Opinion ID: 495306
Heading Depth: 2
Heading Rank: 1

Heading: The Federal Commerce Clause Issues

Text: 11 Shell's primary challenge is that the $237,000 annual fee violates the federal commerce clause because it places an unreasonable burden on interstate commerce. By its own terms, the commerce clause grants Congress power [t]o regulate Commerce ... among the several States. U.S. Const. art. I, Sec. 8, cl. 3. The present case does not involve an affirmative exercise of that power by Congress insofar as the route of the pipeline or the amount of the fee is concerned. 4 However, even in the absence of affirmative congressional action, the commerce clause prohibits states from taking certain action respecting interstate commerce. CTS Corp. v. Dynamics Corp. of Am., --- U.S. ----, 107 S.Ct. 1637, 1648, 95 L.Ed.2d 67 (1987). The Court's interpretation of  'these great silences of the Constitution,'  id. (quoting H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 535, 69 S.Ct. 657, 663, 93 L.Ed. 865 (1949)), has sprung primarily from a concern to avoid the Balkanization of commerce among the states. See Hughes v. Oklahoma, 441 U.S. 322, 325-26, 99 S.Ct. 1727, 1731, 60 L.Ed.2d 250 (1979); see also Regan, The Supreme Court and State Protectionism: Making Sense of the Dormant Commerce Clause, 84 Mich.L.Rev. 1091, 1094-95 (1986) (arguing that the dormant commerce clause is concerned primarily with purposeful economic protectionism). Yet, as the Court itself recently stated, its dormant commerce clause jurisprudence has not always been easy to follow. CTS Corp., 107 S.Ct. at 1648. 12 In the present case, the district court granted Santa Monica's motion for summary judgment on the franchise fee question on the ground that Santa Monica acted as a market participant that is not subject to the restrictions of the dormant commerce clause. Under the Court's market participant doctrine, if a state or state subdivision acts as a market participant rather than as a market regulator, the commerce clause does not  'require independent justification'  for any protectionist practices. White v. Massachusetts Council of Constr. Employers, Inc., 460 U.S. 204, 207, 103 S.Ct. 1042, 1044, 75 L.Ed.2d 1 (1983) (quoting Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 809, 96 S.Ct. 2488, 2497, 49 L.Ed.2d 220 (1976)). However, the key distinction between market regulator and market participant, see, e.g., South-Central Timber Dev., Inc. v. Wunnicke, 467 U.S. 82, 93, 104 S.Ct. 2237, 2243, 81 L.Ed.2d 71 (1984) (plurality), though clearly defined in theory, has occasioned considerable dispute in application in the four principal Supreme Court cases. See Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 96 S.Ct. 2488, 49 L.Ed.2d 220 (1976) (6-3 decision by Powell; White in dissent); Reeves, Inc. v. Stake, 447 U.S. 429, 100 S.Ct. 2271, 65 L.Ed.2d 244 (1980) (5-4 decision by Blackmun; Powell and White in dissent); White, 460 U.S. 204, 103 S.Ct. 1042 (7-2 decision by Rehnquist; Blackmun and White in dissent); Wunnicke, 467 U.S. 82, 104 S.Ct. 2237 (4-2-2 decision by White, joined by Blackmun; Powell concurrence in result; Rehnquist dissent). For reasons discussed below, we hold that Santa Monica has not acted as a market participant for purposes of the dormant commerce clause. 13 This case falls somewhere between the paradigm examples of market regulator and market participant. Cf. Reeves, 447 U.S. at 439 n. 12, 100 S.Ct. 2278, n. 12 (When a State buys or sells, it has the attributes of both a political entity and a private business.). Santa Monica has not acted as a paradigm market regulator, as it would if it adopted an ordinance regulating the fees for all oil pipelines within the city. Santa Monica has independently negotiated a franchise agreement with Shell and has not prohibited private landowners in the city from selling easements to Shell. Hence, Santa Monica urges the position that it should be deemed a market participant because the franchise relationship with Shell is contractual. But contractual privity does not insulate a state or local body from commerce clause scrutiny. Wunnicke, 467 U.S. at 97, 104 S.Ct. at 2245 (holding that a state may not impose requirements with a substantial regulatory effect outside of that particular market merely because it can use its economic power to impose a requirement upon someone with whom it is in contractual privity); see Golden State Transit Corp. v. City of Los Angeles, 475 U.S. 608, 106 S.Ct. 1395, 1400-01, 89 L.Ed.2d 616 (1986); Wisconsin Dep't of Indus., Labor & Human Relations v. Gould Inc., 475 U.S. 282, 106 S.Ct. 1057, 1062-64, 89 L.Ed.2d 223 (1986). 