Opinion ID: 176237
Heading Depth: 4
Heading Rank: 1

Heading: Standard for evaluating dormant Commerce Clause challenges

Text: The parties initially dispute whether the district court used the proper standard to evaluate the Processors' Commerce Clause claims. Such claims are traditionally evaluated using a two-tiered analysis. The first inquiry requires a court to determine whether a state statute directly regulates or discriminates against interstate commerce, or [whether] its effect is to favor in-state economic interests over out-of-state interests. Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 579, 106 S.Ct. 2080, 90 L.Ed.2d 552 (1986). If a state statute does either, it is generally struck down . . . without further inquiry. Id.; see also Dep't of Revenue of Ky. v. Davis, 553 U.S. 328, 338, 128 S.Ct. 1801, 170 L.Ed.2d 685 (2008) (holding that a discriminatory state law is virtually per se invalid and will survive only if it advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives (citation and internal quotation marks omitted)). But if the statute has only indirect effects on interstate commerce and regulates evenhandedly, Brown-Forman, 476 U.S. at 579, 106 S.Ct. 2080, a court then moves on to the second inquiry, which requires the application of the balancing test set forth in Pike v. Bruce Church, Inc., 397 U.S. 137, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970). That test upholds a state regulation unless the burden it imposes upon interstate commerce is clearly excessive in relation to the putative local benefits. Id. at 142, 90 S.Ct. 844. The first inquiry under Brown-Forman focuses on whether a regulation has a direct effect or only an incidental effect on interstate commerce. But [w]hat counts as a `direct' burden on interstate commerce has long been a matter of difficulty for courts, and, presumably due to its questionable value as an analytical device, the `direct/incidental' distinction has fallen out of use in dormant commerce clause analysis. Tenn. Scrap Recyclers Ass'n v. Bredesen, 556 F.3d 442, 448-49 (6th Cir.2009). This court in Tennessee Scrap thus reformulated the dormant Commerce Clause analysis as follows: The first prong targets the core concern of the dormant commerce clause, protectionismthat is, differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter. Protectionist laws are generally struck down without further inquiry, because absent an extraordinary showing the burden they impose on interstate commerce will always outweigh their local benefits. However, if the Court determines that the law is not protectionist, it goes on to analyze the law under the deferential Pike balancing test. Id. at 449 (citations and internal quotation marks omitted). In addition to regulations that are protectionist, the Supreme Court has recognized a second category of regulation that is also virtually per se invalid under the dormant Commerce Clause: a regulation that has the practical effect of controlling commerce that occurs entirely outside of the state in question. The Commerce Clause precludes the application of a state statute to commerce that takes place wholly outside of the State's borders, whether or not the commerce has effects within the State. Healy v. Beer Inst., 491 U.S. 324, 336, 109 S.Ct. 2491, 105 L.Ed.2d 275 (1989) (citation omitted) (striking down as unconstitutional a New York liquor price-affirmation statute that caused distillers to adjust their pricing in other states). A state, in other words, cannot project its legislation into another state, Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511, 521, 55 S.Ct. 497, 79 L.Ed. 1032 (1935), such as by forcing an out-of-state merchant to seek regulatory approval in one State before undertaking a transaction in another, Healy, 491 U.S. at 337, 109 S.Ct. 2491. Most critical to this inquiry is the issue of whether the practical effect of the regulation is to control conduct beyond the boundaries of the State. Id. at 336, 109 S.Ct. 2491. Like a regulation that favors in-state economic interests at the expense of out-of-state interests, a state's regulation that controls extraterritorial conduct is per se invalid. See KT & G Corp. v. Att'y Gen. of Okla., 535 F.3d 1114, 1143 (10th Cir.2008) ([A] statute will be invalid per se if it has the practical effect of extraterritorial control of commerce occurring entirely outside the boundaries of the state in question. (citation omitted)). The district court in the present case addressed the Processors' extraterritorial arguments in the latter half of its analysis under Tennessee Scrap, where it employed the Pike test. According to the Processors, the court erred by failing to recognize that the Rule is per se invalid if it has the practical effect of controlling commerce outside of Ohio. In response, the State defends the court's analysis as correct in light of Tennessee Scrap. But the plaintiffs in Tennessee Scrap did not argue that the regulation at issue in that case had any extraterritorial effects. Tenn. Scrap, 556 F.3d at 448. Moreover, recent cases from other circuits have expressly held that a state regulation that governs extraterritorially is a per se violation of the Commerce Clause. The Eighth Circuit Court of Appeals, for example, has held that [a] statute may violate the dormant Commerce Clause in one of three ways: (1) the statute clearly discriminates against interstate commerce in favor of in-state commerce; (2) it imposes a burden on interstate commerce that outweighs any benefits received; or (3) it has the practical effect of extraterritorial control of interstate commerce. Grand River Enters. Six Nations, Ltd. v. Beebe, 574 F.3d 929, 942 (8th Cir.2009) (citations omitted). At least three other circuits have expressed their Commerce Clause jurisprudence in a similar three-part fashion. See Selevan v. N. Y. Thruway Auth., 584 F.3d 82, 90 (2d Cir.2009); KT & G Corp., 535 F.3d at 1143; Cloverland-Green Spring Dairies, Inc. v. Pa. Milk Mktg. Bd., 462 F.3d 249, 261-63 (3d Cir.2006). And five more circuits recognize the extraterritorial-effects inquiry as being distinct from the Pike balancing test. See Midwest Title Loans, Inc. v. Mills, 593 F.3d 660, 665 (7th Cir.2010) (But another class of nondiscriminatory local regulations is invalidated without a balancing of local benefit against out-of-state burden, and that is where states actually attempt to regulate activities in other states.); Carolina Trucks & Equip., Inc. v. Volvo Trucks of N. Am., Inc., 492 F.3d 484, 489 (4th Cir.2007) (The principle that state laws may not generally operate extraterritorially is one of constitutional magnitude.); Alliance of Auto. Mfrs. v. Gwadosky, 430 F.3d 30, 35 (1st Cir.2005) (A state statute that purports to regulate commerce occurring wholly beyond the boundaries of the enacting state outstrips the limits of the enacting state's constitutional authority and, therefore, is per se invalid.); Bainbridge v. Turner, 311 F.3d 1104, 1112 (11th Cir.2002) (holding that laws that directly regulate commerce occurring in other states are invalid); Gerling Global Reinsurance Corp. of Am. v. Low, 240 F.3d 739, 746 (9th Cir. 2001) (The Commerce Clause seeks to prevent extraterritorial economic `effects' . . . .). To be sure, the critical consideration in any dormant Commerce Clause analysis is the overall effect of the statute on both local and interstate activity. Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 579, 106 S.Ct. 2080, 90 L.Ed.2d 552 (1986) (remarking that there is no clear line separating the category of state regulation that is virtually per se invalid under the Commerce Clause, and the category subject to the Pike v. Bruce Church balancing approach). Nevertheless, a state regulation is virtually per se invalid if it is either extraterritorial or discriminatory in effect. When it is neither, then the Pike balancing test controls. Id.