Commerce Clause Overview

Under the dormant Commerce Clause, in order to preserve some degree of uniformity and consistency  in such commercial transactions, the individual states may not inconsistently regulate commercial activities that are national in nature.  So, what's good for one state is good for another...especially if it's applied to I Gaming.   Kevin Smith (formerly) at the River City Group did a good job of explaining it. 

US Cross-Border Commerce Ruling Could Affect I-Gaming 

by Kevin Smith - River City Group

A U.S. Supreme Court ruling dealing with the sale of wine across state lines could have implications to the online gambling industry.

Monday's decision in the consolidated cases of Granholm v. Heald from Michigan and Swedenberg v. Kelly from New York, encompassed the interpretation of the Constitution, the intent of the 1933 amendment to end prohibition and changing personal tastes in the age of the Internet.

In what could be a precedent-setting decision, the court ruled (5-4) that a number of states have laws that are discriminatory and anti-competitive to some wineries. At the center of the cases was whether a state can prohibit the online sale of wine to its residents from an out-of-state winery, while allowing in-state wineries to sell their products, as long as they didn't ship those products across state borders.

Small winery owners were among those who pursued the cases, with backing from the Institute for Justice and other groups. Each state's attorney general argued that cross-border restrictions are necessary to maintain limits on underage drinking and to preserve the states' ability to tax liquor sales.

The court ruled, however, that such laws are anti-competitive and in direct violation of the Commerce Clause of the U.S. Constitution, and while the cases focused on the states of New York and Michigan, the ruling could open up the interstate wine market to another 20 or so states that prohibit the practice.

Clint Bolick, the strategic litigation counsel for the Institute for Justice, which represented plaintiffs, called the ruling "a victory for consumers and small businesses and a defeat for economic protectionism."

He said it could be a sign that the court supports freedom for interstate commerce conducted over the Web, which could translate to the loosening of other regulations in the future.

"It demonstrates that in the era of the Internet," Bolick explained, "the court will vindicate the principles of free trade that made this country great."

If indeed the decision ushers in a new era of free trade in the e-commerce world, at least one online betting company is looking to be at the forefront of the revolution.

Jeff True, the general manager for the western region for Youbet.com, said the court ruling could enable his company to offer its services in the nine states where it is prohibited.

"We are able to accept bets from 41 states right now," True said, "and we think this decision could go a long way in allowing us to operate in those other nine."

Those hopes are hung on a portion of the opinion, written by Justice Anthony Kennedy, arguing that if in-state companies are allowed to partake in a form of commerce among in-state companies, it must be opened up to out-of-state companies as well.

"States have broad power to regulate liquor," Kennedy wrote for the majority. "This power, however, does not allow states to ban, or severely limit, the direct shipment of out-of-state wine while simultaneously authorizing direct shipment by in-state producers. If a state chooses to allow direct shipments of wine, it must do so on evenhanded terms."

Kennedy also wrote that laws blocking some businesses from a market while allowing others to access it are in direct violation of the Commerce Clause.

"Laws such as those at issue contradict the principles underlying this rule by depriving citizens of their right to have access to other states' markets on equal terms," he wrote.

When the case was argued before the court on Dec. 7, 2004, lawyers for New York and Michigan asserted that the prohibition-ending 21st Amendment to the Constitution gave states such wide authority over the importation of alcohol that it trumped the principle embodied in the Commerce Clause: that the states may not, without congressional authorization, discriminate against one another.

The court rejected this argument, however, and True said the principles of Kenney's position are applicable to interstate race wagering.

"If a state is going to allow it, then they should allow it for everyone, regardless if the provider of the service is using the Internet, telephone or an OTB facility to handle the wagers," he said. "We have always believed in this, but went along with the status quo because it was the right thing to do. But this decision might change the way we see the picture."

He added, "As a publicly traded company, we have to answer to our shareholders. We are obligated to explore all of our options that would make the most sense for us, and this case might give us the ammunition to do that in areas that had been off limits to us prior to this case."

Kennedy, who was joined by Justices Antonin Scalia, David Souter, Ruth Bader Ginsburg and Stephen Breyer, said New York and Michigan "provide little evidence for their claim that purchasing wine over the Internet by minors is a problem."

Moreover, the majority said, the states could devise tax-collection procedures without resorting to discrimination in interstate commerce.

Chief Justice William Rehnquist and Justices John Paul Stevens, Sandra Day O'Connor and Clarence Thomas dissented.

The Legalese

The Dormant Commerce Clause doctrine in United States case law limits the power of states to legislate in connection with interstate commerce.

The Dormant Commerce Clause does not expressly exist in the text of the United States Constitution. It is a doctrine of congressional power inferred by the U.S. Supreme Court from the actual Commerce Clause in Article I, § 8 of the Constitution. This article authorizes Congress to "regulate commerce among the states."

The Commerce Clause vests Congress with the power to regulate, "that is, to prescribe the rule by which commerce is to be governed" [1]. Typically, Congress utilizes this power by enacting a law. However, according to the Dormant Commerce Clause, even when Congress has not acted (i.e. Congress’s power to regulate commerce lies dormant) the Supreme Court may find certain state and local laws unconstitutional if they unduly burden interstate commerce.

