a federal district court is either based on diversity jurisdiction or federal question jurisdiction. Diversity jurisdiction exists when a suit arises between (1) citizens of different states; (2) a citizen of a state and a citizen of a foreign country; or (3) a citizen of a state and a foreign country where the plaintiff is the foreign country. The amount in controversy must exceed $75,000 or the action must be brought in an appropriate state court. Criminal cases are not brought under diversity jurisdiction.

A corporation is considered a citizen of the state of its incorporation and the state in which it has its principal place of business. A partnership (general or limited) is a citizen of every state in which an individual partner is a citizen. 

In a diversity case, the federal district court resolves all issues according to the law of the state in which it sits, however, federal procedural rules apply. This is based on the decision handed down by the Supreme Court in Erie Railroad Co. v. Tompkins (304 U.S. 64 (1938)). 

Federal question jurisdiction applies when a case arises under the U.S. Constitution or a federal law or a treaty. For example, if a federal bank is robbed (thus, violating a federal statute), or if a U.S. treaty with a foreign nation requires interpretation, the case will be heard in a federal district court.

Federal district courts have sole or exclusive jurisdiction over certain matters, such as cases involving federal crimes, antitrust, bankruptcy, patent and copyright cases, suits against the United States, and admiralty cases. State courts are not permitted to hear these cases. In contrast, state courts have jurisdiction over state crimes, state constitutional issues, divorce cases, adoption, wills and estates. Both the federal courts and state courts have concurrent jurisdiction over certain matters. When concurrent jurisdiction arises and the plaintiff chooses to have the case heard in a state court, the defendant may remove the case to a federal district court and have it heard or adjudicated there.

U.S. Courts of Appeals

The U.S. Courts of Appeals are the federal court system’s intermediate appellate courts. There are thirteen circuits in the federal appellate court system. Theses courts perform no fact-finding function; their purpose is to review only the legal conclusions reached by lower federal courts or the procedures used at the trial level. 

The first eleven Courts of Appeals have jurisdiction over cases arising in a particular geographical area, called a circuit. For example, the Court of Appeals for the Third Circuit, located in Philadelphia, hears appeals from the federal district courts located in their circuit, namely, Delaware, New Jersey, Pennsylvania, and the Virgin Islands. The courts at this level also hear appeals from the Tax Court, the Bankruptcy Court, and decisions from several administrative agencies, such as the National Labor Relations Board. 

The twelfth court of appeals is located in Washington, D.C., known as the District of Columbia. The thirteenth court of appeals is called the Court of Appeals for the Federal Circuit, which is also located in Washington, D.C. The Circuit Court of Appeals for the Federal Circuit hears specialized appeals concerning patent and trademark issues and appeals from the Claims Court and the Court of International Trade.

The U.S. Supreme Court

The U.S. Supreme Court is the only court explicitly established by the Constitution. It is the highest court in the land and generally serves as an appellate court. Nine justices make up the Supreme Court. As are all federal judges, Supreme Court judges are nominated by the President, must be confirmed by the United States Senate, and serve a life term.

The Supreme Court generally hears appeals from the federal circuit courts of appeals and the highest state courts. At times, a case may be appealed directly from a federal district court to the Supreme Court. The Supreme Court does not accept evidence nor does it hear testimony. It simply reviews the lower court’s record, hears oral arguments and determines whether there has been an error that warrants a reversal or modification of the decision. The Supreme Court’s decision is final.

Appeals to the Supreme Court are not automatic. A request for review of a lower court decision must be made by filing a petition for certiorari. Four of the nine justices must agree to hear an appeal in order to grant certiorari. This is sometimes referred to as the “Rule of Four.” A writ of certiorari is then issued if the Court decides to hear a case. This is an order issued by the Court requiring that the lower court produce the certified record of a case heard in that court.

The Supreme Court also has original jurisdiction in certain cases, meaning that it acts as a trial court. The Court has original and exclusive jurisdiction over all controversies between two or more states; over cases involving foreign ambassadors and ministers; controversies between a state and the United States; and cases involving a state and a citizen from another state or an alien. 

The State Court Systems

State courts are organized much like the federal court system. They differ in specifics such as number of courts, their names, how individuals become judges, and jurisdiction. At the base of a state’s judicial system are courts of limited jurisdiction. These include municipal courts, justice of the peace courts, landlord-tenant courts, and small claims courts. These courts generally hear minor criminal matters or civil controversies involving small amounts of money. Court proceedings are relatively informal and often no transcript of the testimony and proceedings is kept. The parties to a case frequently represent themselves (called a pro se procedure) and the presiding judicial officer is not required to be an attorney in many states.

State trial courts perform the same functions as courts of limited jurisdiction. However, they handle cases of greater significance and often there is no limit to the dollar amount that may be awarded or the penalties meted out in a criminal case, except those stipulated by state statutes. Also, unlike the inferior courts, a detailed record of the proceedings of a case is kept. A judge or jury may perform the fact-finding duties at this level; however, the judge always determines questions of law.

The state appellate courts review questions of law only. As in the federal court system, no juries are involved in an appeal. Some states have only one level of appellate court, while others have an intermediate level and a supreme court.

Civil Procedure

The judicial system has developed detailed and complex rules on how, when, and where a legal dispute can be brought to court. For a civil suit, the rules of civil procedure apply. A different set of rules pertain to criminal cases. These rules of procedure are necessary to obtain an orderly and impartial determination of a trial that is consistent with prior decisions based on the same facts. The procedural rules are not uniform among the states; however, there are basic similarities.

In the following sections, we will outline the primary steps of a civil lawsuit. Note, not every step is employed in every case because parties often settle out of court or they may not want to raise every issue possible. As a general rule, attorneys will try to settle cases before beginning the process of initiating a trial. A recently issued Federal Executive Order requires attorneys to pursue alternative methods of dispute resolution in attempts to obtain out-of-court settlements prior to instituting a law suit. These procedures will be discussed later in the chapter.

The Pleadings

Pleadings are the papers or documents filed with the court to institute and respond to a lawsuit. To initiate a lawsuit, a litigant files a complaint with the clerk of the appropriate court. This formal document states the litigant’s (the plaintiff) claim against the opposing party (the defendant) and includes sufficient facts to show that some legal remedy is appropriate to right the harm done.

The defendant is served with process, usually in the form of a writ, notice, summons, or the actual complaint. Service puts the defendant on notice that an action is pending against him or her, and that he or she is subject to the particular court’s jurisdiction.

The defendant must respond to the plaintiff’s complaint by filing an answer within a specified period of time. The defendant, through his or her answer, either admits or denies the plaintiff’s allegations or states that the he or she lacks the information needed to evaluate the truth or veracity of the plaintiff’s allegations. This amounts to a denial of the allegations found in the complaint.

The answer may also include affirmative defenses to the claim asserted in the complaint. An affirmative defense is a rule of law enabling the defendant to prevail in the case even though all of the plaintiff’s allegations are true. For example, if a plaintiff sues a defendant after the time within which to bring the action has expired, the defendant may raise this point as an affirmative defense and ask the court to have the case dismissed.

At times, the answer may include a counterclaim. This is a separate claim being asserted by the defendant against the plaintiff that arises from the same facts as stated in the complaint. A counterclaim is the defendant’s means for obtaining legal relief; it is not merely a defense to the plaintiff’s claim.

If the defendant fails to file an answer to the complaint, a default judgment may be entered against him or her. The default judgment establishes the defendant’s liability; however, the plaintiff still must prove damages.

Some jurisdictions allow or require the plaintiff to respond to the defendant’s affirmative defenses or counterclaim by means of a reply. It is a point-by-point response to the elements introduced in the defendant’s affirmative defense or counterclaim. If the particular jurisdiction does not allow a reply to an affirmative defense, the defendant’s new assertions are automatically denied. However, a plaintiff who wishes to contest a counterclaim must file a reply.

Purpose of the Pleadings

Historically, pleadings defined and limited the questions to be decided at the trial stage. Issues raised in the pleadings were considered part of the case; all others were excluded from further consideration. On rare occasions, amendments, changes, or additions to the pleadings were permitted. Once the litigants admitted to allegations they were bound by their admissions. Allegations that were denied would be included in the dispute between the parties. This stage of the case also included several technical pleading rules that, if violated, could jeopardize a party’s chances of winning a suit. 

Some jurisdictions continue in this tradition. Others have used this stage to provide notice to each litigant of the claims being asserted by the other litigant(s). Additionally, these jurisdictions are more inclined to decide cases on the merits rather than on the technical defects of the pleadings. In these jurisdictions, amendments to the pleadings may be allowed at the discretion of the judge. In addition, they may be used to introduce issues to be considered at trial that were not initially raised in the pleadings.

Motions

Once the pleadings have been filed and reviewed, it may be evident that the plaintiff has no case. In such a situation, pursuing the litigation would be a waste of the court’s limited time and resources. The procedure for disposing of the case at this point is a motion to dismiss. It may be made after the plaintiff has filed the complaint. A similar procedure is used to dismiss a case after the pleadings are completed. This is a motion for judgment on the pleadings.

Motions for dismissal may be made in order to attack inadequate service of process or a particular court’s lack of jurisdiction over the parties or subject matter, or both. However, the most important type of motion to dismiss is a demurrer. This motion is used to assert that the plaintiff has “failed to state a claim upon which relief can be granted.” In other words, even if every allegation made in the plaintiff’s complaint were true, the plaintiff could not recover because no rule of law exists entitling him to win on those facts.

Discovery

Discovery is the process used to exchange relevant information between the litigants. Its purpose is to aid the litigants in preparing their arguments and to narrow and clarify the issues to be decided at trial. The costs of obtaining discovery can be substantial and the time period extensive depending on the extent to which the litigants carry out the process. 

Written questions called interrogatories may be directed to each party and the parties are legally bound to answer them. Further, a deposition may be taken whereby the parties in the case and/or witnesses are questioned under oath before a court reporter. Other forms of discovery include requests for documents and other evidence such as the litigants’ files and records; mental and physical examinations; and requests for admissions, which are one litigant’s written demand that the other party agree to admit or deny certain statements of fact or law. Failure to comply with discovery procedures can result in the imposition of sanctions against a litigant or his or her attorney. 

Summary Judgment

Once the discovery process is completed, it is common for one party to make a motion to the court for a summary judgment. If the party making the motion prevails, the case will not go to trial. In order to succeed, the movant must show that there are no genuine issues of material fact, and that he or she is entitled to judgment as a matter of law based upon the information garnered from discovery.

Pre-Trial Conference

The participants in the pre-trial conference include the parties, the judge, and the attorneys. Pre-trial conferences may or may not be mandatory, and are scheduled at the trial judge’s discretion. The parties in attendance discuss the issues that will be tried, the length of the trial, and the possibility of settlement. If the case cannot be settled, the judge enters a pre-trial order including any stipulations and other matters that are the subject of agreement. Typically, the terms of the pre-trial order bind the parties throughout the rest of the case.

The Trial

A trial may be held with or without a jury. Generally, the jury is the trier of fact, meaning that the jury determines the facts alleged in the case and evaluates the veracity or credibility of any witnesses called at trial. The judge on the other hand acts as the trier of law. If neither party requests a trial by jury, the judge will assume both roles as trier of fact and the trier of law. Note, the jury can never make findings of law.

The U.S. Constitution guarantees the right to a jury trial for cases at law in federal courts if the amount in controversy exceeds $20. Most states have similar guarantees in their own state constitutions, but impose a higher minimum dollar amount. In a civil case, however, a party must affirmatively request (demand) a jury trial. If neither party to a lawsuit affirmatively requests a trial by jury, it is presumed to be waived.

In most civil cases, the plaintiff has the burden of proving the case by a preponderance of the evidence. This means that the greater weight of evidence must favor the plaintiff. To sustain that burden of proof, the plaintiff must convince the judge or jury that the facts probably bear out what the plaintiff alleges. In some types of civil cases, a slightly higher quantum of proof, called clear and convincing evidence, may be required. In criminal cases, guilt must be proved by a standard called “beyond a reasonable doubt.” 

Jury Selection

The selection of the jury in a trial is extremely important to the litigants. A panel of possible jurors is selected at random from the citizens residing within the court’s venue. The jury pool may be constituted in a variety of ways depending on the jurisdiction. The selection process of an individual jury is called the “voir dire,” a French term meaning “to speak the truth.” Depending on the state or court procedures, the judge, attorneys, or both, may question potential jurors to find out whether or not they can decide the case without bias or prejudice.

A potential juror may be removed “for cause” if the attorney, after questioning, believes the potential juror could not be unbiased. Attorneys have an unlimited number of challenges for dismissing potential jurors for cause. Attorneys may also eliminate potential jurors without providing any reason for doing so. These peremptory challenges are very limited in number. Peremptory challenges are allowed because the judicial system recognizes that to a limited extent, an attorney’s instinctual feelings play a part in the jury selection process. Today, potential jurors may not be eliminated from participating on juries solely because of race or gender. The jury selection process is an evolving one in the legal system.

Petit Jury

The petit (meaning small) jury is selected to hear the proceedings of the trial. It usually is made up of six to twelve individuals, again depending on the procedures used in an individual jurisdiction. A petit jury may hear either civil or criminal cases.

Grand Jury

A grand jury is so named because it is comprised of more jurors than a petit jury. A federal grand jury must have at least sixteen but not more than 23 persons. A grand jury is used only in criminal cases. Its purpose is to determine, after hearing the state’s evidence, whether probable cause exists for supposing that a crime has been committed and whether a trial should be held. If the grand jury finds probable cause, it returns a bill of indictment. If it does not find probable cause, it returns a “no bill.” 

Trial Proceedings

Each trial begins with the attorney for the plaintiff making an opening statement outlining the facts that he or she expects to prove during the trial. The defendant’s attorney may make his or her opening statement at this point or may reserve the right to make it until after the plaintiff presents his or her case-in-chief.

Presenting the Plaintiff’s Case

After the opening statement(s), the plaintiff calls his or her first witness for examination (questioning). This is the direct examination. The defendant’s attorney is then permitted to cross-examine this witness. If the defense attorney cross-examines the witness, the plaintiff’s attorney has another opportunity of question the same witness. This is redirect examination. The defense attorney may then follow with re-cross-examination. This process continues with each witness.

Directed Verdict

After the plaintiff calls all of his or her witnesses, the defendant’s attorney is permitted to ask the judge to direct a verdict for the defendant on the ground that the plaintiff has presented no evidence that would justify the granting of the plaintiff’s remedy. This is called a motion for a directed verdict. The defendant makes an assertion that, even upon reading the evidence in a light most favorable to the plaintiff, the case must be resolved in favor of the defendant as a matter of law. Motions for a directed verdict are seldom granted at this stage of the trial.

The Defense

If the motion for directed verdict in favor of the defendant is not granted, the defendant’s attorney presents their evidence and witnesses. When the defendant rests, either attorney may again move for a directed verdict. If not granted, the plaintiff is allowed to present a rebuttal. This may include additional evidence to refute the defense’s case. The defendant can rebut this evidence in a rejoinder.

Closing Arguments

Once all the evidence is presented, each party’s attorney delivers a closing argument. The plaintiff goes first. Each attorney urges a verdict in favor of his or her respective client. The judge then instructs the jury (if a jury is hearing the case) in the law that applies to the case. These are often called charges to the jury. In a criminal case, the state may offer a rebuttal argument since the state bears the burden of proof in a criminal case.

Verdicts

The jury then begins its deliberations in an effort to reach a verdict. The jury’s deliberations may result in one of several outcomes. It may issue a general verdict. In this case, the jury declares which party prevailed and the relief or remedy (if any) to be awarded. A general verdict gives the jury the freedom to ignore the judge’s charge or instructions and follow its own inclinations because it does not have to state its factual findings or its application of the law to those findings.

Alternatively, and at the discretion of the trial judge, a special verdict may be rendered. In this situation, the jury makes specific findings of fact; essentially it answers questions submitted to it by the court. Based on its answers, the judge determines which party is entitled to obtain a judgment by applying the law to the jury’s findings.

Once the jury has reached its verdict, on rare occasions, a judgment notwithstanding the verdict (in Latin, non obstante veredicto) may be granted. The party against whom the verdict was rendered moves for a judgment in his or her favor because, based on the weight of evidence, the party receiving the judgment should not have prevailed, again as a matter of law. Unless the jury was clearly lax in the performance of its duties, a court will not grant a Judgment N.O.V. We shall return to this issue in a contracts case, Sellers v. Looper.

Motion for a New Trial

If the losing party does not accept the judgment rendered, it may make a motion for a new trial. Such a motion will be granted if the judge recognizes that an error of law occurred during the trial, if misconduct by the jury or attorney was evident or has come to light, if new evidence was found, or if the plaintiff was awarded excessive damages. A court may also hear motions to increase (additur) or decrease (remittitur) damages. A motion for additur will not be entertained in a federal case due to constitutional grounds.

Appeals

A losing party may decide to appeal the decision of the trial court. The prevailing party at trial also may appeal if the award is not as much as was expected. The party making the appeal is called the appellant. The other party is called the appellee. In some cases, the party appealing is called the petitioner, and the other party called the respondent. 

