Opinion ID: 1833239
Heading Depth: 1
Heading Rank: 1

Heading: The Substantial Effects Test

Text: A primary reason for the adoption of the United States Constitution in 1787 was to rectify weaknesses the newly formed Union suffered under the Articles of Confederation. 2 Joseph Story, Commentaries on the Constitution of the United States § 1082 (Melville M. Bigelow ed., 5th ed. 1891). Fractionalization of our nation along state lines prevented a unified voice in dealing with problems such as national defense, internal security, and maintenance of an effective commerce with foreign nations and among the several states. Associate Justice Joseph Story wrote concerning the Commerce Clause that the want of uniformity in the regulations of commerce was a source of perpetual strife and dissatisfaction, of inequalities, and rivalries, and retaliations among the states. Id. The power over navigation, and over commercial intercourse, was one of the primary objects, for which the people of America adopted their government.... Id. at § 1062. Thus, state regulations, import duties, and other state restrictions on trade between the States and with foreign nations were to be regulated by the Federal Government in the newly written Constitution. However, the States desired certain limitations on those powers delegated to the new Federal Government, as evidenced by the Tenth Amendment to the United States Constitution. [15] The Constitution is one of limited and enumerated powers; and none of them can be rightfully exercised beyond the scope of the objects specified in those powers. 2 Joseph Story, Commentaries on the Constitution of the United States, supra, § 1079. It was with this understanding that Congress was given the powers enumerated in Art. I, § 8, Cl. 3, to regulate commerce with foreign nations, and among the several states. For the next 150 years, the United States Supreme Court strictly construed the term interstate commerce. See Kidd v. Pearson, 128 U.S. 1, 9 S.Ct. 6, 32 L.Ed. 346 (1888); United States v. Dewitt, 76 U.S. 41, 19 L.Ed. 593 (1869); Gibbons v. Ogden, 22 U.S. 1, 6 L.Ed. 23 (1824). In Gibbons, Chief Justice John Marshall explained: The subject to which the power is next applied, is ... commerce `among the several States.' The word `among' means intermingled with. A thing which is among others, is intermingled with them. Commerce among the States, cannot stop at the external boundary line of each State, but may be introduced into the interior. It is not intended to say that these words comprehend that commerce, which is completely internal, which is carried on between man and man in a State, or between different parts of the same State, and which does not extend to or affect other States. Such a power would be inconvenient, and is certainly unnecessary. Comprehensive as the word `among' is, it may very properly be restricted to that commerce which concerns more States than one. The phrase is not one which would probably have been selected to indicate the completely interior traffic of the State, because it is not an apt phrase for that purpose; and the enumeration of the particular classes of commerce, to which the power was to be extended, would not have been made, had the intention been to extend the power to every description. The enumeration presupposes something not enumerated; and that something, if we regard the language or the subject of the sentence, must be the exclusively internal commerce of a State. The genius and character of the whole government seem to be, that its action is to be applied to all the external concerns of the nation, and to those internal concerns which affect the States generally; but not to those which are completely within a particular State, which do not affect other States, and with which it is not necessary to interfere, for the purpose of executing some of the general powers of the government. The completely internal commerce of a State, then, may be considered as reserved for the State itself. 