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The Market-Participant Exception And The Dormant Foreign Commerce Clause

A.B., College of William & Mary; Candidate for J.D., Benjamin N. Cardozo School of Law. I am grateful to Laura Grosshans and Professors Paul R. Verkuil and Martin J. Stone for their thoughtful critiques of earlier drafts of this Note.

The Supreme Court has long accepted the proposition that the Constitution`s Commerce Clause1 contains an implied prohibition against a state2 law that burdens interstate or international trade.3 While the bulk of Dormant Commerce Clause jurisprudence and literature relates to state impediments to interstate commerce, the first, and perhaps more fundamentally important, part of the Commerce Clause gives Congress power over trade with foreign countries.4 Thus, the Court has imposed the strictures of the Dormant Commerce Clause on state regulation of foreign trade.5

For the past three decades the Supreme Court has recognized an exception to the Dormant Interstate Commerce Clause rule when the state acts not to regulate the market but instead behaves as a "market participant."6 This relatively young exemption was born in the Court`s decision in Hughes v. Alexandria Scrap Corp.7 and was succinctly stated in South-Central Timber Development, Inc. v. Wunnicke: "If a State is acting as a market participant, rather than as a market regulator, the Dormant Commerce Clause places no limitation on its activities."8 To date, the Court has not settled the question of whether the market- participant exception applies to foreign commerce. While the circuits have held opposing views on this question,9 the Supreme Court has not reached the issue.10 This Note will argue that the exception should not apply to foreign commerce. Arguments that might support the exception`s application to domestic commerce are vulnerable on their own terms and fail when applied to foreign commerce. Moreover, even state participation in (as distinct from regulation of) the market infringes on and impedes the federal government`s constitutionally-vested power to attend to foreign affairs.

I. The Market-Participant Exception: A Primer

In Reeves, Inc. v. Stake,11 the Court expounded on the principle that supports its application of the market-participant exception. When a state, whose primary duty is to attend to its citizens` well-being, conducts business in the marketplace, it is subject to the same limitations as a private party. Thus, it should enjoy the same freedoms as a private actor, including the ability "to exercise [its] own independent discretion as to parties with whom [it] will deal."12

In South-Central Timber, a seller of unprocessed logs challenged an Alaska law that required that timber harvested from state land be processed, prior to being exported, at mills inside the state. The Court began to sketch the boundary for actions that qualify as market participation:

The limit of the market-participant doctrine must be that it allows a State to impose burdens on commerce within the market in which it is a participant, but allows it to go no further. The State may not impose conditions, whether by statute, regulation, or contract, that have a substantial regulatory effect outside of that particular market.13

The Court distinguished between the timber market, in which it decided the state was a participant, and the processing market, in which the Court found the state not to be a mere participant. The Court noted that it is highly unusual for a seller to be able to dictate the buyer`s use of a product once it has been sold.14 The Court saw Alaska`s market-participant argument as an attempt to "avail itself of the market- participant doctrine to immunize its downstream regulation of [a] market in which it is not a participant."15

More recently, in Camps Newfound/Owatonna v. Town of Harrison,16 the Court specifically stated that a general tax exemption is market regulation, not participation.17 In that case, Maine disallowed church camps that served predominantly out-of-state visitors from taking advantage of an exemption from one of the state`s property tax laws. Justice Stevens defined more clearly the Court`s theory of the market- participant exception by explaining that the law at issue in that case was too broad to be classified as anything but market regulation by the state acting as a state:

Maine`s tax exemption-which sweeps to cover broad swathes of the nonprofit sector-must be viewed as action taken in th...

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