An appeal is not a second trial. Therefore, no jury is used in appellate procedures. The judges of the appellate court (usually in three-judge panels) read the written record of the lower court’s proceedings. Oral arguments may be scheduled and the parties submit written briefs or arguments to the court. Appellate courts make their determination as a matter of law whether or not there was error made in the trial.

Appealable matters include the trial judge’s decisions on the pleadings or motion to dismiss, on admissibility of evidence, on granting or rejecting a motion for summary judgment, directed verdict, judgment n.o.v., or on a motion for a new trial. Further, a party may make an appeal based on the trial court’s rulings on service of process; its legal findings in a nonjury trial; its instructions to the jury in a jury trial; and, the damages or equitable relief awarded.

The appellate court has several options at its disposal. It may affirm the ruling of the lower court, reverse the lower court’s decision, or affirm one part of the decision and reverse another part of it. If the appellate court does not agree with the application of the law made by the lower court, it may set aside or modify the action of the lower court and enter a judgment that the lower court should have entered. It may set aside the action of the lower court and send the case back (remand) with directions to hold a new trial or enter a new judgment in accordance with the opinion rendered by the appellate court. 

Enforcement of Judgments

It is one thing for a plaintiff to be awarded a favorable judgment and another to collect on that judgment. If the losing party fails to comply with the award of a judgment of monetary damages, the prevailing party has to obtain a writ of execution that enables the sheriff to seize certain property in order to satisfy the judgment. The judgment may be satisfied by garnishment of the losing party’s salary, wages, or other funds held by a third party. If the successful party is awarded an equitable remedy such as an injunction or the award of specific performance and the losing party fails to obey the order, he or she may be held in contempt of court and punished by fine and/or imprisonment.

Alternative Dispute Resolution

Two factors may especially impact negatively on our legal system: delay and cost. The heavy volume of lawsuits and the highly formal and technical procedures involved in all stages of a lawsuit contribute to this problem. The legal system has developed several alternative means, known as alternative dispute resolution (ADR) by which to streamline the process and to settle conflicts.

Mediation

The process of mediation involves seeking an intermediary or outside party to assist parties in resolving their dispute. The intermediary, a mediator, has no legal power to enforce a solution. It is the mediator’s role to assist the parties in understanding each others’ positions, present the strengths and weaknesses of each party’s side, and assess the benefits of settlement versus the cost of proceeding toward a trial..

Arbitration

In this process, the neutral third party, the arbitrator, is empowered to issue a decision that is binding on the parties. The parties may agree to arbitrate a dispute or a statute may be enacted to compel arbitration. Such agreements are usually made before any disputes arise through the inclusion of an arbitration clause in a contract, although arbitration may commence after a dispute arises, through mutual consent of the parties.

Arbitrators need not be attorneys. In many cases they are professionals with expert knowledge of the subject matter in dispute. Arbitration, although a more informal proceeding than a trial, does follow rules of procedure and includes limited discovery.

Mediation/Arbitration

The combination of the above two means for resolving a dispute is called med/arb. This alternative to a lawsuit involves a third party who first acts as a mediator. All issues not resolved through mediation are then subjected to binding arbitration. The mediator and arbitrator may be two different people.

Court-Annexed Arbitration

In this case, arbitration is ordered by a judge after a lawsuit has been filed. Jurisdictions allowing court-annexed arbitration provide that the judge’s decision to order arbitration depends on the subject matter of the dispute and the amount of money at issue. The losing party does not lose his or her right to a conventional trial after the procedure is completed.

Other Means of ADR

Minitrial

The “minitrial” is an ADR procedure used by businesses to resolve legal issues without incurring the expense and delay associated with litigation. A legal dispute is processed through an informal, abbreviated, private “trial” in which the attorneys present their side to a panel of business executives of the disputing companies that have the power to resolve the dispute. Time limits are agreed to in advance. A neutral “advisor” acts as the judge and presides over the hearing, while offering opinions and proposals to the executives.

Summary Jury Trial

A summary jury trial may be ordered by a court to help the parties realize the strengths and weaknesses of their case to facilitate a settlement. A jury is empaneled by the court and is usually not told that their verdict is non-binding and merely advisory. A limited time is given to each side to present its best case to the jury. Each party may meet with the jury to discuss the strong and weak points of its case. The advantage of a summary jury procedure is that it helps influence a settlement by providing the parties with the knowledge of what an actual jury would think about the case. On the other hand, the downside is both parties would be revealing trial strategies at an earlier stage of the litigation, and the “winning” party may be reluctant to settle the case and want to proceed to a real trial.

 

Ethical Considerations

Stumpy’s Bikes

In 2015, Jack bought a motorcycle from Stumpy’s Bikes in Neptune, N.J. While driving the bike, the rear wheel broke down and Jack was seriously injured. He incurred over $75,000 in medical bills, loss of wages in the amount of $12,000, and serious pain and suffering.When Jack decided to sue the manufacturer, he was met with a claim by the manufacturer that the contract for sale of the motorcycle contained the following:

“All disputes must be resolved through arbitration.”

In addition, the state legislature had placed an upper limit of $50,000 on the damages the arbitrator can award. Jack brings suit in the Chancery Court of Monmouth County for a declaratory judgment that the arbitration agreement should be set aside.

Is the arbitration agreement enforceable? Is it fair for a legislature to place a cap on arbitration awards?

 

Questions

  1. What is jurisdiction? What is the difference between specific and general jurisdiction?
  2. What are “long arm statutes”?
  3. In International Shoe, how did the Court balance the due process rights of the corporation against the rights of the state of Washington to collect taxes from it?
  4. What are “minimum contacts”?
  5. Discuss in rem and quasi in rem jurisdiction. How did the Court rule in the Harrods case? How did the Supreme Court rule in Goodyear v. Brown? 
  6. What is venue? How does venue differ from jurisdiction? 
  7. In the federal district courts civil jurisdiction is based on diversity and federal question jurisdiction. Explain what these terms mean.
  8. Describe exclusive and concurrent jurisdiction.
  9. Provide an example of a situation in which the U.S. Supreme Court exercises original jurisdiction.
  10. What is a writ of certiorari?
  11. Explain the process of bringing a civil suit through a typical state court system.
  12. Define summary judgment and motion to dismiss.
  13. What is the function of the grand jury? The petit jury?
  14. Define: general verdict, special verdict, and judgment notwithstanding the verdict.
  15. Watch the movie “Twelve Angry Men.” What does it teach you about a jury? 
  16. What do appellate courts do? Under what circumstances can a party appeal a case?
  17. Explain the various forms of alternative dispute resolution.

 

Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin

Chapter Four | International Perspectives

Introduction

Globalization is a term of art. The past decade has seen a dramatic change in political, economic, and business relationships across the world. Technology and the rise of the Internet have provided an extraordinary acceleration of these trends. While globalization has many advantages, it also provides some significant challenges to the business community. The demands on the business community, as it operates within a variety of cultures and legal traditions, will only continue to require that students of business and business professionals have an understanding of international law and its impact.

Despite the fact that there are numerous global political and economic organizations, none has clear preeminence over what we would consider the traditional aspects of creating law. For example, there is no single legislature, court, or executive that has jurisdiction over all aspects of international law. This Chapter examines some of the more important areas of international law, especially those influencing businesses operating increasingly in a globalized environment.

Sources of International Law

International law consists of rules that have been generally accepted by the international community, including international treaties, conventions, and other agreements; the application of custom between nations; the writings of certain renowned and well-respected publicists or writers; general principles of law recognized by “civilized nations” and which are found in the major legal systems; and, in limited circumstances, decisions of international courts and tribunals. The sources of international law may be found in Article 38 of the Statute of the International Court of Justice. 

United States and International Law

In the United States, the U.S. Constitution grants most of the power over international relations to the federal government. The Commerce Clause (Article I, Section 8) specifically grants Congress the power to “regulate commerce with foreign nations.” Article II, section 2 grants the president “the power, by and with the advice and consent of the Senate to make treaties, provided two thirds of the senators present concur.” The Supremacy Clause accords treaties the status of “law of the land.” The United States Supreme Court underscored this view in Missouri v. Holland, 252 U.S. 416 (1920), holding that a treaty takes precedence over a conflicting state law. 

The case of The Paquete Habana provides an early glimpse into the U.S. perspective on the incorporation of principles of international law into the broader development of American law.

 

Case Study

The Paquete Habana.; The Lola

Supreme Court of the United States, 175 U.S. 677 (1900)

Procedural Posture

Claimant shipmasters each appealed from the decrees of the District Court of the United States for the Southern District of Florida condemning two fishing vessels and their cargoes as prizes of the Spanish-American War, where the evidence showed that each vessel, sailing under a Spanish flag, had been engaged in fishing off the coast of Cuba before being captured by blockading squadrons.

Overview

Claimants were masters of a sloop and schooner, with crews of three and six. While they were out to sea, fishing along the coast of Cuba and near Yucatan, the United States imposed a blockade of Cuba and declared war against Spain. When the vessels returned with their catches of fresh fish, they were seized and a libel of condemnation of each vessel as a prize of war was filed. The district court entered a final decree of condemnation and public sale at auction. Claimants appealed. The Supreme Court first ruled that, pursuant to 26 Stat. 826 (1891), it had appellate jurisdiction over the controversy without regard to the amount in dispute and without certification from the district court, as required by prior statutory law. In reversing, the Court ruled that, under the law of nations, in each case the capture was unlawful and without probable cause. It was a rule of international law that coast fishing vessels, pursuing their vocation of catching and bringing in fresh fish, were exempt, with their cargoes and crews, from capture as prize of war. Although not reduced to treaty or statutory law, courts were obligated to take notice of and give effect to that rule.

Outcome

The decrees condemning the vessels were reversed and, in each case, it was ordered that the proceeds of the sales of each vessel and cargo be restored to the respective claimant, with compensatory damages and costs.

International Systems

Comparative Law

“Comparative Law” examines the similarities and differences between national legal systems. International law governs the relationships between or among nations [public international law] or governs the conduct of certain actors in the international business environment [private international law] in such areas as taxation and contracts. Comparative law is the study of legal systems of different nations. 

There are four significant legal systems in operation in the world today: civil law, common law, socialist law, and Islamic law. The common-law system was discussed extensively in Chapter 1. 

Civil Law Systems

Civil law systems find their origins in Roman law and were strongly influenced by the French and German Civil Codes of the nineteenth century. Civil codes were the collected legal principles of those nations. Civil codes have a positive view of the protection of private property, individual rights, and freedom of contract. Civil law generally included areas of private law, typically encompassing tort, property, and contract law. Juries are rarely used in adjudicating civil cases in the civil law system. 

Since civil law systems rely on a code or written law, the legislature is the preeminent player. While courts may be called upon to interpret a code, it is not empowered to make new law, as in the common-law system. Civil law systems include most Western and Eastern European nations, much of Latin America, Japan, and South Korea. Interestingly, the legal system of the State of Louisiana had its origins in the French civil law system found in the Napoleonic Code, reflecting its traditions that developed because of its French origins. The United States is considered to have a “mixed system,” including both civil and common law. The Uniform Commercial Code is an example of an important code in the American legal system that is often interpreted by decisions of judges. 

Socialist Law Systems

A significant subset of civil law is socialist law. While the source of socialist law often may be found in a code, issues of property ownership, individual rights, and limits on governmental power are not viewed in the same way as they are in the broader civil law societies or in those legal systems based in common law.

Socialist law finds its underpinnings in the political and economic philosophy of socialism: an economic system in which the factors of production (land, labor, capital, and entrepreneurial ability) are owned or tightly controlled by the state. Countries that espoused socialist law experienced significant political and economic challenges as a result of the fall of the Berlin Wall and the collapse of communism in the period following 1989. These challenges have had a dramatic impact on the legal system. In socialist countries, bureaucrats (also referred to as apparatchiks or members of the nomenklatura) and not judges or members of the legislature exert significant powers in settling disputes between parties. Many nations that practiced socialist law have converted their legal systems to more conventional civil law systems in line with economic transformation to some form of capitalism or private ownership. Interestingly, China has faced the dilemma of incorporating the common law system previously found in Hong Kong into its civil law system which still finds attributes of social law. 

Islamic Law Systems

The Islamic legal system known as Shari’a (God’s Rules) finds its roots in the Koran, the Sunna (the traditional teachings and practices of the Prophet Mohammed), the writings of Islamic scholars, and the consensus of the Moslem legal community. Islamic law is the primary source of law in Saudi Arabia and is followed, at some level, in most nations in the Middle East, North Africa, and parts of southern Asia. Under Islamic law, religious figures exert great influence in the legal system, as well as in civil society.

A significant challenge in Islamic law jurisdictions emanates from a traditional and conservative view of Islam made in the 10th Islamic scholars that the law had been sufficiently interpreted and any need for independent reasoning or additional development was unnecessary. Given the reality of commercial developments since the 10th century, the reconciliation of the requirements of Shari’a and modern commerce can be a significant challenge. Shari’a law also greatly impacts on business association forms and the charging of interest in traditional loan arrangements. Lending practices in Islamic banking result in a sharing of risks more common in a partnership rather than in a more conventional banking arrangement 

Principles of International Law Impacting on the Commercial Environment

Sovereign Immunity

The doctrine of sovereign immunity requires the domestic courts of a country decline to hear cases brought against other nations out of deference to their status as independent and sovereign nation-states. The historical significance of this doctrine dates to a time when a state’s ruler (its “sovereign”) personified the nation itself. The practical application of the doctrine of sovereign immunity is that countries are granted immunity from suits filed in other countries. 

In 1976, however, the United States Congress passed the Foreign Sovereign Immunities Act, effectively creating a narrower view of the absolute nature of sovereign immunity. This statute continues to support the theory that a nation-state is immune from suits involving injuries resulting from governmental action. The significant change represented by the FSIA, however, is that governments are not immune from suit when damages arise because of commercial or nongovernmental activity. For example, the “commercial activity” exception under the FSIA specifically excludes the state from the protection of sovereign immunity when the state is acting as a private party and enters into a commercial contract with another private party.

The case of The Schooner Exchange provides an insight into the fundamentals of sovereign immunity and an interesting look at how the newly created Supreme Court of the United States developed and applied principles of law in its formative period.

 

Case Study

The Schooner Exchange v. M’faddon, et al

Supreme Court of the United States, 11 U.S. 116 (1812)

Procedural Posture

Libellants, two Maryland citizens, filed an action in district court to reclaim defendant vessel and were denied. On appeal, the Circuit Court of the United States for the District of Pennsylvania ordered the vessel restored to the citizens, who claimed to be the vessel’s sole owners. The French, through its reigning emperor, Napoleon, had an interest in the vessel and sought review.

Overview

Two Maryland citizens owned a vessel that was forcibly seized under the decrees of Napoleon, the French emperor. The vessel sailed into an American port and the citizens filed a libel action to reclaim it. The district court denied the libel for lack of jurisdiction. The appellate court reversed. The court found that the vessel was a national armed vessel commissioned by, and in the service of the emperor of France. The court found that the United States was at peace with France and permitted the vessel to enter the ports as a friendly power. The court held that when the vessel entered American territory, it did so under the implied promise that the vessel was exempt from United States jurisdiction and enjoyed sovereign immunity.

Outcome

The court reversed the sentence of the Circuit Court and affirmed the order of the district court that dismissed the libel.

Act of State Doctrine

The nature of sovereign authority extends to activities undertaken by the government within its own borders. The Act of State doctrine provides that the courts of one country cannot challenge the appropriateness or legitimacy of actions undertaken by another government within its own territory. The act of state doctrine has particular relevance to property seizure cases accomplished through expropriation, confiscation, and nationalization — with or without compensation. 

The Kirkpatrick case provides an interesting view into the underlying theory supporting this doctrine and its application in a modern case.

 

Case Study

W. S. Kirkpatrick & Co., Inc., et al. v. Environmental Tectonics Corp., International 

Supreme Court of the United States, 493 U.S. 400; 110 S. Ct. 701 (1990) 

Procedural Posture

Respondent, an unsuccessful bidder for a Nigerian contract, filed suit against petitioners, a contractor awarded a Nigerian contract, a Nigerian citizen, and others, claiming that the award of the contract was achieved through bribery. The district court ruled that the action was barred by the act of state doctrine. The United States Court of Appeals for the Third Circuit reversed the district court ruling. Petitioners sought review.

Overview

Petitioner contractor sought a government construction contract with Nigeria and paid bribes in the form of “commissions” to entities owned by the Nigerian citizen who aided in obtaining the contract. Respondent, an unsuccessful bidder, learned of the “commission” and brought the matter to the attention of the Nigerian and the United States governments. Charges were brought against petitioner contractor, who pleaded guilty to them. Respondent then brought a civil action in federal court against petitioner, and others, seeking damages under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.S. § 1961 et seq., and the Robinson-Patman Act, 49 Stat. 1526, 15 U.S.C.S. § 13 et seq. Petitioners moved to dismiss the complaint under Fed. R. Civ. P. 12(b)(6) on the ground that the action was barred by the act-of-state doctrine. The court treated the motion as one for summary judgment and granted it. On appeal, the judgment was reversed and remanded for trial. Certiorari was granted and the court affirmed the appellate court and held that the act-of-state doctrine had no application to the case because the validity of no foreign sovereign act was at issue.

Outcome

The court affirmed the appellate court and held that the act-of-state doctrine had no application to the case because the validity of no foreign sovereign act was at issue.

