Article I, Section 8, Clause 3:

[The Congress shall have Power . . . ] To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes; . . .

For laws that are neither facially discriminatory nor protectionist in purpose or effect, the Supreme Court now applies a balancing approach to determine if they impermissibly burden interstate commerce. The Court first articulated the modern balancing test in 1945, in Southern Pacific Co. v. Arizona.1 In that case, the Court held that an Arizona train-length law imposed an unconstitutional burden on interstate commerce. Writing for the majority, Justice Harlan Stone explained that courts would generally uphold regulations as within state authority “[w]hen the regulation of matters of local concern is local in character and effect, and its impact on the national commerce does not seriously interfere with its operation, and the consequent incentive to deal with them nationally is slight.” 2

According to the Court, determining whether a state or local regulation was valid required a “reconciliation of the conflicting claims of state and national power,” which “is to be attained only by some appraisal and accommodation of the competing demands of the state and national interests involved.” 3 To weigh those conflicting claims, the Court would consider “the nature and extent of the burden which the state regulation . . . imposes on interstate commerce, and whether the relative weights of the state and national interests involved are such as to make inapplicable the rule, generally observed, that the free flow of interstate commerce and its freedom from local restraints in matters requiring uniformity of regulation are interests safeguarded by the commerce clause from state interference.” 4 Applying that balancing test to the Arizona law under review, the Court concluded that it was “obstructive to interstate train operation,” would have “a seriously adverse effect on transportation efficiency and economy,” and “passes beyond what is plainly essential for safety.” 5

A more commonly cited articulation of the modern balancing test comes from Pike v. Bruce Church, Inc.6 In that case, the Court explained:

Since the adoption of the balancing test for evaluating facially neutral laws under the Dormant Commerce Clause, the Court has issued divergent rulings on state regulations.8 It has not expressly identified what constitutes an intolerable burden on interstate commerce, though it has held that a state law does not necessarily impose an undue burden on interstate commerce merely because it increases compliance costs or causes some entities to stop doing business in that state.9 Likewise, the Court has not articulated a definition of “legitimate local purpose,” though it has identified categories of interests that could be considered legitimate or illegitimate. In Pike, for example, the Court indicated that states had a legitimate interest in addressing safety (particularly in the context of long-standing local regulation), protecting in-state consumers, protecting or promoting in-state businesses, and maxmimizing the financial return to in-state industries.10 Under the Court’s balancing approach, however, the existence of a legitimate local interest is not alone a sufficient basis to uphold a law that burdens interstate commerce. The Court has also explained that “[s]hielding in-state industries from out-of-state competition is almost never a legitimate local purpose.” 11

Cases that have arisen in the context of financial regulation illustrate the fact-specific nature of the balancing test. In Lewis v. BT Investment Managers, Inc., the Court struck down a state law prohibiting ownership of local advisory businesses by out-of-state banks, holding companies, and trust companies. It acknowledged that “banking and related financial activities are of profound local concern” and that “[d]iscouraging economic concentration and protecting the citizenry against fraud are undoubtedly legitimate state interests.” 12 The Court nevertheless held that “disparate treatment of out-of-state bank holding companies cannot be justified as an incidental burden necessitated by legitimate local concerns,” in part because “some intermediate form of regulation” could accomplish the same goals.13 Likewise, in CTS Corp. v. Dynamics Corp. of America, the Court recognized the state’s legitimate interest in regulating its corporations and resident shareholders. In that case, it upheld the state law, finding that the state’s interest outweighed any burden on interstate commerce from the effects of the law.14 By contrast, in Edgar v. MITE Corp., the Court reasoned that states did not have a legitimate interest in protecting nonresident shareholders.15

At times, the Court has applied an extraterritoriality principle in its Dormant Commerce Clause analysis, holding that certain facially neutral state laws are unconstitutional because they attempt to regulate beyond a state’s borders.16 The Court has recognized that this principle “protects against inconsistent legislation arising from the projection of one state regulatory regime into the jurisdiction of another State” and “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 [regulating] State.” 17 The Court has not articulated a general rule for when it will consider a state’s law to have the practical effect of regulating extraterritorial commerce.18

For both discriminatory and facially neutral laws, the Court’s “critical consideration” is a law’s “overall effect . . . on both local and interstate activity.” 19 Yet determining whether a law is discriminatory and per se invalid, or facially netural and subject to the balancing test, is not straightforward. While the Court has cautioned that “no clear line” separates these two categories of regulations,20 it has identified some categories of laws that are generally discriminatory: laws that aim to create “barriers to allegedly ruinous outside competition,” “to create jobs by keeping industry within the State,” “to preserve the State’s financial resources from depletion by fencing out indigent immigrants,” and to “accord [a state’s] own inhabitants a preferred right of access over consumers in other States to natural resources located within its borders” would all be invalidated.21