22 U.S. at 194-95. Clearly, the authority over internal activity, such as the regulation of turnpikes, roads, toll bridges, ferries, auction licenses, and inspections, and rights to carry goods and passengers by land or water remained with the States, even if such activity [a]ffect[s], to a great extent, the foreign trade, and that between the States, as well as the trade among the citizens of the same State. But, although these laws thus affect the trade and commerce with other States, Congress could not interfere, as its power does not reach the regulation of internal trade, which resides exclusively in the States. Gibbons, 22 U.S. at 65. In 1925 Congress enacted the FAA, which regulates only contracts evidencing transaction[s] involving commerce. When Congress enacted the FAA, no United States Supreme Court decisions had extended the power of Congress under the Commerce Clause to encompass positive regulations of state activities, and Congress did not contemplate such an expansive interpretation of its power in enacting this statute. Thus, Congress clearly did not intend the FAA to apply to contracts involving intrastate commerce, i.e., commerce occurring completely within a State. Furthermore, the FAA applied only to commercial contracts. This is evident in the explanation of H.R. 646 (the bill that became the FAA), offered on June 6, 1924, when Representative Mills stated: This bill provides that where there are commercial contracts and there is disagreement under the contract, the court can [en]force an arbitration agreement in the same way as other portions of the contract. ___ Cong. Rec. 11080 (daily ed. June 6, 1924)(statement of Rep. Mills). Mr. Graham of Pennsylvania explained: This bill simply provides for one thing, and that is to give an opportunity to enforce an agreement in commercial contracts and admiralty contractsan agreement to arbitrate, when voluntarily placed in the document by the parties to it. 65 Cong. Rec.1931 (1924). In the mid 1930s the United States Supreme Court began to change the judicial interpretation of interstate commerce to enlarge the power and scope of congressional authority under the Commerce Clause; this change and subsequent expansion have resulted in much confusion and error in our courts. [16] In 1935 the United States Supreme Court classified traditionally intrastate activities as having either a direct or an indirect effect on interstate commerce in order to determine whether the activities were subject to congressional regulation. Activities that affected interstate commerce directly were within Congress's power; activities that affected interstate commerce indirectly were beyond Congress's power. A.L.A. Schechter Poultry Corporation v. United States, 295 U.S. 495, 546, 55 S.Ct. 837, 79 L.Ed. 1570 (1935). The Court stated that the distinction was a fundamental one, essential to the maintenance of our constitutional system. 295 U.S. at 548, 55 S.Ct. 837. However, two years after the Schechter decision, the Court abandoned the direct/indirect classifications and expanded the concept of interstate commerce. In NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 57 S.Ct. 615, 81 L.Ed. 893 (1937), the Court held that intrastate activities that have such a close and substantial relation to interstate commerce that their control is essential or appropriate to protect that commerce from burdens and obstructions are within Congress's power to regulate. 301 U.S. at 37, 57 S.Ct. 615. In United States v. Darby, 312 U.S. 100, 61 S.Ct. 451, 85 L.Ed. 609 (1941), the Court stated:  The power of Congress over interstate commerce is not confined to the regulation of commerce among the states. It extends to those activities intrastate which so affect interstate commerce or the exercise of the power of Congress over it as to make regulation of them appropriate means to the attainment of a legitimate end, the exercise of the granted power of Congress to regulate interstate commerce. 312 U.S. at 118, 61 S.Ct. 451 (emphasis added). This holding directly conflicts with the explicit language in Article I of the United States Constitution. Thus began the judicial departure from the original and specific language of the Constitution, which granted Congress the power only to regulate commerce ... among the several states. U.S. Const., Art. I, § 8. No case provides a more exemplary illustration of the significance of this departure than Wickard v. Filburn, 317 U.S. 111, 63 S.Ct. 82, 87 L.Ed. 122 (1942). In 1938, Congress enacted the Agricultural Adjustment Act (the AAA), which purported to regulate not only the sale or movement of wheat in interstate commerce but also the actual production of wheat by farmers on their own farmland for their own consumption. The primary reason for the AAA was that United States farmers were producing more wheat than they could sell, and, as a result, wheat prices had fallen sharply. Congress attempted to alleviate the problem by subsidizing farmers and placing limits on their production. To implement the AAA, officials at the county level established production limits for each farmer; they allotted Mr. Filburn 11.1 acres for growing wheat. Mr. Filburn operated a small farm in Ohio; in 1940, he planted 23 acres of winter wheat, which was to be harvested