International Economic and Political Organizations

International organizations are classified as either intergovernmental organizations (IGOs) or nongovernmental organizations (NGOs). NGOs may be either nonprofit or for-profit organizations. Nonprofit NGOs serve private national groups involved in international relations. Prominent examples of nonprofit NGOs are the International Red Cross, Amnesty International, and Doctors Without Borders. For-profit NGOs include multinational enterprises (MNEs) or multinational corporations (MNCs) that are businesses functioning in two or more countries.

IGOs are sponsored by two or more nation-states to coordinate activities of mutual interest. IGOs are becoming an increasingly important mechanism for states to work together to manage complex interactions between them. Arguably, the best known and most significant IGO is the United Nations.

United Nations

The United Nations was established in 1945 as the “brainchild” of President Franklin Roosevelt when its Charter was adopted by founding member states. The Charter of the United Nations establishes the United Nation’s goals of maintaining peace and security, promoting economic and social cooperation, and protecting human rights. Each of the member states is a sovereign nation and is treated as an equal member of the organization. 

The organs of the UN are the General Assembly, the Security Council, the Secretariat, the International Court of Justice, the Trusteeship Council, and the Economic and Social Council (ECOSOC).

General Assembly

The General Assembly is a quasi-legislative body made up of representatives of all member states. The General Assembly is the main deliberative organ of the United Nations.

The functions and powers of the General Assembly include:

  • to consider and make recommendations on cooperation in the maintenance of international peace and security, including disarmament and arms regulation;
  • to discuss any question relating to international peace and security, and except where a dispute or situation is being discussed by the Security Council, to make recommendations on it;
  • to discuss, and with the same exception, make recommendations on any question within the scope of the Charter or affecting the powers and functions of any organ of the United Nations;
  • to initiate studies and make recommendations to promote international political cooperation; the development and codification of international law; the realization of human rights and fundamental freedoms for all; and, international collaboration in economic, social, cultural, educational, and health fields;
  • to make recommendations for the peaceful settlement of any situation, regardless of origin, which might impair friendly relations among nations;
  • to receive and consider reports from the Security Council and other United Nations organs;
  • to consider and approve the United Nations budget and to apportion the contributions among Members;
  • to elect the non-permanent members of the Security Council, the members of the Economic and Social Council, and those members of the Trusteeship Council that are elected;
  • to elect jointly with the Security Council the Judges of the International Court of Justice; and, on the recommendation of the Security Council, to appoint the Secretary-General. 
Secretary-General

The Secretary-General is the “chief administrative officer” of the United Nations and is empowered to perform in that capacity “such other functions as are entrusted” to him or her by the Security Council, the General Assembly, the Economic and Social Council, and other United Nations organs. The Charter also authorizes the Secretary-General to “bring to the attention of the Security Council any matter which in his opinion may threaten the maintenance of international peace and security.” In many ways, the Secretary-General also represents the moral authority of the United Nations.

Security Council

The Security Council is composed of representatives of 15 member states, five of which are “permanent member.” Since the Security Council is responsible for the maintenance of international peace and security, the Security Council is the only organ of the United Nations with the authority to use armed force. The five permanent members of the United Nations exercise what is called a “veto power” over substantive matters. The five permanent members of the Security Council are the United States, France, the United Kingdom, Russia, and China — the victorious parties of World War II. 

The functions and powers of the Security Council are:

  • to maintain international peace and security in accordance with the principles and purposes of the United Nations; 
  • to investigate any dispute or situation which might lead to international friction; 
  • to recommend methods of adjusting such disputes or the terms of settlement; 
  • to formulate plans for the establishment of a system to regulate armaments; 
  • to determine the existence of a threat to the peace or act of aggression and to recommend what action should be taken; 
  • to call on Members to apply economic sanctions and other measures not involving the use of force to prevent or stop aggression; 
  • to take military action against an aggressor; 
  • to recommend the admission of new Members; 
  • to exercise the trusteeship functions of the United Nations in “strategic areas”; 
  • to recommend to the General Assembly, the appointment of the Secretary-General, and together with the Assembly, to elect the Judges of the International Court of Justice.
Secretariat

The Secretariat is the administrative arm of the United Nations. The Secretary General, elected by the General Assembly, is the leader of the Secretariat.

The duties carried out by the Secretariat include:

  • administering peacekeeping operations and mediating international disputes;
  • surveying economic and social trends and problems;
  • preparing studies on human rights and sustainable development;
  • inform the world’s communications media about the work of the United Nations;
  • organizing international conferences on issues of worldwide concern;
  • interpreting speeches and translating documents into the Organization’s official languages.
International Court of Justice

The International Court of Justice or ICJ was established in 1945 under the Charter of the United Nations. As the principal judicial organ of the United Nations, it is based at The Hague in the Netherlands. The Court decides disputes submitted by states, through the application of international law discussed earlier. States, not individuals, are parties to disputes before the ICJ.

In addition to settling disputes, the International Court of Justice also issues advisory opinions when requested to do so by specific international organs and agencies. The only bodies at present authorized to request advisory opinions of the Court are the five organs of the United Nations and sixteen specialized agencies of the United Nations family.

The Trusteeship Council administers any trust territories placed under the legal authority of the United Nations. One of its functions was to oversee the process of decolonization after World War II. It suspended its operation in 1994. 

International Monetary Fund

The International Monetary Fund (IMF) is an IGO consisting of 189 member countries (as of July 2016). It was established to promote international monetary cooperation, exchange (currency) stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and, to provide temporary financial assistance to countries.

The purposes of the IMF are: 

  • to promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems;
  • to facilitate the expansion and balanced growth of international trade; to contribute thereby to the promotion and maintenance of high levels of employment and real income; and, to the development of the productive resources of all members, as primary objectives of economic policy;
  • to promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation;
  • to assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions, which hamper the growth of world trade;
  • to give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity;
  • in accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

The operations of the IMF involve surveillance, financial assistance and technical assistance. Surveillance is a process of monitoring and consultation through the maintenance of an information flow with its member countries regarding the national and international consequences of the economic and financial policies of member states.

Financial assistance provided by the IMF is a mechanism by which loans are made available to countries experiencing balance-of-payments and other currency problems. The restoration of conditions for sustainable economic growth enables countries to rebuild their international reserves, stabilize their currencies, and continue paying for imports without having to impose trade restrictions, severe budget cuts, or capital controls on their own citizens.

Technical assistance offered by the IMF adds to the “development of the productive resources of member countries by enhancing the effectiveness of economic policy and financial policy.” The IMF provides advice on fiscal and monetary policy, and financial matters relating to strengthening human and institutional capacity, including providing guidance how to design and implement effective macroeconomic and structural policies.

World Bank

The World Bank is the name that is commonly used for the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The World Bank Group is comprised of five financial organizations, namely the IBRD, the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Center for Settlement of Investment Disputes (ICSID). Its members include the 189 member states of United Nations (as of July 2016). The World Bank is a significant development resource, providing financing to member national governments to support economic development by financing specific development projects. (Since 1947, the World Bank has sponsored 11,690 projects in 172 countries.) Member states are jointly responsible for both the financing of the Bank and the distribution of its resources, supported by contributions (subscriptions) from member states based on the relative strengths of their economies. The website of the World Bank contains a full roster of current and prior projects supported by funding from the Word Bank.

World Trade Organization

The World Trade Organization (WTO) was established in 1995. The WTO is the global organization broadly dealing with the rules of trade between nations. 

The primary goals of the WTO is to help producers of goods and services, exporters, and importers conduct their business by:

  • Administering trade agreements;
  • Acting as a forum for trade negotiations;
  • Settling trade disputes;
  • Reviewing national trade policies;
  • Assisting developing countries in trade policy issues, through technical assistance and training programs;
  • Cooperating with other international organizations.

The headquarters of the WTO is located in Geneva, Switzerland. The WTO has 162 members (as of July 2016), including both states and customs territories. WTO agreements, which are considered as “binding contracts between member states,” form the foundation of the global trading system. These agreements have been negotiated, signed, and ratified by the legislatures or parliaments of the majority of the world’s trading nations. The WTO is an important part of the global trading system that provides stability in trade to its member nations.

The WTO was created through a series of trade negotiations, or rounds, originally held under the General Agreement on Tariffs and Trade (GATT). The GATT was initially adopted at Geneva in 1947; since then eight additional rounds have been conducted. The first five rounds dealt mainly with tariff reductions. The last three rounds included non-tariff issues such as trade in services and the impact of trade on the environment in the negotiations. The last completed round, the 1986-94 Uruguay Round, led to the creation of the WTO. Doha Round negotiations have been conducted over the past decade and have been marked by sharp disagreements between developed and developing countries on such issues as intellectual property rights, compulsory licensing, and environmental issues.

The WTO agreement is entirely institutional and procedural creating a framework that permits the various trade agreements negotiated since 1947 to be in effect “managed” structurally by the WTO. The WTO has five main organs: the Ministerial Conference, the General Council, a Council for Trade in Goods, a Council for Trade and Services, and a Council for Trade Related Aspects of Intellectual Property Rights. Unlike its predecessor, the WTO maintains an extensive dispute resolution mechanism.

Ethical Considerations

Bhopal

Find some information about the “Bhopal Disaster” on the web. Why did Union Carbide wish the case to be tried in India? Why did the Indian government want their claim to be heard in the United States? Who has the stronger ethical argument?

Final Payment

The government of Indonesia makes a contract with the Kelly Corporation, a New Jersey Corporation, who will supply them with building materials for new airport construction in Jakarta. The government fails to make the last payment on their obligation in the amount in the amount of $1.8 million. Kelly initiates a suit in Newark, New Jersey for full payment, interest, and attorney’s fees. Indonesia counters that the court must dismiss the suit based upon the doctrine of sovereign immunity. Should the court dismiss Kelly’s suit? When can a country invoke sovereign immunity?

 

Questions

  1. The establishment of the WTO has led to controversy and concern across the world. What are the broader implications for the development global trading systems under the WTO?
  2. Describe the sources of international law.
  3. The U.S. Constitution grants most of the power for the conduct of international relations to the federal government. What are the specific areas of constitutional authority that address this issue?
  4. What is the significance of the doctrine of sovereign immunity?
  5. What is the impact of the Foreign Sovereign Immunities Act on the doctrine of sovereign immunity?
  6. What is the difference between a NGOs and an IGO?
  7. What is the source of the authority of the United Nations? Discuss.
  8. Explain the Act of State Doctrine and the ruling in the Kirkpatrick case.
  9. What is the significance and purpose of the World Bank?
  10. How did the Court deal with the issue of sovereign immunity Schooner Exchange?
  11. What did the Court rule in the Paquete Habana case?
  12. Does membership in international political and economic organizations compromise the sovereignty of the United States?

 

Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin

Chapter Three | Constitutional Perspectives

Introduction 

As the “supreme law of the land,” the U.S. Constitution influences all aspects of our government, its operation, and the people that it serves. It provides us with the structure of our government by creating the three main branches of government through the allocation and separation of powers among them. The Constitution prevents the federal government from taking certain actions, most particularly those restricting or violating individual rights without due process of law. The Constitution also provides protections for certain “artificial persons” such as corporations.  The United States operates under a federal system in which the national government and the governments of each of the states coexist. The federal government is one of limited or enumerated powers where the three branches of the government can only exercise those powers specifically granted to them by the U.S. Constitution. As a result, whenever the constitutionality of congressional legislation is at issue, some relationship to a specifically enumerated power in the constitutional text must be shown.  On the other hand, a state government possesses a general “police power,” i.e., broad authority to promulgate legislation for the “health, safety, morals, and general welfare” of its citizens. As a result, an action undertaken by a state government will be considered valid provided it does not violate some specific limitation imposed by the Constitution of the United States or the Constitution of the State.  At first glance, it may seem as if the federal government has very limited power since its powers are enumerated. However, in addition to the specific powers found in the Constitution, Congress is given the power to “make all laws which shall be necessary and proper for carrying into execution” the specific powers granted to the federal government. Accordingly, if Congress is seeking an objective that is within its specifically enumerated powers, then it can use a means that is rationally related to the objective it is trying to achieve. 

Doctrine of Separation of Powers

The United States Constitution provides for the allocation of distinct powers to three branches of government. Article I of the Constitution created the legislative branch and established a Congress made up of two bodies, the House of Representatives and the Senate. Congress has the sole power to legislate (or make laws) at the federal level. Article I, Section 8 establishes the means by which legislation is enacted by Congress.  The second branch of government is the executive branch, created in Article II of the Constitution. It establishes in the President the executive power to enforce or execute laws passed by Congress. Article II states that the President is the “commander-in-chief” of the armed forces. The President also has the power to make treaties and appoint ambassadors, subject to approval or confirmation by the United States Senate.  Article III states that “the judicial power of the United States shall be vested in one supreme court and in such inferior courts as the Congress may from time to time ordain and establish.” Article II also delineates the scope of federal judicial powers—termed jurisdiction—and the types of cases federal courts may decide. Generally, a federal court will have the power to hear cases where a federal law is at issue, where the United States is a party, where the case involves a “federal question” under the Constitution, or where a suit is between a state and a citizen of another state or between citizens of different states. 

Checks and Balances 

In addition to establishing the three branches of government and enumerating specific powers of the federal government, the Framers of the Constitution set up a system of checks and balances within Articles I, II, and III. For example, the President can veto legislation passed by Congress, but the Congress can override that veto by a two-thirds majority. In addition, the President, Vice President, federal judges, and other federal officials may be impeached and potentially removed from office; treaties made or negotiated by the President must be approved by the Senate, again by a two-thirds majority; and the President may appoint certain individuals (e.g., federal judges), but only with the “advice and consent” of the Senate. From the very early days of our Republic, the Supreme Court assumed to itself the power to strike down a statute that is in violation of the Constitution. In effect, the system of checks and balances prevents each of the three branches of government from overstepping the limitations of their enumerated or granted powers. 

Example The Supreme Court, relying on the “necessary and proper” clause, held that Congress had the power to create a national bank even though such a power was not specifically granted in the Constitution. The Court found that this power was incidental to the carrying out of one of the constitutionally enumerated powers, specifically Congress’ power to raise revenue. McCulloch v. Maryland, 17 U.S. 316 (1819). 

Supremacy and Preemption 

Article VI, Clause 2 of the Constitution is called the Supremacy Clause. It provides that the Constitution, any law enacted by Congress, and treaties entered into by the United States are the supreme law of the land. The Supremacy Clause is the keystone in establishing the order in the relationship between the federal and state governments. The Supremacy Clause provides that when a direct conflict exists between a federal law and a state law, the state law is invalid and the federal law is supreme. Some powers, however, may be shared by the states and the federal government. These are called concurrent powers. In the case of shared or concurrent powers, it may be necessary to determine which law—federal or state—should prevail. As a general rule, however, when concurrent federal and state powers are involved, a state law that conflicts with a federal law is invalid. A few general principles apply to this discussion.  A federal law enacted pursuant to a power specifically delegated to it by the Constitution will generally override a state law addressing the same action. When Congress expresses an intention to act in an exclusive manner in an area in which it shares power with the states, it may be said that Congress has preempted this area. Thus, a federal regulatory scheme preempts a state law every time there is a direct conflict between the two or when the state regulation interferes with a stated federal objective. 

PreemptIon 

The facts of any individual conflict, however, almost never lead to such a clear-cut delineation. Congress rarely makes obvious its intent to preempt an entire subject area against state regulation. It is often the job of the courts to decide whether Congress intended to exercise exclusive dominion over the area in question. The Commerce Clause, which will be discussed below in great detail, is an area where such conflict often occurs. Before ruling that federal  law preempts a state law, courts must first decide whether Congress intended to supersede or preempt state law. Such intent may be inferred if the federal law is so “pervasive, comprehensive, or detailed” that the states have no room to legislate in that area. Hence, it may be said that the federal law “occupies the field.” For example, issues relating to the storage of nuclear waste materials provide an example where it may be said that federal regulation clearly intends to “occupy the field” because of the problematic nature of inconsistent state laws on this subject. However, even the test itself is subject to interpretation. The use of guiding words such ‘pervasive’ and ‘comprehensive’ is open to a wide range of meaning as the following case illustrates.  It is difficult to determine the outcome of a preemption debate when a court applies a balancing test between state and federal interests. State law that is enacted pursuant to a state’s police power carries a strong presumption of validity or constitutionality. However, in two cases the Supreme Court invalidated state regulations limiting the length of trailer trucks traveling on interstate highways. In the first case, Raymond Motor Transportation, Inc. v. Rice, 434 U.S. 429 (1978), the Court determined that the statutes “place[d] a substantial burden on interstate commerce and they cannot be said to make more than the most speculative contribution to highway safety.” Later, in Kassel v. Consolidated Freightways Corp. of Delaware, 450 U.S. 662 (1981), the Court went even further by concluding that an Iowa law prohibiting 65-foot double trailers from entering the state discriminated against interstate commerce and was, therefore, invalid. Federal law was intended to occupy the field and state regulation was impermissible.  City of Burbank provides an interesting glimpse into the area of preemption.  

 

Case Summary 

City of Burbank v. Lockheed Air Terminal, Inc.