14 Santa Monica argues that it has entered the particular market for the transportation of crude oil. The city controls easements in the area beneath city streets, a commodity with value that it may sell to Shell. The city thus competes with other entities that also might supply Shell's needs--private landowners in Santa Monica who may sell easements under their land, neighboring municipalities and private landowners, and tank truck and barge operators. 15 Although Santa Monica's argument is not without considerable intuitive appeal, this court has previously rejected a similar argument in a related context. In Western Oil & Gas Ass'n v. Cory, 726 F.2d 1340 (9th Cir.1984), aff'd per curiam by an equally divided Court, 471 U.S. 81, 105 S.Ct. 1859, 85 L.Ed.2d 61 (1985), this court held that the State of California did not act as a market participant in its attempt to impose a fee for the transportation of crude oil from offshore oil rigs across state-owned tidal and submerged lands. The court reasoned that California did not participate in a market in the sense intended under the Supreme Court's dormant commerce clause jurisprudence because the state held the land by virtue of its sovereign capacity and the state commission had a virtual monopoly over the sale of easements on tidal and submerged lands. Id. at 1343. The court reached this conclusion even though alternatives arguably existed to the pipeline route over state lands, albeit with varying degrees of economic feasibility. In particular, the pipeline operators apparently could have sought a pipeline route over certain tidal lands that the state did not own, see id., or transported the oil by barge. The court also observed: This control over the channels of interstate commerce permits the State to erect substantial impediments to the free flow of commerce. Id. 16 As the district court recognized, the present case is distinguishable from Cory insofar as California had a stronger monopoly position than Santa Monica has. Shell concedes the existence of alternatives to a pipeline under Santa Monica streets. However, like Cory, this case involves lands held in a sovereign capacity that are recognized transportation corridors for commerce. As the court recognized in Cory, restrictions on publicly controlled transportation corridors raise the dormant commerce clause concern for impediments to the free flow of commerce. See Regan, supra, at 1184 (discussing the special importance of an effective transportation network to interstate commerce). We would find it untenable if a state or its subdivision could allocate rights to the use of publicly held transportation corridors in a manner that discriminated against interstate commerce in favor of intrastate commerce. See West v. Kansas Natural Gas Co., 221 U.S. 229, 262, 31 S.Ct. 564, 574, 55 L.Ed. 716 (1911) (invalidating a state attempt to refuse to grant underground pipeline easements across state highways to foreign corporations, while granting similar easements to domestic corporations for intrastate transportation of the same commodity, when the apparent purpose was to limit export of natural gas produced in state). 17 We therefore conclude that, following Cory, Santa Monica is not a market participant in the setting of franchise fees for easements under public streets. 5 Santa Monica contends that such a holding in effect would vest a private company with the power of eminent domain, or, alternatively, vest a private company with the power to dictate the terms on which it uses substreet property. We reject these contentions. Our holding that Santa Monica is not a market participant means only that in deciding whether, or on what terms, to grant a franchise for the use of public streets the city may not burden interstate commerce in a manner that violates the dormant commerce clause. 6
18 Our conclusion that Santa Monica has not acted as a market participant does not end our inquiry. We must also determine whether the proposed franchise fee is invalid under a traditional dormant commerce clause analysis. At the outset, we note that this case does not involve either of the two primary objects with which the commerce clause is concerned--statutes that discriminate against interstate commerce and statutes that adversely affect interstate commerce by subjecting activities to inconsistent regulations. CTS Corp., 107 S.Ct. at 1648-49; id. at 1652 (Scalia, J., concurring). First, Santa Monica has not acted to restrict the flow of goods or natural resources from being shipped into or outside of its boundaries in order to protect producers or suppliers within the city. See, e.g., Hughes v. Oklahoma, 441 U.S. 322, 99 S.Ct. 1727, 60 L.Ed.2d 250 (1979); Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 847, 25 L.Ed.2d 174 (1970); West, 221 U.S. 229, 31 S.Ct. 564. Santa Monica has not acted to favor domestically produced crude oil over that produced outside of Santa Monica; none is produced in Santa Monica. In addition, Shell has not presented any evidence that Santa Monica has treated any local oil pipeline operators preferentially. The record shows that Shell is the only company operating an oil pipeline in Santa Monica. 