the following year. Because he harvested 11.9 acres more than was allowed under the quota system, he was fined and received other sanctions. Mr. Filburn sought relief in federal court, arguing that the quota scheme was unconstitutional because his activities were local in nature and, in regulating them, Congress had exceeded its powers of regulation under the Commerce Clause. The district court agreed with Filburn, and the Secretary of Agriculture appealed to the United States Supreme Court. In rendering its judgment, the Supreme Court first noted that Congress had provided several compelling reasons for passing the AAA in 1938, foremost of which was Congress's finding that wheat surpluses and shortages adversely affected interstate commerce. See 7 U.S.C. § 1331 (entitled Legislative Finding of Effect on Interstate and Foreign Commerce and Necessity of Regulation). Congress found that because wheat production had such serious effects on interstate commerce, federal regulation was necessary to minimize recurring surpluses and shortages. The United States Supreme Court, deferring to Congress's findings concerning interstate commerce, held that Congress had the authority, under the Commerce Clause, to impose the quota system and to apply it to Mr. Filburn even if the wheat he harvested was never sold and he simply used it to feed his family, his livestock, and his poultry: `Hence the reach of that power extends to those intrastate activities which in a substantial way interfere with or obstruct the exercise of the granted power.' . . . . ... But even if appellee's activities be local and though it may not be regarded as commerce, it may still, whatever its nature, be reached by Congress if it exerts a substantial economic effect on interstate commerce and this irrespective of whether such effect is what might at some earlier time have been defined as `direct' or `indirect.' 317 U.S. at 124-25, 63 S.Ct. 82 (citations omitted). To the Court, it did not matter that the wheat had not entered interstate commerce, or that it was not grown to be sold. It did not matter that Mr. Filburn's actions were not even considered to be commerce. In fact, the Court candidly admitted that a single farmer who produces food for his own consumption could not possibly have a substantial effect on interstate commerce; nevertheless, the Court stated that the fact [t]hat [Mr. Filburn's] own contribution to the demand for wheat may be trivial by itself is not enough to remove him from the scope of federal regulation where, as here, his contribution, taken together with that of many others similarly situated, is far from trivial. 317 U.S. at 127-28, 63 S.Ct. 82. Despite the obvious absence of commerce in Mr. Filburn's activities, the Court considered the effects of his actions on interstate commerce, rather than the actual substance of his activities. In so doing, the Court rejected its prior rulings distinguishing commercial activity from such activities as production, manufacturing, and mining, areas traditionally held not to fall within the category of commerce. See Kidd v. Pearson, supra; Veazie v. Moor, 55 U.S. 568, 14 L.Ed. 545 (1852). Additionally, the Court refused to apply distinctions it had formerly made between interstate and local activities or indirect and direct effects on interstate commerce. 317 U.S. at 119-20, 63 S.Ct. 82. The Court concluded that Congress could use its commerce power to stimulate the economy through subsidies and production limits, even if doing so entails the regulation of noncommercial local activities. See 317 U.S. at 121, 63 S.Ct. 82. The reasoning employed in Wickard created a new affirmative channel for the Congressional exercise of power over commerce. Notwithstanding the importance of the federalist structure of our nation, as intended by the Founders in the Constitution and as recognized by the earlier interpretations of the Commerce Clause, the Wickard Court, in its admitted departure from prior rulings, improperly expanded Congress's power in order to promote a popular social policy of the time. The implications of Wickard cannot be overstated. The holding in that case considerably eroded the distinctions between interstate and intrastate commerce and, in so doing, removed the Commerce Clause restraints on Congressional regulation of activities traditionally recognized as state activities. Now, almost 60 years after the Justices in Wickard created the substantial-effects test, it appears there are no logical limits on what Congress can do under this broad-sweeping test. [17] All human activities, e.g., marriage, education, worship, and recreation, even if [the] activity be local and though [they] may not be regarded as commerce, have some economic connection or effect on interstate commerce in the aggregate. 