411 U.S. 624 (1973)

The owner-operator of the Hollywood Burbank Airport brought suit against the City of Burbank to enjoin enforcement of a city ordinance forbidding any pure jet aircraft from taking off from the airport between 11 p.m. of one day and 7 a.m. of the next, and forbidding the airport operator from permitting any such takeoffs. The District Court enjoined enforcement of the ordinance, and the appellate court affirmed. DOUGLAS, J. The Court in Cooley v. Board of Wardens, 12 How 299, first stated the rule of pre-emption which is the critical issue in the present case. Speaking through Mr. Justice Curtis, it said: “Now the power to regulate commerce, embraces a vast field, containing not only many, but exceedingly various subjects, quite unlike in their nature; some imperatively demanding a single uniform rule, operating equally on the commerce of the UnitedStates in every port; and some, like the subject now in question, as imperatively demanding that diversity, which alone can meet the local necessities of navigation. “. . . Whatever subjects of this power are in their nature national, or admit only of one uniform system, or plan of regulation, may justly be said to be of such a nature as to require exclusive legislation by Congress.”

* * * * *

Section 1508 provides in part, “The United States of America is declared to possess and exercise complete and exclusive national sovereignty in the airspace of the United States. …” By Sec. 1348(a), (c) the Administrator of the Federal Aviation Administration (FAA) has been given broad authority to regulate the use of the navigable airspace, “in order to insure the safety of aircraft and the efficient utilization of such airspace … “ and “for the protection of persons and property on the ground. …” The Solicitor General, though arguing against pre-emption, concedes that as respects “airspace management” there is pre-emption. That, however, is a fatal concession, for as the District Court found: “The imposition of curfew ordinances on a nationwide basis would result in a bunching of flights in those hours immediately preceding the curfew. This bunching of flights during these hours would have the twofold effect of increasing an already serious congestion problem and actually increasing, rather than relieving, the noise problem by increasing flights in the period of greatest annoyance to surrounding communities. Such a result is totally inconsistent with the objectives of the federal statutory and regulatory scheme.” It also found “[t]he imposition of curfew ordinances on a nationwide basis would cause a serious loss of efficiency in the use of the navigable airspace.”

* * * * *

There is, to be sure, no express provision of pre-emption in the 1972 [Noise Control] Act. That, however, is not decisive. As we stated in Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230: “Congress legislated here in a field which the States have traditionally occupied. … So we start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress. … Such a purpose may be evidenced in several ways. The scheme of federal regulation may be so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it. … Or the Act of Congress may touch a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject. … Likewise, the object sought to be obtained by the federal law and the character of obligations imposed by it may reveal the same purpose. … Or the state policy may produce a result inconsistent with the objective of the federal statute.” It is the pervasive nature of the scheme of federal regulation of aircraft noise that leads us to conclude that this is pre-emption. As Mr. Justice Jackson stated, concurring in Northwest Airlines, Inc. v. Minnesota, 322 U.S. 292, 303: “Federal control is intensive and exclusive. Planes do not wander about in the sky like vagrant clouds. They move only by federal permission, subject to federal inspection, in the hands of federally certified personnel and under an intricate system of federal command. The moment a ship taxis onto a runway it is caught up in an elaborate and detailed system of controls.” Both the Senate and House Committees included in their Reports clear statements that the bills would not change the existing pre-emption rule. The House Report stated: “No provision of the bill is intended to alter in any way the relationship between the authority of the Federal Government and that of the State and local governments that existed with respect to matters covered by section 611 of the Federal Aviation Act of 1958 prior to the enactment of the bill.” The Senate Report stated: “States and local governments are pre-empted from establishing or enforcing noise emission standards for aircraft unless such standards are identical to standards prescribed under this bill. This does not address responsibilities or powers of airport operators, and no provision of the bill is intended to alterin any way the relationship between the authority of the Federal government and that of State and local governments that existed with respect to matters covered by section 611 of the Federal Aviation Act of 1958 prior to the enactment of the bill.” These statements do not avail [City of Burbank]. Prior to the 1972 Act, section 611(a) provided that the Administrator “shall prescribe and amend such rules and regulations as he may find necessary to provide for the control and abatement of aircraft noise and sonic boom.” Under section 611(b)(3) the Administrator was required to “consider whether any proposed standard, rule, or regulation is consistent with the highest degree of safety in air commerce or air transportation in the public interest.” When the legislation which added this section to the Federal Aviation Act was considered [it was asked] whether the proposed legislation would “to any degree preempt State and local government regulation of aircraft noise and sonic boom.” The Secretary [of Transportation] requested leave to submit a written opinion [in which] he stated: “The courts have held that the Federal Government presently preempts the field of noise regulation insofar as it involves controlling the flight of aircraft. … HR3400 would merely expand the Federal Government’s role in a field already preempted. It would not change this preemption. State and local governments will remain unable to use their police powers to control aircraft noise by regulating the flight of aircraft.” * * * * * According to the Senate Report, it was “not the intent of the committee inrecommending this legislation to effect any change in the existing apportionment of powers between the Federal and State and local governments,” and the Report concurred in the views set forth by the Secretary in his letter. * * * * * Our prior cases on preemption are not precise guide-lines in the present controversy, for each case turns on the peculiarities and special features of the federal regulatory scheme in question. Control of noise is of course deep seated in the police power of the States. Yet the pervasive control vested in EPA and in FAA under the 1972 Act seems to us to leave no room for local curfews or other local controls. What the ultimate remedy may be for aircraft noise which plagues many communities and tens of thousands of people is not known. The procedures under the 1972 Act are under way. In addition, the Administrator has imposed a variety of regulations relating to takeoff and landing procedures and runway preferences. The Federal Aviation Act requires a delicate balance between safety and efficiency, and the protection of persons on the ground. Any regulations adopted by the Administrator to control noise pollution must be consistent with the “highest degree of safety.” The interdependence of these factors requires a uniform and exclusive system of federal regulation if the congressional objectives underlying the Federal Aviation Act are to be fulfilled. If we were to uphold the Burbank ordinance and a significant number of municipalities followed suit, it is obvious that fractionalized control of the timing of take-offs and landings would severely limit the flexibility of the FAA in controlling air traffic flow. The difficulties of scheduling flights to avoid congestion and the concomitant decrease in safety would be compounded. In 1960 the FAA rejected a proposed restriction on jet operations at the Los Angeles airport between 10 p.m. and 7 a.m. because such restrictions could “create critically serious problems to all air transportation patterns. … This decision, announced in 1960, remains peculiarly within the competence of the FAA, supplemented now by the inputof the EPA. We are not at liberty to diffuse the powers given by Congress to FAA and EPA by letting the States or municipalities in on the planning. If that change is to be made, Congress alone must do it. AFFIRMED.

As a further example, Congress enacted the Federal Telecommunications Act of 1996 (FTA) to open up competition within that industry. The FTA provided for the deregulation of the telephone industry and prohibited state and local governments from impeding entry into the rapidly expanding telecommunications market. To achieve Congress’ goals, the FTA prohibits any state or local law from “prohibit[ing] or having the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service.” (Section 253). Under the Supremacy Clause, the FTA preempts any state or local law that comes into conflict with it. 

Judicial Review

Practically before the ink was dry on the Constitution, a constitutional crisis developed involving President Thomas Jefferson and his opponent in the election of 1801, President John Adams, whom Jefferson had defeated for reelection. A dispute arose relating to the appointment of a justice of the peace (a local magistrate) in the District of Columbia by President Adams during the waning hours of his Presidency when Jefferson’s Secretary of State James Madison refused to sign William Marbury’s judicial commission. The Supreme Court was asked to issue a writ of mandamus ordering Madison to sign the commission. The basis of the petition was a provision of the Judiciary Act of 1789 which authorized a plaintiff to seek the writ directly in the Supreme Court. In Marbury v. Madison, 5 U.S. 137 (1803), the United States Supreme Court held that this provision of the Judiciary Act of 1789 under which Marbury had sought relief was repugnant to the Constitution. The Court concluded that Congress had improperly expanded the original jurisdiction of the Court by permitting Marbury to seek a writ of mandamus directly in the United States Supreme Court. In striking down this provision of the Judiciary Act, Chief Justice John Marshall established the power of the Supreme Court to declare a law enacted by Congress unconstitutional. Known as the power of judicial review, it enables the United States Supreme Court to deny enforcement of laws or other governmental actions that it determines to be in violation of the United States Constitution and thus which are null and void.  Judicial review is not limited solely to review of federal actions and laws. It extends as well as to actions undertaken by states which are likewise repugnant to the Constitution. When the United States Supreme Court reviews the judgment of a state court, it is exercising its appellate, rather than its original, jurisdiction. However, in exercising this appellate jurisdiction, the Supreme Court’s review of a state court judgment is limited to cases involving a “federal question.” The Supreme Court will not ordinarily review a state court decision that merely relates to a question of state law. However, as the case of Bush v. Gore, 531 U.S. 98 (2000) may indicate, there is not always a “bright line” between a federal and a state question. 

Congressional Regulatory Authority

Article I, Section 8 of the Constitution delineates several important powers of the federal government: the power to regulate commerce among and between the states, the power to lay and collect taxes, and the power to spend money for the general welfare. These powers are especially relevant in the context of the regulation of businesses in the United States.

The Commerce Clause

Perhaps the most important of the express powers of Congress set forth in Article I, Section 8, is the commerce power, embedded in the Commerce Clause. The Commerce Clause grants Congress the power to “regulate commerce… among the several states.” It serves two distinct functions: (1) it acts as the source of Congressional regulatory authority; and, (2) it acts, implicitly, as an independent check on state regulation that unduly restricts or burdens interstate commerce.  During most of the 19th century, federal regulation of business was occasional and fairly limited. The theory of laissez faire dominated both the political and economic landscapes. It was the era of “Big Business” and the rise of the “Robber Barons” and trusts. The last decade of the 19th century and the early part of the 20th century, however, brought a rise in federal regulation of business, as abuses were regularly chronicled by the “Muckrakers” of the burgeoning Progressive era of American politics. As a result, the Supreme Court was increasingly called upon to define the limits and reaches of the commerce power by ruling on the constitutionality of a variety of state statutes which had been enacted to protect the rights of women and children in the workplace.  Throughout the 1920s, the Supreme Court was hostile to calls to reign-in even some of the worst abuses under the theory that to do so would impair the “freedom of contract” of individuals in the marketplace. By the late 1930s, however, the Supreme Court had removed almost all constitutional limitations placed on the regulation of a wide variety of commercial activities  by Congress and upheld what would once have been struck down as unconstitutional. What had changed? The Great Depression had brought a reappraisal of the role of the federal government in the economic life of the nation. The Supreme Court now contained justices who were sympathetic to regulation of business and who would find constitutional authority in the Congress to do so under this same Commerce Clause that had once been used to block most federal regulation of business. Not all welcomed this change. Critics argued that the Commerce Clause had been transformed into an all-encompassing exercise of police power which allowed Congress to reach most economic activities—even those within a state’s borders—that affected interstate commerce only in a broad sense. The Commerce Clause was no longer seen as a limitation on Congressional authority as it once had been. The era of regulation had begun.  During the next five decades prior to the Rehnquist Court (1986-2005) and the Roberts’ Court (2005- ), the Supreme Court routinely upheld legislation under a broad view of the Commerce Clause, so long as it found a rational basis for congressional action. The Court achieved this result by adopting various theories upon which legislation might be based, in addition to those areas involving the traditional “means and instrumentalities” of interstate commerce about which there was little disagreement and judicial consensus. 

Substantial Economic Effect Theory: The “Affectation” Doctrine

The first major expansion of the power of Congress under the Commerce Clause is termed the “substantial economic effect” theory, which provides that Congress may regulate activities having a “substantial economic effect” upon interstate commerce. The Court’s 1937 decision in NLRB v. Jones & Laughlin Steel Corp. marked the loosening of the nexus required between the regulation of an essentially local activity and interstate commerce and the genesis of the expansion of federal regulatory authority under the commerce clause.  

 

Case Summary

NLRB v. Jones & Laughlin Steel Corp. 

301 U.S. 1 (1937)

In a proceeding under the National Labor Relations Act [the Act] of 1935, the National Labor Relations Board [NLRB] found that Jones & Laughlin Steel Corporation violated the Act by engaging in unfair labor practices affecting commerce. These practices included discrimination against union members with regard to hiring and tenure of employment and coercion and intimidation of its employees in order to interfere with their self-organization. The discriminatory and coercive action alleged was the discharge of certain employees.  The NLRB sustained the charge and ordered Jones & Laughlin to cease and desist from such discrimination and coercion, to offer reinstatement to ten employees, to provide restitution for their pay losses, and to post a notice for 30 days stating that the corporation would not discharge or discriminate against members, or those desiring to become members, of the labor union. Jones & Laughlin failed to comply; the Board petitioned to the Circuit Court of Appeals to enforce the order. The court denied the petition, holding that the order was beyond the range of federal power. The Supreme Court granted certiorari.  HUGHES, C.J. … The scheme of the National Labor Relations Act … may be briefly stated. The first section sets forth findings with respect to the injury to commerce resulting from the denial by employers of the right of employees to organize and from the refusal of employers to accept the procedure of collective bargaining. There follows a declaration that it is the policy of the United States to eliminate these causes of obstruction to the free flow of commerce. The Act then defines the terms it uses, including the terms “commerce” and “affecting commerce.” Section 2. It creates the National Labor Relations Board and prescribes its organization. Sections 3-6. It sets forth the right of employees to self-organization and to bargain collectively through representatives of their own choosing. Section 7. It defines “unfair labor practices.” Section 8. It lays down rules as to the representation of employees for the purpose of collective bargaining. Section 9. The Board is empowered to prevent the described unfair labor practices affecting commerce and the Act prescribes the procedure to that end. … * * * * *  Contesting the ruling of the Board, the respondent [Jones & Laughlin] argues (1) that the Act is in reality a regulation of labor relations and not of interstate commerce; …  The facts as to the nature and scope of the business of the Jones & Laughlin Steel Corporation have been found by the Labor Board. * * * * *  Summarizing these operations, the Labor Board concluded that the works in Pittsburgh and Aliquippa “might be likened to the heart of a self-contained, highly integrated body. They draw in the raw materials from Michigan, Minnesota, West Virginia, Pennsylvania in part through arteries and by means controlled by the respondent; they transform the materials and then pump them out to all parts of the nation through the vast mechanism which the respondent has elaborated.” * * * * *  First. The Scope of the Act. — The Act is challenged in its entirety as an attempt to regulate all industry, thus invading the reserved powers of the States over their local concerns. . .  * * * * * The grant of authority to the Board does not purport to extend to the relationship between all industrial employees and employers. Its terms do not impose collective bargaining upon all industry regardless of effects upon interstate or foreign commerce. It purports to reach only what may be deemed to burden or obstruct that commerce and, thus qualified, it must be construed as contemplating the exercise of control within constitutional bounds. It is a familiar principle that acts which directly burden or obstruct interstate or foreign commerce, or its free flow, are within the reach of the congressional power. Acts having that effect are not rendered immune because they grow out of labor disputes.  … It is the effect upon commerce, not the source of the injury, which is the criterion. … Whether or not particular action does affect commerce in such a close and intimate fashion as to be subject to federal control, and hence to lie within the authority conferred upon the Board, is left by the statute to be determined as individual cases arise. * * * * *  Although activities may be intrastate in character when separately considered, if they have such a close and substantial relation to interstate commerce that their control is essential or appropriate to protect that commerce from burdens and obstructions, Congress cannot be denied the power to exercise that control. * * * * *  [T]he stoppage of [Jones & Laughlin’s] operations by industrial strife would have a most serious effect upon interstate commerce. In view of respondent’s far-flung activities, it is idle to say that the effect would be indirect or remote. It is obvious that it would be immediate and might be catastrophic. We are asked to shut our eyes to the plainest facts of our national life and to deal with the question of direct and indirect effects in an intellectual vacuum. Because there may be but indirect and remote effects upon interstate commerce in connection with a host of local enterprises throughout the country, it does not follow that other industrial activities do not have such a close and intimate relation to interstate commerce as to make the presence of industrial strife a matter of the most urgent national concern. When industries organize themselves on a national scale, making their relation to interstate commerce the dominant factor in their activities, how can it be maintained that their industrial labor relations constitute a forbidden field into which Congress may not enter when it is necessary to protect interstate commerce from the paralyzing consequences of industrial war? We have often said that interstate commerce itself is a practical conception. It is equally true that interferences with that commerce must be appraised by a judgment that does not ignore actual experience. * * * * *  Experience has abundantly demonstrated that the recognition of the right of employees to self-organization and to have representatives of their own choosing for the purpose of collective bargaining is often an essential condition of industrial peace. Refusal to confer and negotiate has been one of the most prolific causes of strife. … And of what avail is it to protect the facility of transportation, if interstate commerce is throttled with respect to the commodities to be transported! * * * * *  It is not necessary again to detail the facts as to respondent’s enterprise. … [I]t presents in a most striking way the close and intimate relation which a manufacturing industry may have to interstate commerce and we have no doubt that Congress had constitutional authority to safeguard the right of [Jones & Laughlin’s] employees to self-organization and freedom in the choice of representatives for collective bargaining. * * * * *  Our conclusion is that the order of the Board was within its competency and that the Act is valid as here applied. …  Judgment reversed, in favor of the NLRB. 

