Market Participation

Does the dormant Commerce clause limit the activities of state and local government when it conducts its own governmental functions. This issue implicates states rights and local sovereignty. It is one thing to restrict the ability of state and local government to regulate the private marketplace. It is quite another to handcuff local government in its direct operations. In HUGHES v. ALEXANDRIA SCRAP CORP., 426 U.S. 794 (1976) the state of Maryland had offered subsidies to scrap processors to get rid of hulk vehicles. The complex state subsidy scheme favored local processors. As a result of the subsidy, Maryland effectively made it more lucrative for unlicensed suppliers to dispose of their hulks in Maryland rather than take them outside the State. Out-of-state processors challenged the subsidy scheme on the grounds that it discouraged the interstate flow of junk vehicles. The Court noted that this challenge represented an unprecedented attempt to extend the dormant commerce clause to state and local operations:

...until today the Court has not been asked to hold that the entry by the State itself into the market as a purchaser, in effect, of a potential article of interstate commerce creates a burden upon that commerce if the State restricts its trade to its own citizens or businesses within the State. ... Nothing in the purposes animating the Commerce Clause prohibits a State, in the absence of congressional action, from participating in the market and exercising the right to favor its own citizens over others.

In his concurring opinion, Justice Stevens wrote:

It is important to differentiate between commerce which flourishes in a free market and commerce which owes its existence to a state subsidy program. Our cases finding that a state regulation constitutes an impermissible burden on interstate commerce all dealt with restrictions that adversely affected the operation of a free market. This case is unique because the commerce which Maryland has "burdened" is commerce which would not exist if Maryland had not decided to subsidize a portion of the automobile scrap-processing business. ... This is the first case in which any litigant has asked a federal court to address the question whether a state subsidy constitutes a "burden" on interstate commerce. That fact is significant because there must have been countless situations during the past two centuries in which the several States have experimented with different methods of encouraging local enterprise without providing like encouragement to out-of-state competitors. The absence of any previous challenge to such programs reflects, I believe, a common and correct interpretation of the Commerce Clause as primarily intended (at least when Congress has not spoken) to inhibit the several States' power to create restrictions on the free flow of goods within the national market, rather than to provide the basis for questioning a State's right to experiment with different incentives to business.

There is an important distinction which cannot be underemphasized in this arena. The dormant commerce clause represents a judicial intrusion in an area reserved by the Constitution to the Congress. When the Court fails to act, it merely leaves the decision to the Congressional domain. The Court seems to have struck a different balance in this area largely because it recognizes that the danger of direct intrusion into local governmental functions.

In REEVES, INC. v. STAKE, 447 U.S. 429 (1980) the court dealt with the decision of the State of South Dakota to confine sales from that plant to South Dakota residents. For more than 50 years, South Dakota had operated a cement plant that produced cement for both state residents and out-of-state buyers. The market in surrounding states had come to depend on the availability of that plant to some extent. In 1978, because of a cement shortage, the State Cement Commission announced a policy to confine the sale of cement by the state plant to residents of the State. The Court found that the State of South Dakota had every right to control its own operations and to restrict sales of a state enterprise to residents. And in so doing, the Court recognized the importance of state sovereignty in this inquiry:

The Commerce Clause responds principally to state taxes and regulatory measures impeding free private trade in the national market-place, and there is no indication of a constitutional plan to limit the ability of the States themselves to operate freely in the free market. .... Restraint in this area is also counseled by considerations of state sovereignty, the role of each State "`as guardian and trustee for its people,'" Heim v. McCall, 239 U.S. 175, 191 (1915), quoting Atkin v. Kansas, 191 U.S. 207, 222 -223 (1903),11 and "the long recognized right of trader or manufacturer, engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal." United States v. Colgate & Co., 250 U.S. 300, 307 (1919). Moreover, state proprietary activities may be, and often are, burdened with the same restrictions imposed on private market participants. Evenhandedness suggests that, when acting as proprietors, States should similarly share existing freedoms from federal constraints, including the inherent limits of the Commerce Clause. See State ex rel. Collins v. Senatobia Blank Book & Stationery Co., 115 Miss. 254, 260, 76 So. 258, 260 (1917); Tribune Printing & Binding Co. v. Barnes, 7 N. D. 591, 597, 75 N. W. 904, 906 (1898). Finally, as this case illustrates, the competing considerations in cases involving state proprietary action often will be subtle, complex, politically charged, and difficult to assess under traditional Commerce Clause analysis. Given these factors, Alexandria Scrap wisely recognizes that, as a rule, the adjustment of interests in this context is a task better suited for Congress than this Court

WHITE v. MASS. COUNCIL OF CONSTR. EMPLOYERS, 460 U.S. 204 (1983) presents another illustration of the deference afforded to state and local governmental functions. In 1979 the Mayor of Boston, Mass., issued an executive order which required that all construction projects funded in whole or in part by city funds, or funds which the city had the authority to administer, should be performed by a work force consisting of at least half bona fide residents of Boston. The State Court struck this order down on the grounds that it violated the commerce clause. But the Supreme Court saw this as another example of the right of municipality to govern its own affairs articulated in the Hughes decision:

We were first asked in Hughes v. Alexandria Scrap Corp., 426 U.S. 794 (1976), to decide whether state and local governments are restrained by the Commerce Clause when they seek to effect commercial transactions not as "regulators" but as "market participants." We underscored the holding of Hughes v. Alexandria Scrap Corp., saying: "The basic distinction drawn in Alexandria Scrap between States as market participants and States as market regulators makes good sense and sound law. As that case explains, the Commerce Clause responds principally to state taxes and regulatory measures impeding free private trade in the national marketplace. There is no indication of a constitutional plan to limit the ability of the States themselves to operate freely in the free market." Alexandria Scrap and Reeves, therefore, stand for the proposition that when a state or local government enters the market as a participant it is not subject to the restraints of the Commerce Clause. As we said in Reeves, in this kind of case there is "a single inquiry: whether the challenged `program constituted direct state participation in the market. We reaffirm that principle now.

Boston was not attempting to restrict the residency of persons working on city funded jobs. The Court would not tell Boston how to spend its money, or what restrictions it might impose on the implementation of local projects.