7 The fact that the practical burden of Santa Monica's actions with respect to oil pipeline operators may fall on nonlocal companies because of the absence of local oil pipeline operators does not establish discrimination against interstate commerce. CTS Corp., 107 S.Ct. at 1649. 19 Second, Santa Monica's franchise fee poses no threat of inconsistent regulation. The amount of a franchise fee is unlike regulations on the method or mode of transportation that the Court has struck down. See Kassel v. Consolidated Freightways Corp., 450 U.S. 662, 671, 101 S.Ct. 1309, 1316, 67 L.Ed.2d 580 (1981) (plurality) (invalidating regulation of truck size on interstate highways); Southern Pac. Co. v. Arizona, 325 U.S. 761, 773-74, 65 S.Ct. 1515, 1522, 89 L.Ed. 1915 (1945) (noting the confusion and difficulty that would attend the unsatisfied need for uniformity in setting maximum limits on train lengths). Interstate transportation of oil is not impeded by the fact that states, counties, cities, and private landowners may assess different charges for the use of land under or through which a pipeline passes. 20 Shell's primary challenge is that Santa Monica's proposed franchise fee, viewed as a user fee or rent, is disproportionate to the value of the city land and services rendered. 8 The Supreme Court has traditionally upheld user fees only if they bear a reasonable relationship to the government's costs. See Evansville-Vanderburgh Airport Auth. Dist. v. Delta Airlines, Inc., 405 U.S. 707, 92 S.Ct. 1349, 31 L.Ed.2d 620 (1972) (upholding airport user fee collected to defray costs of airport construction and maintenance, where fee was apportioned to reflect amount of use and was not excessive in relation to the actual costs incurred); Clark v. Paul Gray, Inc., 306 U.S. 583, 598-600, 59 S.Ct. 744, 752-53, 83 L.Ed. 1001 (1939) (upholding fee on caravan traffic that was not shown to be manifestly disproportionate to the cost of using the highways); Ingels v. Morf, 300 U.S. 290, 57 S.Ct. 439, 81 L.Ed. 653 (1937) (striking down a fee on caravan traffic found excessive in comparison to costs of using highway); Interstate Transit, Inc. v. Lindsey, 283 U.S. 183, 51 S.Ct. 380, 75 L.Ed. 953 (1931) (invalidating user fee that was proportioned solely to earning capacity of vehicles, not number of passengers, mileage, or wear and tear on road incident to vehicles' use). 21 Similarly, in Cory, we made clear that user fees must be proportional to the value of the services rendered. There, we considered whether California's attempt to impose a fee for an easement across state-owned submerged tidelands violated the dormant commerce clause. The rent for this easement was a flat 8% of the land's appraised value, plus an amount proportional to the volume of oil transported in the pipeline. We found no defect in the flat fee, but held that the volumetric charge unduly burdened interstate commerce, because as a user fee it was not apportioned to reflect the benefits conferred by the state. Cory, 726 F.2d at 1343-45. 22 The district court upheld the $59,000 per mile fee, finding that it resembled the portion of the user fee upheld in Cory. We agree with the district court that Cory's user fee analysis does not require invalidation of the proposed franchise fee because the fee was valued according to a reasonable percentage of the appraised value of land abutting the pipeline within the city. Because Santa Monica's fee is based on an evenhanded formula and not graduated by the amount of business done, it is not a customs duty on goods passing through its jurisdiction like the volumetric charge held invalid in Cory. Shell does not dispute Santa Monica's contention that the proposed franchise fee was based on an appraisal of 50% of the property value of the abutting land, capitalized at an annual rate of 12.5%. 23 As in Cory, we are unable to conclude that this valuation is  'manifestly disproportionate to the services rendered.'  Commonwealth Edison Co. v. Montana, 453 U.S. 609, 621-22 & n. 12, 101 S.Ct. 2946, 2955-56 & n. 12, 69 L.Ed.2d 884 (1981) (quoting Clark, 306 U.S. at 599, 59 S.Ct. at 753). We conclude that Shell has not met its burden at summary judgment of showing that Santa Monica has discriminated against interstate commerce. Accordingly, we affirm the district court's grant of summary judgment.