Over the years, this power was extended to cover a factory that produces goods within a state if the goods competed with goods produced in other states, because substandard working conditions may have an effect in other states. (United States v. Darby Lumber, 312 U.S. 100 (1941)). Further, a factory that produces goods to be sold both locally and interstate may have all of its working conditions regulated under the Commerce Clause, because labor strife that occurs among employees producing local goods may affect employees producing interstate goods. (Maryland v. Wirtz, 392 U.S. 183 (1968)). 

Cumulative Effect Theory 

The second theory under which the Court has expanded Congressional power under the Commerce Clause is termed the “cumulative effect” theory. This principle provides that Congress may regulate not only an activity which alone has a substantial effect on interstate commerce, but also an activity, which though not considered substantial in its own right, is one of an entire class of activities, if the class, taken as the whole, would have a substantial effect on commerce. The case which established the “cumulative effect” principle was Wickard v. Filburn, where the Court upheld federal legislation regulating the most local of all activities—production of wheat for personal consumption on the family farm—on the theory that these individual activities cumulatively would have an effect on interstate commerce and thus could be subject to regulation under the Commerce Clause.   

 

Case Summary 

Wickard v. Filburn

317 U.S. 111 (1942)

In 1938, Congress enacted the Agricultural Adjustment Act to stabilize agricultural production and so, give farmers reasonable minimum prices. The Act gave Claude Wickard, the Secretary of Agriculture, the power to pronounce a yearly national acreage allotment for the coming wheat crop. The allotment was apportioned among the states and their counties, and then among the farms within each county. Filburn was an Ohio farmer who raised a small portion of winter wheat. Some of it was sold but most of it was grown for personal use. Filburn’s permitted allocation for 1941 was 11.1 acres. However, he planted and harvested 23 acres. He was assessed a penalty of $117.11 for violating the regulation.  JACKSON, J. … It is urged that under the Commerce Clause, … Congress does not possess the power it has in this instance sought to exercise. The question would merit little consideration … except for the fact that this Act extends federal regulation to production not intended in any part for commerce but wholly for consumption on the farm. … Such activities are, [Filburn] urges, beyond the reach of congressional power under the Commerce Clause, since they are local in character, and their effects upon interstate commerce are at most “indirect.” In answer the Government argues that the statute regulates neither production nor consumption, but only marketing; and, in the alternative, that if the Act does go beyond the regulation of marketing it is sustainable as a “necessary and proper” implementation of the power of Congress over interstate commerce. * * * *  For nearly a century, … decisions of this Court dealt rarely with questions of what Congress might do in the exercise of its granted power under the Clause and almost entirely with the permissibility of state activity which it was claimed discriminated against or burdened interstate commerce. During this period there was perhaps little occasion for the affirmative exercise of the commerce power, and the influence of the Clause on American life and law was a negative one, resulting almost wholly from its operation as a restraint upon the powers of the states. * * * *  It was not until 1887, with the enactment of the Interstate Commerce Act, that the commerce power began to exert positive influence in American law and life. This … was followed in 1890 by the Sherman Anti-Trust Act and, thereafter, mainly after 1903, by many others. …  When it first dealt with this new legislation, the Court adhered to its earlier pronouncements, and allowed but little scope to the power of Congress. … [H] owever, other cases called forth broader interpretations of the Commerce Clause destined to supersede the earlier ones, and to bring about a return to the principles first enunciated by Chief Justice Marshall[.] … It was soon demonstrated that the effects of many kinds of intrastate activity upon interstate commerce were such as to make them a proper subject of federal regulation.  [Thus,] even if [Filburn’s] activity be local and though it may not be regarded as commerce, it may still, whatever its nature, be reached by Congress if it exerts a substantial economic effect on interstate commerce, and this irrespective of whether such effect is what might at some earlier time have been defined as “direct” or “indirect.” * * * *  The effect of consumption of homegrown wheat on interstate commerce is due to the fact that it constitutes the most variable factor in the disappearance of the wheat crop. Consumption on the farm where grown appears to vary in an amount greater than 20 percent of average production. … That [Filburn’s] own contribution to the demand for wheat may be trivial by itself is not enough to remove him from the scope of federal regulation where, as here, his contribution, taken together with that of many others similarly situated, is far from trivial. …  It is well established by decisions of this Court that the power to regulate commerce includes the power to regulate the prices at which commodities in that commerce are dealt and practices affecting such prices. One of the primary purposes of the Act in question was to increase the market price of wheat, and to that end to limit the volume thereof that could affect the market. It can hardly be denied that a factor of such volume and variability as home-consumed wheat would have a substantial influence on price and market conditions. This may arise because being in marketable condition such wheat overhangs the market and if induced by rising prices tends to flow into the market and check price increases. But if we assume that it is never marketed, it supplies a need of the man who grew it which would otherwise be reflected by purchases in the open market. … This record leaves us in no doubt Congress may properly have considered that wheat consumed on the farm where grown if wholly outside the scheme of regulation would have a substantial effect in defeating and obstructing its purpose to stimulate trade therein at increased prices. * * * *  Judgment for Wickard, reversing the decision of the lower court. 

Commerce-Prohibiting Acts: Acts Which Burden Interstate Commerce

The third theory by which the Court expanded the power of Congress under the Commerce Clause power is the “commerce-prohibiting” theory, which allows Congress to regulate local matters that have some negative effect on or which place a burden on interstate commerce. Without a doubt, the states hold a strong interest in regulating activities within their borders. States may exercise police powers to regulate private activities in order to protect or promote “public safety, health, morals, or general welfare of their citizens.” However, when a state regulation places a burden on interstate commerce, courts are required to balance the state’s interest against the burden it has placed on interstate commerce.  The “commerce-prohibiting” theory may be found in the case of Heart of Atlanta Motel v. United States, where the Supreme Court held that Congress has the power to prohibit racial discrimination in hotels and motels serving interstate travelers such discrimination may deter persons from traveling, thus having an effect on interstate commerce.  

 

Case Summary

Heart Of Atlanta Motel v. United States 

379 U.S. 241 (1964)

The owner of a motel, who refused to rent rooms to blacks, despite the Civil Rights Act of 1964, brought an action to have the Civil Rights Act of 1964 declared unconstitutional. The motel owner alleged that Congress, in passing the act, had exceeded its power to regulate commerce.  CLARK, J. … This is a declaratory judgment action … attacking the constitutionality of Title II of the Civil Rights Act of 1964. … Appellant owns and operates the Heart of Atlanta Motel which has 216 rooms available to transient guests. … It is readily accessible to interstate highways 75 and 85 and state highways 23 and 41. Appellant solicits patronage from outside the State of Georgia through various national advertising media, including magazines of national circulation; it maintains over 50 billboards and highway signs within the State, soliciting patronage for the motel; it accepts convention trade from outside Georgia and approximately 75 percent of its registered guests are from out of State. Prior to passage of the Act the motel had followed a practice of refusing to rent rooms to Negroes, and it alleged that it intended to continue to do so. In an effort to perpetuate that policy this suit was filed. …  The sole question posed is, therefore, the constitutionality of the Civil Rights Act of 1964 as applied to these facts. The legislative history of the Act indicates that Congress based the Act on Section 5 and the Equal Protection Clause of the Fourteenth Amendment as well as its power to regulate interstate commerce under Art. I, Sec. 8, cl. 3 of the Constitution.  The Senate Commerce Committee made it quite clear that the fundamental object of Title II was to vindicate “the deprivation of personal dignity that surely accompanies denials of equal access to public establishments.” At the same time, however, it noted that such an objective has been and could be readily achieved “by congressional action based on the commerce power of the Constitution.” Our study of the legislative record, made in the light of prior cases, has brought us to the conclusion that Congress possessed ample power in this regard, and we have therefore not considered the other grounds relied upon. …  While the Act as adopted carried no congressional findings, the record of its passage through each house is replete with evidence of the burdens that discrimination by race or color places upon interstate commerce. … This testimony included the fact that our people have become increasingly mobile with millions of all races traveling from State to State; that Negroes in particular have been the subject of discrimination in transient accommodations, having to travel great distances to secure the same; that often they have been unable to obtain accommodations and have had to call upon friends to put them up overnight. … These exclusionary practices were found to be nationwide, the Under Secretary of Commerce testifying that there is “no question that this discrimination in the North still exists to a large degree” and in the West and Midwest as well. … This testimony indicated a qualitative as well as quantitative effect on interstate travel by Negroes. The former was the obvious impairment of the Negro traveler’s pleasure and convenience that resulted when he continually was uncertain of finding lodging. As for the latter, there was evidence that this uncertainty stemming from racial discrimination had the effect of discouraging travel on the part of a substantial portion of the Negro community. … We shall not burden this opinion with further details since the voluminous testimony presents overwhelming evidence that discrimination by hotels and motels impedes interstate travel. * * * * *  The power of Congress to deal with these obstructions depends on the meaning of the Commerce Clause. … [T]he determinative test of the exercise of power by the Congress under the Commerce Clause is simply whether the activity sought to be regulated is “commerce which concerns more States than one” and has a real and substantial relation to the national interest. * * * * * That Congress was legislating against moral wrongs in many of these areas rendered its enactment no less valid. In framing Title II of this Act Congress was also dealing with what it considered a moral problem. But that fact does not detract from the overwhelming evidence of the disruptive effect that racial discrimination has had on commercial intercourse. * * * * *  It is said that the operation of the motel here is of a purely local character. But, assuming this to be true, “if it is interstate commerce that feels the pinch, it does not matter how local the operation that applies the squeeze.” Thus the power of Congress to promote interstate commerce also includes the power to regulate the local incidents thereof, including local activities in both the States of origin and destination, which might have a substantial and harmful effect upon that commerce. …  We, therefore, conclude that the action of the Congress in the adoption of the Act as applied here to a motel which concededly serves interstate travelers is within the power granted it by the Commerce Clause of the Constitution, as interpreted by this Court for 140 years. …  Judgment in favor of the United States. 

The Dormant Commerce Clause

What might be the result if the federal government chooses not to regulate an area that it may constitutionally regulate, and a state nevertheless chooses to enact a regulation in that area? The response to this question involves what is termed as the “dormant commerce” clause. Even though there had been no federal regulation, the state statute may not unduly burden interstate commerce. Since only Congress has the power to regulate interstate commerce, any state statute negatively affecting interstate commerce may be declared unconstitutional. In Huish Detergents, Inc. v. Warren County, Kentucky, et al., 214 F.3d 707 (2000), the Sixth Circuit held an ordinance enacted by Warren County, Kentucky, restricting the collection and processing of waste generated by the city of Bowling Green to a single contractor violated the Dormant Commerce Clause. Huish Detergents, a manufacturer of laundry detergent, sued in federal district court claiming the County could not force it to use and pay only the county approved company to dispose of its waste and no one else. Huish alleged that as a result of the county ordinance, other contractors, including those from other states, could not compete to collect and dispose solid waste. Relying upon precedent that state restrictions on the interstate travel of waste violates the Commerce Clause, the court held the ordinance requiring the waste only be processed at the city’s transfer station and nowhere else, violated the dormant commerce clause. It was an impermissible intrusion into the authority of Congress—even though Congress had chosen not to legislate on that question.  The following case, Family Winemakers of California v. Jenkins, also illustrates the application of the Dormant Commerce Clause.

 

Case Study 

Family Winemakers Of California v. Jenkins

592 F.3d 1 (1st cIr. 2010) 

Procedural Posture

Defendant Massachusetts officials appealed from a United States District Court for the District of Massachusetts injunction against Mass. Gen. Laws ch. 138, § 19F, which established differential methods for distributing wines. Plaintiffs, a group of California winemakers argued the statute discriminated against interstate commerce in light of both the Commerce Clause, U.S. Const. art. I, § 8, cl. 3, and U.S. Const. amend. XXI, § 2. Overview Section 19F only allows “small” wineries, defined by Massachusetts as those producing 30,000 gallons or less of grape wine a year, to obtain a “small winery shipping license.” This license allows them to sell their wines in Massachusetts in three ways: by shipping directly to consumers, through wholesaler distribution, and through retail distribution. All of Massachusetts’s wineries are “small” wineries. Some out-of-state wineries also meet this definition.  Wines from “small” Massachusetts wineries compete with wines from “large” wineries, which Massachusetts has defined as those producing more than 30,000 gallons of grape wine annually. These “large” wineries must choose between relying upon wholesalers to distribute their wines in-state or applying for a “large winery shipping license” to sell directly to Massachusetts consumers. They cannot, by law, use both methods to sell their wines in Massachusetts, and they cannot sell wines directly to retailers under either option. No “large” wineries are located inside Massachusetts.  Plaintiffs, a group of California winemakers and Massachusetts residents, assert §19F was designed with the purpose, and has the effect, of advantaging Massachusetts wineries to the detriment of those wineries that produce 98 percent of the country’s wine, in violation of the Commerce Clause. Massachusetts defends § 19F on the basis that its law has neither a discriminatory purpose nor a discriminatory effect. Massachusetts has not argued in its briefs that there are no legitimate alternative methods of regulation to serve § 19F’s asserted purposes. Massachusetts also argues that under the Twenty-first Amendment, state laws are immunized from Commerce Clause scrutiny unless the laws discriminate on their face.  The primary question before us is whether §19F unconstitutionally discriminates against interstate commerce in light of both the Commerce Clause,1 art. I, §8, cl. 3, and §2 of the Twenty-first Amendment. …  In 2006, the Massachusetts legislature enacted § 19F over then-Governor Romney’s veto. Section 19F does not distinguish on its face between in-state and out-of-state wineries’ eligibility for direct shipping licenses, but instead distinguishes between “small” or “large” wineries through the 30,000 gallon cap. …  [A]ll wineries producing over 30,000 gallons of wine-all of which are located outside Massachusetts-can apply for a “large winery shipment license[.]… “large” wineries can either choose to remain completely within the three-tier system and distribute their wines solely through wholesalers, or they can completely opt out of the three-tier system and sell their wines in Massachusetts exclusively through direct shipping. They cannot do both. … By contrast, “small” wineries can simultaneously use the traditional wholesaler distribution method, direct distribution to retailers, and direct shipping to reach consumers. …  The advantages afforded to “small” wineries by the expanded distribution options in Mass. Gen. Laws ch. 138, § 19F, bore little relation to the market challenges caused by size. Section 19F’s statutory context, legislative history, and other factors also yielded an unavoidable conclusion that the discrimination was purposeful. Nor did § 19F serve any legitimate local purpose that could be furthered by a nondiscriminatory alternative. “Large” wineries — all located outside Massachusetts and accounting for 98 percent of all United States wine — could not distribute directly to consumers unless they did not distribute to retailers. But “small” wineries could simultaneously distribute through wholesalers, direct to retailers, and ship direct to consumers. The Wilson Act of 1890, 27 U.S.C.S. § 121, and the Webb-Kenyon Act of 1913,27 U.S.C.S. § 122, did not protect facially neutral state liquor laws from Commerce Clause invalidation if they were discriminatory. The Twenty-first Amendment similarly did not exempt such laws with discriminatory effects from the Commerce Clause. Nor were such laws exempt if they also discriminated by design, as did the Massachusetts statute. 

Holding 

Discrimination under the Commerce Clause “means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter,” as opposed to state laws that “regulate[ ] evenhandedly with only incidental effects on interstate commerce … . ***** State laws that alter conditions of competition to favor in-state interests over out-of-state competitors in a market have long been subject to invalidation. …  *****  Here, the totality of the evidence introduced by plaintiffs demonstrates that § 19F’s preferential treatment of “small” wineries that produce 30,000 gallons or less of grape wine is discriminatory. Its effect is to significantly alter the terms of competition between in-state and out-of-state wineries to the detriment of the out-of-state wineries that produce 98 percent of the country’s wine. …  *****  Section 19F confers a clear competitive advantage to “small” wineries, which include all Massachusetts’s wineries, and creates a comparative disadvantage for “large” wineries, none of which are in Massachusetts. “Small” wineries that obtain a § 19F(b) license can use direct shipping to consumers, retailer distribution, and wholesaler distribution simultaneously. Combining these distribution methods allows “small” wineries to sell their full range of wines at maximum efficiency because they serve complementary markets. “Small” wineries that produce higher-volume wines can continue distributing those wines through wholesaler relationships. They can obtain new markets for all their wines by distributing their wines directly to retailers, including individual bars, restaurants, and stores. They can also use direct shipping to offer their full range of wines directly to Massachusetts consumers, resulting in greater overall sales. …  *****  We conclude that §19F altered the competitive balance to favor Massachusetts’s wineries and disfavor out-of-state competition by design.  We affirm the judgment of the district court. 

Outcome 

The grant of injunctive relief was affirmed. 

Congress’ power to regulate interstate commerce also includes the power to create statutes that are “necessary and proper” in order to carry out that power. When Congress operates within its limited enumerated powers to pass federal statutes, any state statute that conflicts with a federal statute will be struck down under the Supremacy Clause. In the Gonzalez case, the United States Supreme Court found California’s medical marijuana statute conflicted with the Controlled Substances Act, because the statute interfered with Congressional regulation of interstate commerce.  

