Supreme Court passes on another dormant Commerce Clause test

January 12, 2016

(Reuters) – The U.S. Supreme Court on Monday declined to review a 2015 ruling from the 9th U.S. Circuit Court of Appeals that struck down part of a California law granting resale royalties to fine artists. The artists who filed a petition for certiorari pitched the case as a chance for the justices to rethink the court’s 1989 precedent on the constitutionality of state laws that impact commerce in other states but are not discriminatory or burdensome. But the Supreme Court is in no rush to accept that invitation. In fact, the justices just last month rejected a request to take up a 10th Circuit case that raised the same issue.

If there is confusion in the lower courts about whether precedent flat-out prohibits states from regulating commerce in other states – as both the artists in the 9th Circuit case and groups challenging Colorado’s renewable energy statute in the 10th Circuit case insist – the Supreme Court does not seem very worried about it.

The root of this supposed confusion is a line of Supreme Court cases that culminated in the 1989 decision in Healy v. Beer Institute. In that case, the court held a Connecticut law requiring out-of-state beer shippers to affirm they were charging Connecticut wholesalers no more than counterparts in neighboring states to be unconstitutional under the dormant Commerce Clause. As you probably remember, that doctrine, a corollary of Congress’s constitutional power to regulate interstate commerce, holds that states can’t regulate commerce outside of their borders.

Healy’s key language seems to offer a sweeping interpretation of the dormant Commerce Clause: “A statute that directly controls commerce occurring wholly outside the boundaries of a state exceeds the inherent limits of the enacting state’s authority and is invalid regardless of whether the statute’s extraterritorial reach was intended by the legislature.” Some federal appellate courts, however, have questioned whether the holding applies to all state laws that affect business in other states.

Notably, the 10th Circuit held in the Colorado energy case that Healy and its predecessors don’t invalidate a state law requiring energy generators to assure that at least 20 percent of the electricity they supply to Coloradoans comes from renewable sources. The energy mandate, according to the 10th Circuit, “isn’t a price control statute, it doesn’t link prices paid in Colorado with those paid out of state, and it does not discriminate against out-of-staters,” so the law isn’t subject to the Healy line of cases.

Other appellate judges, including Judge Jeffrey Sutton in the 2012 6th Circuit opinion in American Beverage Association v. Snyder and Judge Stephen Reinhardt in the 9th Circuit’s en banc opinion in the artists’ resale royalties case, have questioned whether the Supreme Court’s broad prohibition on the extraterritoriality of even nondiscriminatory state statutes is a wise policy or an old-fashioned relic.

The artists in the California case, represented by Greines Martin Stein & Richland and Browne George Ross, argued that it’s time for the Supreme Court to revisit what they called a “per se” bar on state laws impacting commerce outside their borders. The law at issue has two components. One requires a 5 percent resale royalty to be paid to artists when a piece of fine art is sold in California. The other piece requires the royalty to be paid (or held in escrow) when a California resident or the resident’s agent sells the work outside of the state. All of the 9th Circuit judges on the en banc panel in the case concluded the interstate prong of the law is unconstitutional, though, as I mentioned, Judge Reinhardt said he’s not convinced that laws without a protectionist motive should be reflexively deemed unconstitutional.

The cert petition picked up that theme, posing the question of whether “if a state statute does not in any way discriminate against, or impose an excessive burden on, interstate commerce, does the Commerce Clause of the United States Constitution nevertheless require the statute’s invalidation solely because it regulates commerce occurring beyond the borders of the state that enacted it?” The artists said their case was an appropriate vehicle to resolve the question because the resale royalty law cannot be described as “protectionist, discriminatory, unduly burdensome on interstate commerce, or any of the other watchwords that should raise a dormant Commerce Clause alarm.”

The out-of-state auction houses who won their challenge to the California resale royalties law at the 9th Circuit argued in their brief opposing Supreme Court review that the statute was a quintessential attempt by one state to impose “its legislative policies on commercial transactions that occur wholly in other states.” The main reason California even adopted the imposition on out-of-state resellers, according to the brief, was to address concerns that in-state art dealers would otherwise be disadvantaged.

“There is no need for this court to grant review simply to confirm its longstanding precedent,” wrote lawyers from Skadden Arps Slate Meagher & Flom, Cooley, Morrison & Foerster and Weil Gotshal & Manges.

For now, the Supreme Court agrees.

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