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A Distinction Without a Substance: The Market Participation Exception

-- By AndrewCascini - 24 Feb 2010

A Distinction is Made...

The Commerce Power and the Dormant Commerce Power

Article I of the Constitution delegates many different powers to Congress. One of these powers is to "regulate Commerce... among the several states." The Supreme Court has inferred the presence of a "dormant commerce clause" from this text. The dormant commerce clause allows state and municipal legislation resulting in interference with interstate commerce to be evaluated and limited by the Supreme Court, even where Congress has passed no conflicting law. Legislation is often found to violate the dormant commerce clause on the grounds that the legislation is economically “discriminatory” to other states.

The Market Participation Exception

The dormant commerce clause does not bar all state and local legislation that may in any way affect the interstate economy, however. The Court has carved an exception from dormant commerce clause doctrine in instances where states, through legislation, are deemed to be merely “participating” in the market.

Origin

In Hughes v. Alexandria Scrap Corp., the Court upheld a state program that aimed to reduce the number of abandoned cars littered on the sides of the roads by choosing to buy in-state junked cars and in-state junk processing services at higher prices and with more lenient documentation standards. “Nothing in the purposes of the Commerce Clause prohibits a state from participating in the market,” wrote Justice Powell for the majority.

Limitation

Yet market participation was held to have its limits. Eight years later in Central Timber Development v. Wunnicke, the Court ruled that states, while enacting legislation to enable market participation, must not “impose conditions, whether by statute, regulation, or contract that have a substantial regulatory effect outside the particular market.” This restriction marked the “limit of the market-participant doctrine.”

The Takeaway

The dormant commerce power and the market participation exception, working together, appear to flesh out a cohesive doctrine. When states pass legislation that affects interstate commerce, that legislation is subject to Constitutional review. If it is found to “regulate” the market, it is to be struck down pursuant to dormant commerce clause doctrine. If, however, the legislation merely enables the state to “participate” in the market, it is acceptable.

...but What Does It Signify?

Participation versus regulation – a tidy verbal distinction indeed! The word “participate” has a flavor of passivity. If I run in a race and am awarded a medal for being a “participant,” the strong implication is that I didn’t really affect the outcome in any meaningful way. The word “regulate,” however, has a more active nature. To regulate is to create changes; it implies control and agency. If we accept these notions, the distinct treatment of market participation as opposed to market regulation seems well in step with dormant commerce clause doctrine as a whole, for it is the domain of the federal government to make changes in the realm of interstate commerce and not the states. But how do these categories of behavior actually differ in practice? Directing attention away from the transcendental legal terminology and towards the actual economic effects reveals a categorical breakdown.

Two Terms, One Effect

Imagine that a state decided to pass a law dictating that all state departmental offices may only purchase assets from companies or individuals who had not violated the National Labor Relations Act. Would this be a “regulatory” decision – Constitutionally impermissible – or a simple act of “market participation?” On the one hand, the state can make a claim that it is simply participating in the market as any other economic actor could. Perhaps the state has acknowledged that its employees are happier using products from NLRA-compliant manufacturers which boosts their productivity, or that products manufactured by NLRA-compliant industries tend to be of higher quality. Either rationale would seem an acceptable exercise of market participation for an individual. On the other hand, the legislation could be regarded as an attempt to regulate the market by forcing industries across the nation to comply with the NLRA or lose their presumably lucrative asset supply contracts with the state. The Court, in Wisconsin Dept. of Labor Relations v Gould, deemed the legislation to be an overreaching attempt to regulate commerce, and struck it down. Suppose, however, that the Wisconsin legislature had never passed the offending statute but had still bought assets from the same manufacturers that it had turned to as a result of the ban on NLRA violators - perhaps because these companies offered their goods at the lowest price. Such a decision would doubtlessly be deemed an exercise in market participation, but the economic effect would have been precisely the same.

Participation as a Label

If it is accepted that the latter hypothetical would be deemed mere market participation, two possible conclusions emerge. The first is that the Court simply decided Gould incorrectly. While such a conclusion may indicate that the distinction between market regulation and market participation is much too fuzzy to practically use as a jurisdictional tool, there is otherwise little analytical value in such a conclusion. The second possibility is that the Court is basing their distinction not on the economic effects of the legislation, but rather upon some unspoken assumption about how a reasonable actor will choose to participate in a free market. Perhaps, then, “market participation” is a merely a label for an economic action taken while evaluating only a particular range of economic considerations. If a state makes a decision based on price or quality of a good, that state is participating in the market. If it is compelled to act by other means, this action will be deemed regulatory.

Final Thoughts

All state economic behavior has consequences in interstate commerce. Yet if market participation is not able to be differentiated from market regulation by an analysis of actual market effect, making a dormant commerce clause exception for the former while still diligently restricting the latter seems unnecessary and arbitrary. Either the market participation exception must be only the first effort in a larger doctrinal shift to erode the dormant commerce clause, or the market participation exception should be deemed an unnecessary departure from dormant commerce clause doctrine and should be eliminated.

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