 

Case Study 

Gonzalez v. Raich 

545 U.S. 1 (2005) 

Procedural Posture 

Respondents, claiming a violation of the Commerce Clause, sought injunctive and declaratory relief prohibiting enforcement of the federal Controlled Substances Act (CSA), 21 U.S.C.S. § 801 et seq., to the extent it prevented them from possessing, obtaining, or manufacturing cannabis for their personal medical use. A district court denied a motion for a preliminary injunction, but the United States Court of Appeals for the Ninth Circuit reversed.  Overview  Respondents were California residents who suffered from a variety of serious medical conditions and had sought to avail themselves of medical marijuana pursuant to the terms of the Compassionate Use Act, Cal. Health & Safety Code § 11362.5 (2005). After an investigation, county officials concluded that one respondent’s use of marijuana was entirely lawful under California law; nevertheless, federal agents seized and destroyed all six of her cannabis plants. The Court held that the regulation of marijuana under the CSA was squarely within Congress’ commerce power because production of marijuana meant for home consumption had a substantial effect on supply and demand in the national market. Given the enforcement difficulties in distinguishing between marijuana cultivated locally and marijuana grown elsewhere, 21 U.S.C.S. § 801(5), and concerns about diversion into illicit channels, the Court had no difficulty concluding that Congress had a rational basis forbelieving that failure to regulate the intrastate manufacture and possession of marijuana would leave a gaping hole in the CSA. Congress was acting well within its authority of the Commerce Clause, U.S. Const., art. I, § 8.

Holding

Our case law firmly establishes Congress’ power to regulate purely local activities that are part of an economic “class of activities” that have a substantial effect on interstate commerce … . We have never required Congress to legislate with scientific exactitude. When Congress decides that the “ ‘total incidence’ ” of a practice poses a threat to a national market, it may regulate the entire class. … In this vein, we have reiterated that when “ ‘a general regulatory statute bears a substantial relation to commerce, the de minimis character of individual instances arising under that statute is of no consequence.’ ”. … ***** The similarities between this case and Wickard are striking. Like the farmer in Wickard, respondents are cultivating, for home consumption, a fungible commodity for which there is an established, albeit illegal, interstate market. Just as the Agricultural Adjustment Act was designed “to control the volume [of wheat] moving in interstate and foreign commerce in order to avoid surpluses …” and consequently control the market price … a primary purpose of the CSA is to control the supply and demand of controlled substances in both lawful and unlawful drug markets. … . In Wickard, we had no difficulty concluding that Congress had a rational basis for believing that, when viewed in the aggregate, leaving home-consumed wheat outside the regulatory scheme would have a substantial influence on price and market conditions. Here too, Congress had a rational basis for concluding that leaving home-consumed marijuana outside federal control would similarly affect price and market conditions. … ***** In assessing the scope of Congress’ authority under the Commerce Clause, we stress that the task before us is a modest one. We need not determine whether respondents’ activities, taken in the aggregate, substantially affect interstate commerce in fact, but only whether a “rational basis” exists for so concluding. … Given the enforcement difficulties that attend distinguishing between marijuana cultivated locally and marijuana grown elsewhere … and concerns about diversion into illicit channels, we have no difficulty concluding that Congress had a rational basis for believing that failure to regulate the intrastate manufacture and possession of marijuana would leave a gaping hole in the CSA. Thus, as in Wickard, when it enacted comprehensive legislation to regulate the interstate market in a fungible commodity, Congress was acting well within its authority to “make all Laws which shall be necessary and proper” to “regulate Commerce … among the several States.” U.S. Const., Art. I, § 8. That the regulation ensnares some purely intrastate activity is of no moment. As we have done many times before, we refuse to excise individual components of that larger scheme. ***** [T]he activities regulated by the CSA are quintessentially economic. “Economics” refers to “the production, distribution, and consumption of commodities.” Webster’s Third New International Dictionary 720 (1966). The CSA is a statute that regulates the production, distribution, and consumption of commodities for which there is an established, and lucrative, interstate market. Prohibiting the intrastate possession or manufacture of an article of commerce is a rational (and commonly utilized) means of regulating commerce in that product. … Because the CSA is a statute that directly regulates economic, commercial activity, our opinion in Morrison casts no doubt on its constitutionality. … ***** One need not have a degree in economics to understand why a nationwide exemption for the vast quantity of marijuana (or other drugs) locally cultivated for personal use (which presumably would include use by friends, neighbors, and family members) may have a substantial impact on the interstate market for this extraordinarily popular substance. . .

Outcome

The court vacated the judgment of the Court of Appeals finding that the CSA was a valid exercise of federal power under the commerce clause. The case was remanded for further proceedings.

A Changing View of the Commerce Clause

A number of cases decided by the U.S. Supreme Court under Chief Justice Rehnquist began to reign-in unlimited Congressional authority under a broad commerce clause analysis. In doing so, the Supreme Court held that the activity which is the object of regulation must itself be commercial in nature. Secondly, the regulated activity must itself be conducted in interstate commerce. Two cases exemplify this change in perspective. In U.S. v Lopez, 514 U.S. 549 (1995), the Court invalidated the Gun-Free School Zone Act. The Act made it a crime to knowingly possess a firearm within a certain distance of a school. Finding the Act neither regulated a commercial activity nor was it conducted in interstate commerce, the Court held that the Act exceeded the authority of Congress “[t]o regulate Commerce … among the several States ….” Five years later, in U.S. v. Morrison, 529 U.S. 598 (2000), the Court held that the Violence Against Women Act was unconstitutional because the activities sought to be criminalized were not commercial in nature and were not conducted in interstate commerce. The Court noted that, “gender-motivated crimes of violence are not, in any sense of the phrase, economic activity.” Further, the Court held that, “simply because Congress may conclude that a particular activity substantially affects interstate commerce does not necessarily make it so. Rather, whether particular operations affect interstate commerce sufficiently to come under the constitutional power of Congress to regulate them is ultimately a judicial rather than a legislative question, and can be settled finally only by the Court.”  Lopez and Morrison have called into question the entire line of cases which expanded the reach of the Commerce Clause since the 1930s. 

The Taxing Power 

Article I, section 8 of the Constitution states that “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises.” Congress can use its taxing authority broadly as a “necessary and proper” means for effectuating one of its delegated powers. In practical terms, nearly every measure enacted in the form of a tax will have at least an incidental regulatory effect. For instance, if an excise tax on cigarettes is enacted, people may smoke fewer cigarettes— and that may be the exact result that regulators had intended. If the regulatory impact of the tax is one that could be achieved directly by use of one of the other enumerated powers (e.g., through the Commerce Clause), the fact that the tax has a regulatory effect is not of constitutional significance. Conversely, if the regulatory effect is one that could not have been achieved directly through the proper exercise of constitutional authority, then the tax may be stricken as an invalid regulation, disguised as a tax. The problem of distinguishing between a tax that is a valid revenue-raising measure, and one that has no real revenue purpose and is therefore invalid regulation disguised as a tax, presents a special problem. As long as a federal law is revenue producing on its face, the Court will not generally probe to discover a hidden regulatory motive and will not be overly concerned with whether the effects of the law trespass on the traditional state police power domain.  There is a twist to the discussion that could not have been anticipated. The Affordable Care Act (ACA) provides an interesting discussion of the relationship between the Commerce Clause and the taxing power. In National Federation of Independent Businesses v. Sebelius, 567 U.S. 519 (2012), a 5-4 vote with Chief Justice Roberts writing for the majority, the Supreme Court ruled that the ACA did not in fact regulate interstate commerce, rejecting a broad “affectation” principle which in another era would have most certainly been applied to health care which involves 17% or more of the total GNP of the United States. The Court stated that it was not a valid exercise under the Commerce Clause to force someone into commerce and then regulate that conduct. However, that was not the end of the discussion for the Supreme Court. In a 5-4 decision, again with the Chief Justice in the majority, the Supreme Court upheld the individual mandate portion of the ACA on the ground that it was enacted pursuant to Congress’ taxing authority, since it provided a penalty for those who did not have health insurance and who chose not to purchase it and imposed that penalty as part of the obligation to pay federal income taxes. 

The Spending Power

While Congress has no express power to legislate for the general welfare, Article I, section 8, gives Congress the power “to lay and collect Taxes … to pay the Debts and provide for the common Defense and general Welfare of the United States.” One can view the federal taxing power as a stick, and in turn, federal spending power as a reward. Congress’ power to spend is very broad; it can be used to promote regulatory ends for the general welfare and sometimes for particular purposes.  Since the 1940s, the United States Supreme Court has consistently upheld congressional regulation pursuant to its spending power. The Supreme Court, however, has viewed the use of the spending power for less than a general purpose with a critical eye. The exercise of the spending power must serve a general public purpose and not be directed at a specific interest. When Congress conditions the receipt of federal funds on specific requirements, it must do so constitutionally. Moreover, any conditions imposed upon a recipient must be reasonably related to the purpose for which the federal monies are spent. Arguably, federal spending power regulation is not as intrusive as other forms of federal regulation since a state has the option of not complying with a spending regulation and can decide not to accept federal funds.

Example  Congress, in order to prevent drivers under the age of 21 from drinking, withholds federal highway funds from states that permit individuals younger than 21 to purchase or possess in public any alcoholic beverage. South Dakota attacks the statute on the grounds that this condition interferes with its own exclusive power under the Tenth and Twenty-First Amendments. 

Due Process Clause 

The cardinal limitations against governmental interference with the fundamental rights of its citizens are found in the first ten amendments of the Constitution, commonly called the Bill of Rights. The principal purpose of the Bill of Rights is to protect individuals (and in some cases, businesses) against various forms of interference by the federal government without “due process of law.” Today, virtually all the fundamental guarantees of the Bill of Rights (with the exception of the use of a Grand Jury in state prosecutions and the requirement of a twelve-person jury in a state criminal case) have been incorporated into the Fourteenth Amendment, and therefore have been made applicable to the states. Held, that the statute is valid. Even if, arguendo, direct congressional setting of the drinking age for the entire country would be unconstitutional, Congress’ indirect use of its condi- tional spending power to achieve the same results is permissible. South Dakota v. Dole, 483 U.S. 203 (1987). 

Substantive Due Process

Substantive due process focuses on the content or substance of a law, that is, the rules that establish standards of behavior for our society. If a law is incompatible with the Constitution, it is said to violate substantive due process. Substantive due process requires that laws enacted by the government are clear and not overly broad. In the context of economic regulations, a statute must be enacted in furtherance of a legitimate state objective and there must be a rational relationship between the means chosen by the legislature and the objective of the regulation. In reality, virtually any statute dealing with “health, safety, morals, or general welfare” comes within the state’s police power and is thus “legitimate” under a substantive due process analysis. Such statutes are presumed to be constitutional, unless the legislation is completely arbitrary and irrational in its application. 

Example

The Court sustained against a due process attack on a federal prohibition on interstate shipment of “filled” milk, i.e. skimmed milk mixed with non-milk fat. The Court noted that Congress had acted upon findings of fact (e.g., committee reports) showing a public health danger from the filled milk. U.S. v. Carolene Products Co., 304 U.S. 144 (1938). 

Procedural Due Process 

Procedural due process focuses on the manner in which the government acts and the enforcement mechanisms it uses. When the government deprives a person of “life, liberty or property,” the Due Process Clauses of the Fifth and Fourteenth Amendments mandate procedural fairness. The requirements of procedural due process include the central premise that people must be given adequate notice of the government action to be instituted against them and to some form of hearing or trial before an action can follow.  Because a corporation has been determined to be a “person” under our Constitution, it is entitled to “due process” as well when its property is the subject of a law or regulation. The key concept in defining property today is a claim of “entitlement” to a benefit. When an individual is legally entitled to a benefit, it creates an expectancy that the benefit will not be arbitrarily terminated or interfered with without “due process of law.” The definition of property or of a property interest is very broad. “Property” can include real property, personal property, intellectual property, other intangible rights such as interests in a person’s reputation, or certain employment rights, e.g., requiring termination of a public employee only for good cause.  The concept of “liberty” embodies principles of freedom that lie at the roots of our legal system. Liberty interests generally fall under one of the following headings: 

  1. freedom from bodily restraint or “physical liberty”;
  2. substantive constitutional rights; and
  3. other fundamental freedoms.

When physical freedom is curtailed by imprisonment or commitment to an institution, liberty interests are burdened, thus, requiring extensive procedural protections. Similarly, “liberty” also includes other rights such as freedom of expression and freedom of religion, as well as substantive rights including free association and belief and the right to privacy. Finally, “liberty” also encompasses a variety of fundamental interests relating to personal autonomy and choice. Some of these rights are found explicitly in the Constitution; others have been created by the Supreme Court to be within the “penumbras and emanations” of provisions of the Bill of Rights. (See Griswold v. Connecticut, 381 U.S. 479 (1965), establishing a right to privacy.)  In the following case, the Court’s opinion focuses on the notice required by procedural due process when the government deprives a person of property.  

 

Case Summary

Mennonite Board Of Missions v. Adams 

462 U.S. 791 (1983)

An Indiana Superior Court upheld the Indiana tax sale statute against constitutional challenge by the Mennonite Board of Missions (MBM), a mortgagee who contended that it had not received constitutionally adequate notice of the pending tax sale of and the opportunity to redeem the property following the tax sale since it was not informed of the pending sale either by the county auditor or by the mortgagor, who had been informed of the sale. The auditor, following the state law, had posted a notice of the sale in the county courthouse and published a notice once each week for three consecutive weeks. The Indiana Court of Appeals affirmed. On appeal, the U. S. Supreme Court reversed and remanded, holding that the manner of notice provided to the mortgagee did not meet the requirements of the due process clause of the Fourteenth Amendment.  MARSHALL, J. … In Mullane v. Central Hanover Bank & Trust Co., … this Court recognized that prior to an action which will affect an interest in life, liberty, or property protected by the Due Process Clause of the Fourteenth Amendment, a State must provide “notice reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Invoking this “elementary and fundamental requirement of due process,” the Court held that published notice of an action to settle the accounts of a common trust fund was not sufficient to inform beneficiaries of the trust whose names and addresses were known. The Court explained that notice by publication was not reasonably calculated to provide actual notice of the pending proceeding and was therefore inadequate to inform those whocould be notified by more effective means such as personal service or mailed notice[.] … ***** This case is controlled by the analysis in Mullane. To begin with, a mortgagee [MBM] possess (sic) a substantial property interest that is significantly affected by a tax sale. … Ultimately, the tax sale may result in the complete nullification of the mortgagee’s interest, since the purchaser acquires title free of all liens and other encumbrances at the conclusion of the redemption period. Since a mortgagee clearly has a legally protected property interest, he is entitled to notice reasonably calculated to apprise him of a pending tax sale. … When the mortgagee is identified in a mortgage that is publicly recorded, constructive notice by publication must be supplemented by notice mailed to the mortgagee’s last known available address, or by personal service. However, unless the mortgagee is not reasonably identifiable, constructive notice alone does not satisfy the mandate of Mullane. Neither notice by publication and posting, nor mailed notice to the property owner, are means “such as one desirous of actually informing the [mortgagee] might reasonably adopt to accomplish it.” … Because they are designed primarily to attract prospective purchasers to the tax sale, publication and posting are unlikely to reach those who, although they have an interest in the property, do not make special efforts to keep abreast of such notices. … Notice to the property owner, who is not in privity with his creditor and who has failed to take steps necessary to preserve his own property interest, also cannot be expected to lead to actual notice to the mortgagee. … The county’s use of these less reliable forms of notice is not reasonable where, as here, “an inexpensive and efficient mechanism such as mail service is available.” … Personal service or mailed notice is required even though sophisticated creditors have means at their disposal to discover whether property taxes have not been paid and whether tax sale proceedings are therefore likely to be initiated. In the first place, a mortgage need not involve a complex commercial transaction among knowledgeable parties, and it may well be the least sophisticated creditor whose security interest is threatened by a tax sale. More importantly, a party’s ability to safeguard its interests does not relieve the State of its constitutional obligation. …Notice by mail or other means as certain to ensure actual notice is a minimum constitutional precondition to a proceeding which will adversely affect the liberty or property interests of any party, whether unlettered or well versed in commercial practice, if its name and address are reasonably ascertainable. We therefore conclude that the manner of notice provided to [MBM] did not meet the requirements of the Due Process Clause of the Fourteenth Amendment. Accordingly, the judgment of the Indiana Court of Appeals is reversed[.] Judgment in favor of the Mennonite Board of Missions.