317 U.S. at 125, 63 S.Ct. 82. In order to reach such areas that traditionally and constitutionally have been reserved to the states for regulation, Congress need only cast a regulatory net over a large enough class of people whose activities in the aggregate substantially affect interstate commerce. Justice Thomas has recently noted that the substantial-effects test continues to generate problems in current congressional lawmaking and in current jurisprudence: [The] `substantial effects' test under the Commerce Clause is inconsistent with the original understanding of Congress' powers and with this Court's early Commerce Clause cases. By continuing to apply this rootless and malleable standard, however circumscribed, the Court has encouraged the Federal Government to persist in its view that the Commerce Clause has virtually no limits. Until this Court replaces its existing Commerce Clause jurisprudence with a standard more consistent with the original understanding, we will continue to see Congress appropriating state police powers under the guise of regulating commerce. United States v. Morrison, 529 U.S. 598, 627, 120 S.Ct. 1740, 146 L.Ed.2d 658 (2000) (Thomas, J., concurring). [18] It appears that from 1937 until 1995 the only limits to the power of Congress with regard to the Commerce Clause were limits imposed by Congress itself, but since 1995 the United States Supreme Court has placed some limits on the broad substantial-effects test. See United States v. Lopez, 514 U.S. 549, 115 S.Ct. 1624, 131 L.Ed.2d 626 (1995), and United States v. Morrison, 529 U.S. 598, 120 S.Ct. 1740, 146 L.Ed.2d 658 (2000). Lopez involved a statute by which Congress had made possession of a gun within a school zone a federal crime. The Government argued that the aggregate effect of violence in schools had a substantial effect on interstate commerce and that Congress therefore had the power under the Commerce Clause to regulate the possession of guns in local school zones. The Court disagreed, however, ruling that the possession of a gun in a local school zone was not an economic activity that substantially affected interstate commerce, even when considered in the aggregate. The Court expressed concern about the constitutional implications of the broad interpretation of interstate commerce argued by the Government. The Court noted that if Congress had the power to regulate crimes in local schools, then Congress would have the power to regulate not only all violent crime, but all activities that might lead to violent crime, regardless of how tenuously they relate to interstate commerce. 514 U.S. at 564, 115 S.Ct. 1624. In Morrison, the law at issue was the Violence Against Women Act of 1994. In an argument similar to the argument it had made in Lopez, the Government contended that violence against women affected interstate commerce and that Congress therefore had the power to enact legislation to regulate such conduct. Chief Justice Rehnquist, writing for the majority, rejected this argument and reaffirmed the principle that only an economic activity that substantially affects interstate commerce could be subject to Congressional regulation under the Commerce Clause. Morrison, supra. The Court observed that the same danger that existed with the Gun-Free School Zones Act in Lopez also existed in the Violence Against Women Act at issue in Morrison Congress's use of the Commerce Clause to completely obliterate the Constitution's distinction between national and local authority. 529 U.S. at 615, 120 S.Ct. 1740. The dissenting Justices in both Lopez, 514 U.S. at 604, 627-29, 115 S.Ct. 1624, and Morrison, 529 U.S. at 640-645, 654-55, 120 S.Ct. 1740, claimed that the majority, by recognizing distinctions between federal and state spheres of authority, was guilty of adhering to a discredited jurisprudence of formalism that evaluates cases by resort to technical legal concept instead of practical ones, to formulas and to controlling nomenclature, thus binding Congress in conceptual straight jackets. [19] 529 U.S. at 655, 120 S.Ct. 1740. However, the dissenting Justices conveniently ignored the fact that it was precisely those technical legal concepts of federalism in the Constitution that our forefathers intended to protect the people and the States from an overextension of power by the National Government and to serve, if need be, as a straitjacket. In the Draft of the Kentucky Resolutions of October 1798, Thomas Jefferson admonished: In questions