Footnotes

1

325 U.S. 761 (1945). Prior to 1945, Chief Justice Stone authored a series of opinions presaging this standard. See DiSanto v. Pennsylvania, 273 U.S. 34, 44 (1927) (Stone, J., dissenting) (advocating “consideration of all the facts and circumstances, such as the nature of the regulation, its function, the character of the business involved and the actual effect on the flow of commerce” ); California v. Thompson, 313 U.S. 109 (1941) (overruling DiSanto); Parker v. Brown, 317 U.S. 341, 362–368 (1943). A notable exception to this approach was South Carolina Highway Department v. Barnwell Bros., in which Justice Stone authored an opinion upholding truck weight and width restrictions that were more limiting than almost all other states, based on a review of whether “the legislative choice is without rational basis.” 303 U.S. 177, 192 (1938). Although the Court has not reversed Barnwell Bros., its application of the rational basis test to subsequent Dormant Commerce Clause challenges has been limited. See Clark v. Paul Gray, Inc., 306 U.S. 583, 594 (1939).

2

S. Pac. Co., 325 U.S. at 767.

3

Id. at 768–69.

4

Id. at 770–71.

5

Id. at 781–782.

6

397 U.S. 137 (1970).

7

Id. at 142 (citation omitted).

8

Several cases applying the balancing approach—both before and after Pike v. Bruce Church—have addressed regulation of the transportation industry. E.g., Bibb v. Navajo Freight Lines, 359 U.S. 520 (1959) (invalidating Illinois law requiring a particular kind of mudguards on trucks and trailers because of the burden on interstate commerce that would result from truckers shifting cargo to differently designed vehicles); Raymond Motor Transp., Inc. v. Rice, 434 U.S. 429, 447 (1978) (holding that Wisconsin truck-length limitations placed no more than “the most speculative contribution to highway safety” ); Kassel v. Consolidated Freightways Corp., 450 U.S. 662 (1981) (invalidating Iowa truck-length limitations on similar grounds).

9

Exxon Corp. v. Governor of Maryland, 437 U.S. 117, 127 (1978) (holding that a Maryland law prohibiting oil producers oil refiners from operating gas stations within the state did not impermissibly burden interstate commerce even where the law would cause some refiners to stop selling in Maryland, because those refiners could “be promptly replaced by other interstate refiners” ).

10

397 U.S. at 143.

11

Maine v. Taylor, 477 U.S. 131, 148 (1986).

12

447 U.S. 27, 38, 43–44 (1980).

13

Id. at 43–44.

14

481 U.S. 69, 88, 93 (1987).

15

457 U.S. 624, 644 (1982).

16

Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511, 524 (1935) (striking down a law requiring milk sellers in New York to pay an out-of-state milk producer the minimum price set by New York law in order to equalize the price of milk from in-state and out-of-state producers, and explaining that “commerce between the states is burdened unduly when one state regulates by indirection the prices to be paid to producers in another” ); Edgar v. MITE Corp., 457 U.S. 624, 642–643 (1982) (emphasizing the extraterritorial effect of an Illinois regulation of take-over attempts of companies that had specified business contacts with the state); Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 580 (1986) (striking down a New York law requiring liquor distillers and producers selling to wholesalers within the state to affirm that the prices they charged were no higher than the lowest price at which the same product would be sold in any other state in the month covered by the affirmation); Healy v. Beer Inst., 491 U.S. 324, 332 (1989) (striking down a Connecticut price-affirmation statute for out-of-state beer shippers, and confirming that “a state law that has the ‘practical effect’ of regulating commerce occurring wholly outside that State’s borders is invalid under the Commerce Clause” ).

17

Healy, 491 U.S. at 336–337; Edgar, 457 U.S. at 642.

18

See Pharm. Rsch. & Mfrs. of Am. v. Walsh, 538 U.S. 644, 669 (2003) (holding that the rule applied in Baldwin and Healy “is not applicable to this case” because the challenged statute was not a price control or price affirmation statute and did not regulate the price of any out-of-state transaction).

19

Brown-Forman, 476 U.S. at 579 (1986).

20

Id.

21

Philadelphia v. New Jersey, 437 U.S. 617, 626–627 (1978) (citing cases).