Takings Clause

Another important constitutional protection of a private economic interest is the ban on the taking of private property by the government without just compensation found in the Fifth Amendment. Both the federal and state governments (via the Fifth and Fourteenth Amendments respectively) have the right to take private property for public use, provided it pays “just compensation.” This power is known as “eminent domain” and the clause is referred to as the “Takings Clause.” The process can be a voluntary one or it can result from a condemnation action by the government. Under the Takings Clause, the government must pay reasonable or just compensation for any property it “takes.” On the other hand, if the government merely “regulates” property under its police power, then it does not need to pay compensation – even if the owner’s use of the property or its value is substantially diminished. Many disputes involving the takings clause revolve around determining what is a “public use” and whether the governmental action is a compensable “taking” or is it merely a non-compensable “regulation.”  Frequently, a problem will arise in the context of land-use regulation. For a land use regulation to avoid being classified as a taking, it must “substantially advance legitimate state interests” and it must not deny an owner the “viable use” of his land in an economic sense. Examples of a legitimate state interest include maintaining a residential character of a neighborhood through zoning; preserving landmarks or historical sites; actions designed to protect the environment; and surprisingly, preserving “youth” or “family values,” through restrictions placed on the number of non-related individuals who might occupy a house. Few land use regulations are likely to be found to deny the owner of the viable use of the land. Regulations, however, denying the owner the right to build any dwelling on the land would qualify as a taking, triggering the payment of reasonable compensation.  When the government makes or authorizes a permanent physical occupation of the property, it automatically constitutes a taking, no matter how minor the interference with the owner’s use and no matter how important the countervailing government interests.  Generally, the more drastic the reduction in value of the owner’s property due to the government regulation, the more likely a taking is to be found. However, note that a very drastic diminution in value, almost certainly much more than 50%, is generally required. 

Example A state land use regulation prevented private property owners from rebuilding their house on their beach front property unless they first gave the public an easement across a sandy strip of their property adjacent to the ocean so that the public could get to and from the public beaches north and south of the owner’s property (beaches which would be connected if the owner gave the public the required easement). Even though this easement would not have permitted the public to remain on the owners’ land, the Court found that it constituted a physical occupation and thus a taking of the owners’ property, providing compensation. Nollan v. California Coastal Commission, 483 U.S. 825 (1987). 

The Takings Clause protects more than land and interests in land. The clause has been applied to takings of personal property, liens, trade secrets, and contract rights. In 2005, the Supreme Court continued its expansion of the Takings Clause that had begun with the 1954 case of Berman v. Parker, 348 U.S. 26, in which the Supreme Court had literally changed the criteria found in the Constitution from “public use” to a broad “public purpose” so that the city of Washington, D.C., could “take” the property of a private party for purposes of the urban renewal of a blighted area, even though the property would then be sold to a private developer.  In 2000, the City of New London, Connecticut, adopted a plan that provided for taking the petitioners’ property for the purposes of affecting an economic development plan. There was no proof or allegation that the petitioner’s property was blighted. The City argued that the disposition of the property would nonetheless qualify as a “public use” within the meaning of the Takings Clause of the Fifth Amendment. Would the Court pay “deference to legislative judgments as to what public needs justify the use of the takings” or would it strike down the plan as a violation of the Fifth Amendment rights of the petitioner’s? The Supreme Court agreed with the position of New London, again in a 5-4 decision.  The Kelo decision has been subjected to severe criticism as the most egregious example of changing or perhaps ignoring the words of the Constitution in order to achieve a social goal. Since the Supreme Court’s decision, many states have rejected the use of eminent domain in these types of cases.  

 

Case Summary

Kelo et al. v. City Of New London et al. 

545 U.S. 469 (2005)

Summary: After approving an integrated development plan designed to revitalize its ailing economy, respondent city, through its development agent, purchased most of the property earmarked for the project from willing sellers, but initiated condemnation proceedings when petitioners, the owners of the rest of the property, refused to sell. Petitioners brought this state-court action claiming, inter alia, that the taking of their properties would violate the “public use” restriction in the Fifth Amendment’s  Takings Clause. The trial court granted a permanent restraining order prohibiting the taking of the some of the properties, but denying relief as to others. Relying on cases such as Hawaii Housing Authority v. Midkiff, 467 U.S. 229, and Berman v. Parker, 348 U.S. 26, the Connecticut Supreme Court affirmed in part and reversed in part, upholding all of the proposed takings. Held: The city’s proposed disposition of petitioners’propertyqualifiesasa“publicuse”within the meaning of the Takings Clause. (a) Though the city could not take petitioners’ land simply to confer a private benefit on a particular private party, see, e.g., Midkiff, 467 U.S., at 245, the takings at issue here would be executed pursuant to a carefully considered development plan, which was not adopted “to benefit a particular class of identifiable individuals,” ibid. Moreover, while the city is not planning to open the condemned land–at least not in its entirety–to use by the general public, this “Court long ago rejected any literal requirement that condemned property be put into use for the … public.” Id., at 244. Rather, it has embraced the broader and more natural interpretation of public use as “public purpose.” See, e.g., Fallbrook Irrigation Dist. v. Bradley, 164 U.S. 112, 158—164. Without exception, the Court has defined that concept broadly, reflecting its longstanding policy of deference to legislative judgments as to what public needs justify the use of the takings power. Berman, 348 U.S. 26; Midkiff, 467 U.S. 229; Ruckelshaus v. Monsanto Co., 467 U.S. 986. (b) The city’s determination that the area at issue was sufficiently distressed to justify a program of economic rejuvenation is entitled to deference. The city has carefully formulated a development plan that it believes will provide appreciable benefits to the community, including, but not limited to, new jobs and increased tax revenue. As with other exercises in urban planning and development, the city is trying to coordinate a variety of commercial, residential, and recreational land uses, with the hope that they will form a whole greater than the sum of its parts. To effectuate this plan, the city has invoked a state statute that specifically authorizes the use of eminent domain to promote economic development. Given the plan’s comprehensive character, the thorough deliberation that preceded its adoption, and the limited scope of this Court’s review in such cases, it is appropriate here, as it was in Berman, to resolve the challenges of the individual owners, not on a piecemeal basis, but rather in light of the entire plan. Because that plan unquestionably serves a public purpose, the takings challenged here satisfy the Fifth Amendment. (c) Petitioners’ proposal that the Court adopt a new bright-line rule that economic development does not qualify as a public use is supported by neither precedent nor logic. Promoting economic development is a traditional and long accepted governmental function, and there is no principled way of distinguishing it from the other public purposes the Court has recognized. See, e.g., Berman, 348 U.S., at 24. Also rejected is petitioners’ argument that for takings of this kind the Court should require a “reasonable certainty” that the expected public benefits will actually accrue. Such a rule would represent an even greater departure from the Court’s precedent. E.g., Midkiff, 467 U.S., at 242. The disadvantages of a heightened form of review are especially pronounced in this type of case, where orderly implementation of a comprehensive plan requires all interested parties’ legal rights to be established before new construction can commence. The Court declines to second-guess the wisdom of the means the city has selected to effectuate its plan. Berman, 348 U.S., at 26.

The Contract Clause 

Article I, Section 10 of the U.S. Constitution provides that “No State shall…pass any…Law impairing the Obligations of Contracts…” This clause, known as the Contracts Clause, prohibits states from passing legislation interfering with, or changing, the obligations of parties to a private contract, or contracts between states and private individuals or entities. What this means is that a state cannot alter the substance of a contract. However, a state can enact legislation that extends the time period of performance, or modifies specific payment terms. However, if a state passes a law that affects or abridges obligations in existing contracts, that law must be prospectively and not retroactively applied.  In pre-New Deal days, the principle of non-interference with a private contract was best exemplified in Lochner v. New York, 198 U.S. 45 (1905). In Lochner, the U.S. Supreme Court held that a New York statute limiting the number of hours that a baker could work per week violated the freedom of individuals to enter into contracts and was not a constitutional exercise of the state’s police powers. The Court stated that the law interfered with “the freedom of master and employee to contract in relation to their employment.” In 1934, during the Great Depression, the Court began to reverse its course and upheld a Minnesota statute that postponed foreclosure sales and extended the time for redemption on the basis that the law did not impair the obligations in the contract, but rather modified the remedy pursuant to the state’s police power in a time of economic emergency. (Home Bldg. & Loan Asso. v. Blaisdell, 290 U.S. 398 (1934)). Since the demise of Lochner, courts have upheld state laws related to preventing apartment evictions, prices of regulated goods and commodities, (e.g. gas, milk), or statutes which established rent controls on classes of rental property. Courts will defer to legislative judgments to respect economic and social regulations unless they are “demonstrably arbitrary or irrational.” (Duke Power Co. v. Carolina Environmental Study Group, Inc., 438 U.S. 59 (1978)).  Today, when analyzing a Contract Clause case, courts apply the following test: 

  1. Is the state regulation a substantial impairment of the obligations of the contractual relationship?
  2. Is there a legitimate public purpose behind the regulation?
  3. Is the state regulation reasonable and appropriate for achieving the statute’s purpose, such as remedying a broad and general social or economic problem? (Energy Reserves Group v. Kan. Power & Light Co., 459 U.S. 400 (1983))

Example If the U.S. economy is in turmoil with a widespread number of home mortgage foreclosures, the Congress may temporarily order a lower interest rate on home mortgages, or impose a moratorium on mortgage foreclosures, without violating the Contract Clause.

Commercial Speech And The First Amendment 

The First Amendment provides, in part, that “Congress shall make no law … abridging the freedom of speech.” For the purposes of this chapter, the First Amendment will be analyzed in the context of commercial speech only.  A communication that furthers the economic interests of the speaker is referred to as commercial speech. Commercial speech, such as advertising, is entitled to First Amendment protection; however, this protection is more limited than the protections given to non-commercial speech, most especially political speech. Commercial speech is not entitled to unfettered, absolute freedom; but rather, the benefits of commercial speech are weighed against the benefits achieved by any government regulation of that speech. In commercial speech cases, the court foregoes the ordinary strict scrutiny standard of review (in which the government must show that its policy  is necessary to achieve a compelling state interest, and must demonstrate that the legislation is narrowly tailored to achieve the intended result) in favor of a less stringent balancing analysis.  Under these standards, truthful commercial speech will receive a limited First Amendment protection. On the other hand, false or deceptive commercial speech may be restricted or even banned by the government. Similarly, speech which advertises an illegal transaction (such as illegal internet gambling or the sale of marijuana), may also be banned or restricted.  At the same time, the use of some products is so tightly tied in with the exercise of constitutional rights that the sale of the product cannot constitutionally be banned. But what about the advertising of products or services that are lawful, but believed by the legislature to be harmful? The Supreme Court addressed this issue in Packer Corp. v. Utah, where the Court curtailed the advertising of cigarettes.   

 

Case Study 

Packer Corporation v. Utah 

285 U. S. 105 (1932) 

Procedural Posture

Defendant, a corporation engaged in billboard advertising, sought review of a judgment of the Supreme Court of Utah, which affirmed defendant’s conviction for displaying a billboard poster advertising cigarettes in violation of 1921 Utah Laws ch. 145, § 2, as amended by 1923 Utah Laws ch. 52, § 2 and 1929 Utah Laws ch. 92. 

Overview 

Defendant argued that 1921 Utah Laws ch. 145 violated the equal protection clause of the Fourteenth Amendment because its prohibition against the advertisement of cigarettes did not extend to newspapers, magazines, or periodicals. On review, the Court held that there was a difference which justified the classification between billboard advertising and advertising in newspapers, magazines, or periodicals. Unlike advertisements in newspapers and magazines, billboard advertisements were constantly before the eyes of observers on the streets and in street cars to be seen without the exercise of choice or volition on their part. The Court ruled that the statute did not unreasonably restrain interstate commerce because the statute’s operation was wholly intrastate. 

Holding 

First. The contention mainly urged is that the statute violates the equal protection clause of the Fourteenth Amendment; that in discriminating between the display by appellant of tobacco advertisements upon billboards and the display by others of such advertisements in newspapers, magazines or periodicals, it makes an arbitrary classification. The history of the legislation shows that the charge is unfounded. In Utah no one may sell cigarettes or cigarette papers without a license. Since 1890, it has been the persistent policy, first of the Territory and then of the State, to prevent the use of tobacco by minors, and to discourage its use by adults. Giving tobacco to a minor, as well as selling it, is a misdemeanor. So is permitting a minor to frequent any place of business while in the act of using tobacco in any form. Mere possession of tobacco by the minor is made a crime. And smoking by anyone in any enclosed public place (except a public smoking room designated as such by a conspicuous sign at or near the entrance) is a misdemeanor. In 1921, the legislature enacted a general prohibition of the sale or giving away of cigarettes or cigarette papers to any person, and of their advertisement in any form. Laws of Utah, 1921, c. 145, §§ 1, 2. After two years, however, the plan of absolute prohibition of sale was abandoned in favor of a license system. Laws of Utah, 1923, c. 52, § 1. But the provision against advertisements was retained, broadened to include tobacco in most other forms. In 1926, this statute was held void under the commerce clause, as applied to an advertisement of cigarettes manufactured in another State, inserted in a Utah newspaper which circulated in other States. State v. Salt Lake Tribune Publishing Co., 68 Utah 187; 249 Pac. 474. Thereupon the legislature, unwilling to abandon altogether its declared policy, amended the law by striking out the provision which prohibited advertising in newspapers and periodicals. The classification alleged to be arbitrary was made in order to comply with the requirement of the Federal Constitution as interpreted and applied by the highest court of the State. Action by a State taken to observe one prohibition of the Constitution does not entail the violation of another. J. E. Raley & Bros. v. Richardson, 264 U.S. 157, 160; Des Moines Nat. Bank v. Fairweather, 263 U.S. 103, 116, 117. Compare Dolley v. Abilene Nat. Bank, 179 Fed. 461, 463, 464. It is a reasonable ground of classification that the State has power to legislate with respect to persons in certain situations and not with respect to those in a different one. Compare Williams v. Walsh, 222 U.S. 415, 420.  Moreover, as the state court has shown, there is a difference which justifies the classification between display advertising and that in periodicals or newspapers: “Billboards, street car signs, and placards and such are in a class by themselves. They are wholly intrastate, and the restrictions apply without discrimination to all in the same class. Advertisements of this sort are constantly before the eyes of observers on the streets and in street cars to be seen without the exercise of choice or volition on their part. Other forms of advertising are ordinarily seen as a matter of choice on the part of the observer. The young people as well as the adults have the message of the billboard thrust upon them by all the arts and devices that skill can produce. In the case of newspapers and magazines, there must be some seeking by the one who is to see and read the advertisement. The radio can be turned off, but not so the billboard or street car placard. These distinctions clearly place this kind of advertisement in a position to be classified so that regulations or prohibitions may be imposed upon all within the class. This is impossible with respect to newspapers and magazines.” 297 Pac. 1013, 1019. The legislature may recognize degrees of evil and adapt its legislation accordingly. Miller v. Wilson, 236 U.S. 373, 384; Truax v. Raich, 239 U.S. 33, 43.  Second. The defendant contends that to make it illegal to carry out the contract under which the advertisement was displayed takes its property without due process of law because it arbitrarily curtails liberty of contract. The contention is without merit. The law deals confessedly with a subject within the scope of the police power. No facts are brought to our attention which establish either that the evil aimed at does not exist or that the statutory remedy is inappropriate. O’Gorman & Young v. Hartford Fire Insurance Co., 282 U.S. 251, 257; Hardware Dealers Mutual Fire Insurance Co. v. Glidden Co., 284 U.S. 151.  Third. The defendant contends also that the statute imposes an unreasonable restraint upon interstate commerce because it prevents the display on billboards of posters shipped from another State. It does not appear from the record that the defendant is the owner of the posters. Its interest is merely in its billboards located in the State, upon which it displays advertisements for which it is paid. So far as the posters are concerned, assuming them to be articles of commerce, compare Charles A. Ramsay Co. v. Associated Bill Posters, 260 U.S. 501, 511, the statute is aimed, not at their importation, but at their use when affixed to billboards permanently located in the State. Compare Browning v. Waycross, 233 U.S. 16, 22, 23; General Railway Signal Co. v. Virginia, 246 U.S. 500, 510. The prohibition is non-discriminatory, applying regardless of the origin of the poster. Its operation is wholly intrastate, beginning after the interstate movement of the poster has ceased. Compare Hygrade Provision Co. v. Sherman, 266 U.S. 497, 503; Hebe Co. v. Shaw, 248 U.S. 297, 304. See also Corn Products Refining Co. v. Eddy, 249 U.S. 427, 433. To sustain the defendant’s contention would be to hold that the posters, because of their origin, were entitled to permanent immunity from the exercise of state regulatory power. The Federal Constitution does not so require. Compare Mutual Film Corp. v. Industrial Commission, 236 U.S. 230, 240, 241. So far as the articles advertised are concerned, the solicitation of the advertisements, it may be assumed, is directed toward intrastate sales. Compare Di Santo v. Pennsylvania, 273 U.S. 34.  Whatever may be the limitations upon the power of the State to regulate solicitation and advertisement incident to an exclusively interstate business, the commerce clause interposes no barrier to its effective control of advertising essentially local. Compare Jell-O Co. v. Landes, 20 F.2d 120, 121; International Text-Book Co. v. District of Columbia, 35 App. D. C. 307, 311, 312. 

Outcome 

The Court affirmed the lower court’s judgment. 

In Central Hudson Gas & Electric Co. v. Public Com’n, 447 U.S. 557 (1980), the Court held that a total state ban on promotional advertising by utilities was unconstitutional.

 

Case Study 

Central Hudson Gas & Electric Corp. v. Public Service Comm’n

447 U.S. 557 (1980) 

Procedural Posture 

Appellant challenged a judgment from the Court of Appeals of New York that upheld as constitutional a regulation promulgated by appellee that completely banned promotional advertising by an electrical utility such as appellant. Appellant contended that the regulation impermissibly restrained commercial speech in violation of U.S. Const. amends. I and XIV. 