of power then let no more be said of confidence in man but bind him down from mischief by the chains of the Constitution. Clearly, the dissents in Lopez and Morrison demonstrate how far the judiciary has expanded the concept of interstate commerce and how the system of federalism so cherished by our forefathers has been undermined by sociological jurisprudence. [20] Chief Justice Rehnquist astutely observed, regarding Justice Breyer's dissent in Lopez, Although Justice Breyer argues that acceptance of the Government's rationales would not authorize a general federal police power, he is unable to identify any activity that the States may regulate but Congress may not. 514 U.S. at 564, 115 S.Ct. 1624. The effect of this increase of power under the Commerce Clause has been to allow Congress to expand what it considers legitimate lawmaking beyond the powers granted to it by the Constitution. [21] As Congress's power under the Commerce Clause has expanded, so too have the reaches of the FAA. Despite the fact that the FAA was enacted in 1925, before the United States Supreme Court eliminated the distinctions between interstate and intrastate commerce in Wickard, and despite the fact that the FAA uses the phrase involving [interstate] commerce, the Court has proceeded to apply Commerce Clause jurisprudence to its analysis of the FAA. The Court justified its expansion of the statute's explicit language, stating: The pre-New Deal Congress that passed the Act in 1925 might well have thought the Commerce Clause did not stretch as far as has turned out to be the case. But, it is not unusual for this Court in similar circumstances to ask whether the scope of the statute should expand along with the expansion of the Commerce Clause power itself, and to answer the question affirmativelyas, for the reasons set forth above, we do here. Allied-Bruce Terminix Cos. v. Dobson, supra, 513 U.S. 265, 275, 115 S.Ct. 834, 130 L.Ed.2d 753 (citations omitted). Not only did the Congress in 1925 fail to foresee the extension of the FAA by the extension of the Commerce Clause, but it also never intended its enactment of the FAA to be an exercise of its power under the Commerce Clause. Likewise, the drafters of the Constitution never intended that Congress have the power to regulate those areas in which the substantial-effects test is now being used. Currently, each contract that contains an arbitration clause is thoroughly examined by the courts for some relationship that may exist with another state, in order to determine whether the contract is interstate in nature. Courts consider such factors as whether materials from another state were used in performance of the contract, whether the parties to the contract affiliated with anyone from another state, whether any parties received training in another state, whether the object of the services rendered is capable of movement across state lines, etc. See Sisters of the Visitation v. Cochran Plastering Co., 775 So.2d 759 (Ala.2000). Courts have exploited Commerce Clause jurisprudence in their analysis of the FAA, so as to transform intrastate activities into interstate commerce, even though only insignificant connections to another state exist. [T]he smallest connection of an arbitration agreement with interstate commerce is sufficient to bring the agreements within the FAA. Med Center Cars, Inc. v. Smith, 727 So.2d 9, 13 (Ala.1998) (citations omitted). [I]f any effect on interstate commerce can be found in a commercial transaction, then the transaction is considered to be one involving interstate commerce. Hurst v. Tony Moore Imports, Inc., 699 So.2d 1249, 1257 (Ala.1997)(concluding that the intrastate purchase of an automobile not used in interstate commerce is an individual activity within a broader class of activities subject to federal regulation). See also Benchmark Homes, Inc. v. Aleman, 786 So.2d 1101 (Ala.2000)(holding that a contract to purchase land and build a house in Alabama affected interstate commerce because some of the components used to build the house came from other states); Coastal Ford, Inc. v. Kidder, 694 So.2d 1285 (Ala.1997)(holding that a dispute between a truck buyer, who was an Alabama resident, and the seller, whose sole place of business was in Alabama, was subject to arbitration because the truck allegedly had traveled in interstate commerce). Words have meaning, and certainly, when our forefathers gave Congress the power to regulate commerce among the states, they did not intend for courts to expand that power so broadly as to subject to federal regulation any transaction that had only trivial connections to other states.