The Supreme Court, in explaining the necessity for the dormant Commerce Clause, said, "Our system, fostered by the Commerce Clause, is that every farmer and every craftsman shall be encouraged to produce by the certainty that he will have free access to every market in the Nation." [2]

Today, if a law is challenged under the doctrine of the dormant Commerce Clause, the Court determines its constitutionality by examining its discriminatory effects. The Court is primarily concerned with whether a law in one state discriminates against out-of-Staters. If so, it is typically found to be unconstitutional. If not, then the Court proceeds in its evaluation of the law using a balancing test. The Court determines whether the burden imposed by a law outweighs the benefits. Again, if such is the case, the law is usually deemed unconstitutional.

There are only two exceptions that permit otherwise unconstitutional laws to remain in effect. The first exception is if Congress approves the law. The second is "if a state is acting as a market participant, rather than as a market regulator" [4].

The Dormant Commerce Clause Doctrine (hereafter DCC) evolved out of Congress' desire to federally regulate commerce by using powers not specifically enumerated in the Constitution. Congress has pulled the basis for this power out of the Commerce Clause. The DCC holds that a state or local law is unconstitutional if it ”burdens“ interstate commerce. The DCC is dormant because it does not distribute federal law; rather, it prohibits state action. This essay will over-simplify how the Courts evaluate issues arising under the DCC.

Originally, pre-1938, the Supreme Court (hereafter Court) would evaluate the DCC questions per state police powers. See Cooley v. Board of Wardens, 53 U.S. (12 How.) 299 (1851). However, today the Court uses a much more contrived test. First, the Court looks at the language of the state statute. They then determine if it is facially discriminatory or facially neutral. If the statute is facially discriminatory, then the statute is presumed unconstitutional. Cases to look at in this area are the City of Philadelphia v. New Jersey, 437 U.S. 617 (1978) and C&A Carbon, Inc v. Town of Clarkstown, N.Y, 511 U.S. 383 (1994).

This presumption can be rebutted if the state can demonstrate under a strict scrutiny standard that either the law is necessary (that no other non-discriminatory means were available), or that the law meets an important state objective/legitimate local interest. This is a hard presumption to rebut, and consequently the Court has only upheld one facially discriminatory state law. See Maine v. Taylor, 477 U.S. 131 (1986).

If the state statute is facially neutral then the Court will examine its purpose or effect. See Hunt v. Washington State Apple Advertising Comm., 432 U.S. 333 (1997) and Exxon Corp. v. Governor of MD. 437 U.S. 117 (1978).

If the statute's purpose or effect is discriminatory, then it is presumed unconstitutional. See Dean Milk Co. v. City of Madison, Wisconsin, 340 U.S. 349 (1951). Again, this presumption can be rebutted if the state can demonstrate under a strict scrutiny standard that either the law is necessary (that no other non-discriminatory means were available), or that the law meets an important state objective/legitimate local interest. The Court usually finds that there are other means available and holds the state law unconstitutional. See Hunt v. Washington State Apple Advertising Comm. 432 U.S. 333 (1997).

If the Court finds that the purpose or effect of the state statute was not discriminatory, then they apply a balancing test. In this test, the Court balances the burden on interstate commerce versus the state interest. In these cases the Court usually finds for the state. See Loren J. Pike v. Bruce Church, Inc., 397 U.S. (1970), and Bibb, Director, Dept. of Public Safety of Ill.. v. Navajo Freight Lines, Inc., 359 U.S. (1959).

Finally, there are two exceptions to the DCC. The first exception occurs when Congress has acted. See Western & Southern Life Ins. v. State Board of California, 451 U.S. 648 (1981). In this case the DCC is no longer dormant and is a Commerce Clause issue. The second exception is "Market Participation". This occurs when the state is acting like a business. Like a business, a state when acting in this capacity may discriminate in favor of its own citizens or, when it is dolling out government benefits.

The preeminent case for Market exceptions are Reeves v. William Stake, 447 U.S. 429 (1980) and South-Central Timber v. Alaska, 467 U.S. 82 (1984). The Reeves case sets the standard for the Market exception test (supra). In this case state run cement co-ops were allowed to make restrictive rules, (e.g. not sell to out-of-state). Here, this government-sponsored business was acting restrictively like an individually owned business and this action was held to be constitutional. Alaska Timber is important because it limits the Market exception (supra). Alaska Timber sets forth that the market-participant doctrine is limited in allowing a State to impose burdens on commerce within the market in which it is a participant, but allows it to go no further. The State may not impose conditions that have a substantial regulatory effect outside of that particular market.

In United Building & Construction Trades Council v. Camden, 465 U.S. 208 (1984), the city of Camden had passed an ordinance requiring that at least 40 percent of the employees of contractors and subcontractors on city projects be Camden residents. The Supreme Court found that this violated the privileges and immunities clause of Article IV. Justice Rehnquist's opinion distinguishes the market-participant doctrine from the privileges and immunities doctrine. Congress has the power under the commerce clause to regulate state market participation, but it lacks power to authorize regulations that violate Article IV. This protection of the privileges and immunities clause cannot be claimed by corporate persons.

1 Gibbons v. Ogden, 22 U.S. 1, 196, 6 L. Ed. 23, 70 (1824).

2 H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 532, 93 L. Ed. 865, 871 (1949).

3 H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 539, 93 L. Ed. 865, 875 (1949).

4 South-Central Timber Dev., Inc. v. Wunnicke, 467 U.S. 82, 87, 81 L. Ed. 2d 71, 76 (1984).