Overview 

During the winter, in the time of a fuel shortage, the Public Service Commission of the State of New York ordered electric utilities in the state to cease all advertising promoting the use of electricity because the state’s interconnected utility system did not have sufficient fuel stocks or sources of supply to meet all customer demands for the winter. Three years later, once the fuel shortage had eased, the Commission proposed to continue the ban on advertising and sought comments from the public. Notwithstanding opposition to continuation of the ban by an electric utility in the state which argued that the advertising prohibition violated the First Amendment, the Commission extended the prohibition against “promotional” advertising (advertising intended to stimulate the purchase of utility services) on the basis of the state’s interests in conserving energy and ensuring fair and effective rates for electricity. The utility thereafter challenged the ban on advertising in the New York state courts, claiming that the Commission had restrained commercial speech in violation of the First and Fourteenth Amendments. Ultimately, the Court of Appeals of New York upheld the prohibition on advertising, concluding that the governmental interests in the prohibition outweighed the limited constitutional value of the commercial speech at issue (47 NY2d 94, 390 NE2d 749).  In an opinion by Powell, J., joined by Burger, Ch. J., and Stewart, White, and Marshall, JJ., it was held that the ban on promotional advertising by electric utilities imposed by the Public Service Commission violated the First Amendment, as applied to the states through the Fourteenth Amendment, since despite the substantial nature of the state’s asserted interests in prohibiting such advertising- -which advertising was concededly neither inaccurate nor related to unlawful activity, and which was a species of commercial speech protected by the First Amendment, notwithstanding the monopoly power of electric utilities in the state over the sale of electricity–the link between the advertising prohibition and the state’s interest in ensuring fair and efficient rates was too tenuous and speculative to justify the ban, and the prohibition, even though it directly related to the substantial state interest in conserving energy, was more extensive that necessary to further such state interest. Appellee promulgated a regulation that banned all promotional advertising by electric utility companies operating in the state. Appellant challenged a judgment from the state’s highest court that ruled that the regulation did not violate U.S. Const. amends. I and XIV rights. On appeal, the Court reversed after applying the four-prong analysis relevant to commercial speech cases. The Court: (1) noted that appellee did not claim that the expression at issue either was inaccurate or related to unlawful activity; (2) ruled that appellant’s promotional advertising was not unprotected commercial speech merely because appellant held a monopoly over electricity in its service area; (3) ruled that, while appellee’s interests in energy conservation and ensuring fair and efficient energy rates were substantial, the link between the advertising ban and appellant’s rate structure was, at most, tenuous, and; (4) ruled that, because the regulation reached all promotional advertising, it was more extensive than necessary to further appellee’s interest in energy conservation. As such, the regulation impermissibly infringed appellant’s First Amendment rights. 

Outcome 

The Court reversed a judgment that upheld as constitutional appellee’s regulation that completely banned promotional advertising by an electrical utility, such as appellant, because the regulation impermissibly restrained appellant’s First Amendment right of free speech. Appellee’s asserted state interest in ensuring fair and efficient utility rates was not sufficiently linked to the advertising ban. 

Central Hudson developed a four-part analysis for commercial speech cases. The court 

“… must determine whether the expression is protected by the First Amendment. For commercial speech to come within that provision, it at least must concern lawful activity and not be misleading. Next, we ask whether the asserted governmental interest is substantial. If both inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest.” 

Despite the lack of a clearly fashioned definition of what constitutes “commercial speech,” the Central Hudson test remains the dominant approach for resolution of commercial speech problems. 

Corporate Political Speech 

Corporate speech, however, is not always commercial speech. Consider the case in which a corporation spends its funds to support a political candidate or advocates for the enactment or defeat of a specific piece of legislation. Previously, many states restricted the amount of advertising in which corporations could engage. Several states concluded that corporations, with the huge sums of money at their disposal, could unduly influence election outcomes. In First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978), the U.S. Supreme Court, nonetheless, struck down a Massachusetts law that prohibited certain corporations from making contributions or expenditures influencing voters on any issues that would not materially affect the corporate assets or their business. In its decision, the Court stated, “the concept that the government may restrict speech of some elements of our society in order to enhance the relative voice of others is wholly foreign to the First Amendment.” Essentially, it ruled that corporate political speech is to be protected to the same extent and with the same zeal as is the political speech of ordinary citizens.  It was effectively overturned with the passage of the 2002 Bipartisan Campaign Reform Act, also known as McCain-Feingold, which provided that no “electioneering communication,” such as a broadcast, cable, or satellite communication, could mention a candidate for political office within 60 days of a general election or 30 days of a primary election.  Once again, the United States Supreme Court would enter the debate. The United States Supreme Court’s ruling in Citizens United v. FEC, 558 U.S. 310 (2010), significantly impacted the issue of “corporate political speech.” Citizens United, a nonprofit corporation, wanted to distribute a film via video-on-demand about Hillary Clinton, who at the time was a candidate for the Democratic Party’s nomination for President in 2008, and pay for it using money it raised from individuals and from for-profit and nonprofit corporations. Citizens United sued the  Federal Election Commission to enjoin it from applying §203 of the Bipartisan Campaign Reform Act of 2002 which prohibited corporations and unions from using general treasury funds to make direct contributions to candidates or independent expenditures that expressly advocate the election or defeat of a candidate, through any form of media, in connection with  certain qualified federal elections and also prohibited any “electioneering communication.”  On appeal, the Supreme Court invalidated the corporate speech restraints in §203. The Supreme Court held the law was an “outright ban” on corporate political speech, thus violating the First Amendment. The Court also held that the law’s “prohibition on corporate independent expenditures” was a ban on speech because the Government could not suppress political speech on the basis of the speaker’s identity as a nonprofit or for-profit corporation.  The ramifications of the Citizens United, and the future impact of unrestrained corporate funding of political candidates and issues, is a matter of intense political, legal, and social debate. 

Business and Religious Liberty

The First Amendment protects an individual’s right to freedom of religion. The Establishment Clause of the First Amendment prohibits the government from establishing a national religion. The Free Exercise Clause protects an individual’s right to freely exercise his or her religion and prohibits the government from unreasonable intrusion on these rights. In 2014, by a vote of 5-4 in Burwell v. Hobby Lobby Stores, Inc., a sharply divided Supreme Court recognized certain corporations’ rights to religious freedom. The Court was called upon to balance the Establishment Clause with the Free Exercise Clause. It was no easy task and was not met with unanimous approval.  The U.S. Supreme Court held that the regulations adopted by HHS violated the RFRA, which prohibited the federal government from taking any action that substantially burdened the exercise of religion unless it constituted the least restrictive means of serving a compelling government interest. The Court rejected HHS’s argument that the owners of the companies forfeited all RFRA protection when they organized their businesses as corporations. The Court concluded that the challenged HHS regulations substantially burdened the exercise of religion because compliance would be contrary to the owners’ religious objections to abortion and there was a heavy financial penalty for noncompliance. Assuming that the regulations served a compelling government interest, the Court found that they were not the least restrictive means of serving that interest because there were other ways to ensure that every woman had cost-free access to certain contraceptives.  It should be recognized that Hobby Lobby was decided in the context of a closely held corporation in which the plaintiffs were able to show the “sincerely held religious beliefs of the companies’ owners.” 

 

Case Study

Burwell v. Hobby Lobby Stores, Inc.

573 U.S. __ (2014), 134 S.Ct. 2751 (2014) 

Procedural Posture 

Plaintiff owners of closely held corporations with sincere religious beliefs about contraception sued arguing that regulations requiring them to provide health insurance coverage for certain contraception violated the Religious Freedom Restoration Act of 1993 (RFRA), 42 U.S.C.S. § 2000bb et seq. The U.S. Court of Appeals for the Third and Tenth Circuits rendered opposite rulings regarding these claims. The U.S. Supreme Court granted certiorari. 

Overview 

The issue was whether the RFRA permitted the U.S. Department of Health and Human Services (HHS) to require that these corporations provide health insurance coverage for contraception that violated the sincerely held religious beliefs of the companies’ owners. The Patient Protection and Affordable Care Act of 2010 (ACA) generally requires employers with 50 or more full-time employees to offer a group health plan or group health insurance coverage that provides minimum essential coverage. 26 U.S.C.S. § 5000A(f)(2); 26 U.S.C.S. §§ 4980H(a), (c)(2). Any covered employer that does not provide such coverage must pay a substantial price. Specifically, if a covered employer provides group health insurance but its plan fails to comply with ACA’s group-health-plan requirements, the employer may be required to pay $100 per day for each affected “individual.” 26 U.S.C.S.   §§ 4980D(a)-(b). And if the employer decides to stop providing health insurance altogether and at least one full-time employee enrolls in a health plan and qualifies for a subsidy on one of the government-run ACA exchanges, the employer must pay $2,000 per year for each of its full-time employees. The Patient Protection and Affordable Care Act of 2010 also requires an employer’s group health plan or group-health-insurance coverage to furnish “preventive care and screenings” for women without “any cost sharing requirements. 42 U.S.C.S. § 300gg-13(a) (4). Congress did not specify what types of preventive care must be covered but instead, authorized the Health Resources and Services Administration, a component of Health Human Services, to make that important and sensitive decision. …The Health Resources and Services Administration promulgated the Women’s Preventive Services Guidelines. The Guidelines provide that nonexempt employers are generally required to provide coverage, without cost sharing for all Food and Drug Administration (FDA) approved contraceptive methods, sterilization procedures, and patient education and counseling. Certain employers, identified as religions nonprofit organizations, described under HHS regulations as “eligible organizations,” were exempt from the contraceptive mandate.  The owners of three closely held for-profit corporations [asserted] sincere Christian beliefs that life begins at conception and that it would violate their religion to facilitate access to contraceptive drugs or devices that operate after that point. In separate actions, they sued HHS and other federal officials and agencies (collectively HHS) under RFRA and the Free Exercise Clause, seeking to enjoin application of the contraceptive mandate insofar as it requires them to provide health coverage for the four objectionable contraceptives. 

Holding 

[Congress passed the Religious Freedom Restoration Act in 1993. The law states the “[g]overnment shall not substantially burden a person’s exercise of religion even if the burden results from a rule of general applicability,” unless the government can show the law furthers a compelling government interest by the least restrictive means.]  In holding that the HHS mandate is unlawful, we reject HHS’s argument that the owners of the companies forfeited all RFRA protection when they decided to organize their businesses as corporations rather than sole proprietorships or general partnerships. The plain terms of RFRA make it perfectly clear that Congress did not discriminate in this way against men and women who wish to run their businesses as for-profit corporations in the manner required by their religious beliefs. …  David and Barbara Green and their three children are Christians who own and operate two family businesses. Forty-five years ago, David Green started an arts-and-crafts store that has grown into a nationwide chain called Hobby Lobby. There are now 500 Hobby Lobby stores, and the company has more than 13,000 employees. … Hobby Lobby is organized as a for-profit corporation under Oklahoma law.  One of David’s sons started an affiliated business, Mardel, which operates 35 Christian bookstores and employs close to 400 people. Ibid. Mardel is also organized as a for-profit corporation under Oklahoma law.  Though these two businesses have expanded over the years, they remain closely held, and David, Barbara, and their children retain exclusive control of both companies. … David serves as the CEO of Hobby Lobby, and his three children serve as the president, vice president, and vice CEO. …  Hobby Lobby’s statement of purpose commits the Greens to “[h]onoring the Lord in all [they] do by operating the company in a manner consistent with Biblical principles.” … Each family member has signed a pledge to run the businesses in accordance with the family’s religious beliefs and to use the family assets to support Christian ministries. … In accordance with those commitments, Hobby Lobby and Mardel stores close on Sundays, even though the Greens calculate that they lose millions in sales annually by doing so. … The businesses refuse to engage in profitable transactions that facilitate or promote alcohol use; they contribute profits to Christian missionaries and ministries; and they buy hundreds of full-page newspaper ads inviting people to “know Jesus as Lord and Savior.” …  [T]he Greens believe that life begins at conception and that it would violate their religion to facilitate access to contraceptive drugs or devices that operate after that point. … They specifically object to the same four contraceptive methods … and … they have no objection to the other 16 FDA-approved methods of birth control. … Although their group-health-insurance plan predates the enactment of ACA, it is not a grandfathered plan because Hobby Lobby elected not to retain grandfathered status before the contraceptive mandate was proposed. …  As we have noted, the … Greens have a sincere religious belief that life begins at conception. They therefore object on religious grounds to providing health insurance that covers methods of birth control that, as HHS acknowledges … may result in the destruction of an embryo. By requiring the … Greens and their companies to arrange for such coverage, the HHS mandate demands that they engage in conduct that seriously violates their religious beliefs.  If the … Greens and their companies do not yield to this demand, the economic consequences will be severe. If the companies continue to offer group health plans that do not cover the contraceptives at issue, they will be taxed $100 per day for each affected individual. … For Hobby Lobby, the bill could amount to $1.3 million per day or about $475 million per year; for Conestoga, the assessment could be  $90,000 per day or $33 million per year; and for Mardel, it could be $40,000 per day or about $15 million per year. These sums are surely substantial. …  Here … the plaintiffs do assert that funding the specific contraceptive methods at issue violates their religious beliefs, and HHS does not question their sincerity. Because the contraceptive mandate forces them to pay an enormous sum of money – as much as $475 million per year in the case of Hobby Lobby – if they insist on providing insurance coverage in accordance with their religious beliefs, the mandate clearly imposes a substantial burden on those beliefs. …  The objecting parties contend that HHS has not shown that the mandate serves a compelling government interest, and it is arguable that there are features of ACA that support that view. … The least-restrictive-means standard is exceptionally demanding … and it is not satisfied here. HHS has not shown that it lacks other means of achieving its desired goal without imposing a substantial burden on the exercise of religion by the objecting parties in these cases. … 

Outcome 

Decisions affirmed in part and reversed and remanded in part.   

 

Ethical Considerations

Eminent Domain
The State of Delaware passes a statute which closes its waste dumps from accepting the wastes of neighboring states. Is it ethical for a state to prohibit wastes from another state to be dumped within its boundaries? Should a state invoke the power of eminent domain to help build a private soccer stadium facility when local residents balk at the sale of their properties to a private soccer club attempting to move a professional team into their city? Is this a proper use of the power of eminent domain?  

 

Questions 

  1. Explain the Necessary and Proper Clause.
  2. What is the meaning of “checks and balances?”
  3. Discuss the purpose of judicial review.
  4. Critique this statement: “Congress has absolute power over interstate commerce.”
  5. Nowhere in the U.S. Constitution is the power of Congress to establish a bank or create a corporation stated. Nevertheless, the Supreme Court declared a Maryland law imposing a tax on the Bank of the United States unconstitutional. By what means was the Court able to make such a decision? What clause in the Constitution was pivotal in reaching this decision? Explain.
  6. Define the term stare decisis.
  7. In NLRB v. Jones & Laughlin Steel Corp., the Supreme Court held that purely intrastate activities could be regulated by Congress. The Court concluded that the steel corporation had violated its employees’ rights to organize and determined that the National Labor Relations Act was valid. How did it reach this result?
  8. By what means did the Supreme Court expand Congress’ commerce power in Heart of Atlanta Motel v. United States.
  9. Review NLRB v. Jones & Laughlin Steel Corp., decided in 1937; Wickard v. Filburn, decided in 1942; and Heart of Atlanta Motel v. United States, decided in 1964. These cases provide examples of the expansion of Congress’ power to regulate commerce. Why do you think the Supreme Court ruled as it did in these cases? In forming your answer, consider the prevailing economic and social conditions of these times.
  10. Explain the difference between the Commerce Clause and the Dormant Commerce Clause.
  11. Why did the Court affirm the lower court ruling to enjoin the City of Burbank from enforcing a city ordinance forbidding any pure jet aircraft from taking off between 11 p.m. of one day and 7 a.m. of the next, and forbidding the airport operator from permitting any such takeoffs?
  12. In Family Winemakers of California v. Jenkins, why did the court hold the Massachusetts law a violation of the dormant commerce clause? Should a state be allowed to decide how it regulates commerce within its borders, for example, passing laws to help small business within their state in the absence of a federal regulation?
  13. In U.S. v. Lopez, what was the majority’s critique of Justice Breyer’s dissent? What was at issue in that case? Was the passing of the law restricting firearms in a school zone a proper exercise of Congress’ commerce power?
  14. What was at issue in Gonzales v. Raich? Did the case preserve the federal government’s power to regulate illegal drugs?
  15. Explain the difference between procedural due process and substantive due process.
  16. What are the requirements of procedural due process?
  17. What was the notice requirement in the Mennonite Board case?
  18. What is eminent domain? When does a “taking” occur under the Fifth Amendment? Differentiate between a physical taking and a regulatory taking.
  19. Explain how the U.S. Constitution protects the right of ownership of private property from being taken by the government. What was the Court’s ruling in the Kelo case?
  20. What does the Contracts Clause in the Constitution provide?
  21. What protections are afforded to commercial speech under the Constitution? Name the elements to the Central Hudson balancing test.
  22. Explain the issue and ruling in the Packer case.
  23. What did the Court say about political speech in the Citizens United case?
  24. What did the Court rule in the Hobby Lobby case? How does freedom of religion apply to corporations?

 

Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin